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Where Should You Incorporate Your Business?

At one point in time, I was interested in becoming the owner of a franchise.  As a part of my due diligence, I spoke with many franchisees across the country, asking them questions about their businesses, their lives, and their revenue.  As a business attorney, I also asked them what type of corporate entity they had and where they were incorporated.  To my surprise, I was often told that they had incorporated their businesses – whether it was a corporation or LLC – in Delaware.  When I questioned them further as to their reason behind their choices, I often received the answer, “a friend told me Delaware was a great state in which to incorporate.”  While Delaware is known as a great state to incorporate due to its flexible, pro-business statutes, as well as its Chancery Court, there are options outside of Delaware, such as Nevada and Wyoming.

Nevada offers many advantages for incorporation, including no state corporate income tax and no fees on corporate shares; no personal income tax or any franchise tax for corporations or LLCs; and Shareholders, directors, and officers of a corporation or members or managers of an LLC don’t need to be residents of Nevada and are statutorily indemnified.  In addition to the benefits offered in Nevada, Wyoming does not require a company to have share certification, has minimal fees, and can adopt a corporation formed in another state.  While these advantages all seem compelling reasons to incorporate in Delaware, Nevada, or Wyoming, these states are not beneficial for every business.

In most cases, especially for smaller corporations or LLCs, it is best to incorporate your corporation or organize your LLC in the state where your business has a physical presence, which means the state where the business property is located, where the shareholders or members live or where your employees work.  This is because the state where you actually conduct your business may have additional requirements it imposes on your out-of-state business to conduct business in its state, such as additional filing fees, the requirement of filing annual reports, appointing a registered agent, and possibly paying taxes in both the state of incorporation and the state where you do business. 

One other factor to consider is whether the state where you do business requires your foreign business to register to do business in your home state.  For example, let’s say you live in Pennsylvania and your business conducts the majority of its business in Pennsylvania.  But based on your friend’s advice, you incorporate in Delaware.  In order for your business to be recognized in Pennsylvania, you must file as a foreign company with the Department of State.  Failure to do so bars you from the benefits of Pennsylvania, including bringing suit in Pennsylvania should you have a need to do so.  These added hassles are not something that a small business owner normally anticipates when originally deciding where to incorporate.

It’s important to recognize that for the most part, the advantages offered by Delaware, Nevada, and Wyoming are directed towards larger businesses as they have numerous shareholders/members and complex tax situations.  As a small business, the benefits offered may be outweighed by the additional paperwork and fees required by incorporating in a different state.  As a rule of thumb, small business owners should incorporate in the state where they plan to do business.   However, exceptions do exist and you should speak with a business attorney who can help you decide your best course of action.