Where should I incorporate?
This is a question that I am often asked, and although we can explore the legal issues as to where you should incorporate, there are non-legal issues to consider as well. People often hear advertising focusing on “Incorporate here, it is tax free!” The problem with the advertising is people don’t really understand how things work, and that will end up just costing more money when their only focus is to save money, and that just leaves people feeling ripped off.
The thought process about where to incorporate can cover many aspects, from logical, to financial, or to emotional. Most people have some sort of idea of what they are looking for, but they often only focus on single issues. I know we enjoy exploring those ideas, and I would assume many lawyers that are passionate about helping people would as well. It is also important because it can often educate us more about the business and what the clients priorities are. The following four ‘clients’ were portions of actual client conversations [boiled down to their basics] that we have had.
The first client I am thinking about said that they were incorporated in Delaware but they have issued payments to a couple of contractors and wanted to know if they needed to register the business in a specific state (insert any state other than Delaware you wish) as a foreign corporation.
Unfortunately, that is not enough information to answer the question and we would need to learn more to help address the clients concerns.
The second client wanted to incorporate in a jurisdiction because it was his belief that “being a Corporation in [insert any state] would look better and help my business.”
The third client was all about the money, always asking if a decision would cost more.
The last client did not have any idea what they wanted, other than they were thinking of several businesses, looking far into the future and wanting to build a multiple layered structure with a holding company and several subsidiaries (which made me think: Berkshire Hathaway).
When exploring forming a business, we often like to learn about the clients business and desires to ensure we address all of their concerns and the issues that probably should be a concern to ensure that they are fully informed before they make a decision.
Our conversations include the purpose of the business and how the client intends to operate the business. The first thing we will discuss here is where the client intends to conduct the business.
(1) What states, territories, or district (Washington D.C.) do they intend to operate? This is important because it helps us advise of the potential issues within each jurisdiction that they intend to operate. For example, if they told us that they were going to actively conduct businesses in Colorado and nowhere else, we could have a conversation about the benefits and potential drawbacks of incorporating in Colorado, and compare it to another jurisdiction to see if there are any benefits to incorporating elsewhere. In contrast, if the client said that they intend to have an active business presence in Colorado, Missouri, and Wyoming, we would be able compare all three of those locations, to help determine the best course of action.
Deleware, Nevada, and Wyoming are typically considered corporate havens and many businesses that do not conduct any business in any of these states have formed their corporation in those states. If you are conducting business in one of these three states, it would typically cause me to lean more toward recommending one of those states. If you are not conducting business in any of those three states, I’d look to see if there are any other compelling reasons for this client to indicate that the additional expense would be worth it for the client.
Our firm (Deemer Law Group, P.C.) is a Wyoming Professional Corporation, partially because we do business there, because we can help in forming Wyoming Corporations, but also I have found them to be very easy, quick, and efficient to establish businesses with them. To me, that is valuable, because it frustrates me waiting in limbo. The longest wait I have found for Wyoming is waiting for the Registered Agent to sign the appropriate paperwork. Two examples that have made me happy with Wyoming (in comparison to some other states):
(a) When the Secretary of State completes the processing and your Corporation is officially active,
they e-mail you to let you know. I have not found this to be true for many states.
(b) When you need a Certificate of Good Standing to tell another state that you are in good standing
in Wyoming, you can go on-line and get one immediately, FOR FREE. Simply go to a website,
type in some information to locate your corporation, and press submit. Then print out the form
that comes up. To my knowledge, there is only one other state that offers the ability to get the
certificate on-line, and that is Colorado (which we can also help with).
To me, this is real-world benefits that everyone can appreciate, and it doesn’t even touch on financial or legal implications.
If you are doing business in (pick any state), and you incorporate in (pick any state other than the first one), then you will have additional costs for choosing that path. You will need to pay the government filing fees for both states (State of Incorporation and State where you are doing business as a ‘foreign corporation).
You will likely also have to pay for a Registered Agent for the State that you incorporated in (since you will be living elsewhere). The fact that these “Corporate Havens” have no state income tax does not save you money in this situation, because you will still have to pay the income taxes for the state that you do business in and some of those states have minimum tax liabilities as well, so the minute you register, you will owe at least the minimum for that tax year. These tax liabilities for where you do business are there no matter where you incorporate, so you will need to look for other reasons to see if it is worth incorporating in the other state.
In Part 2, we will discuss legal implications for where to incorporate.