Soon-to-be-business owners often ask us if there is any reason to form their businesses in Delaware instead of North Carolina because they’ve heard or read that corporations frequently form their businesses there. Lately, there’s been a lot of interest in incorporating in Nevada and Wyoming due to aggressive advertising.
For most small business owners, incorporating in a state other than your home state will have very little benefit to you and the business and will likely cost you more money. Not only will you have to file annual forms with both states every year, which costs money, you’ll have to get a Certificate of Authority to do business in North Carolina after your formation paperwork has been approved in the other state, which also costs money. Depending on the state, the formation paperwork could cost considerably more than North Carolina.
Some people recommend incorporating in Nevada and Wyoming because those states do not have a corporate tax or a personal income tax. This fact may be insignificant if your business is an LLC, not a corporation, because an LLC oftentimes does not pay corporate taxes. If your business is paying corporate taxes, it may have to pay them anyway because the corporation is based out of and does business in North Carolina. Furthermore, whether you pay personal income tax depends on the state where you live. North Carolina has a personal income tax. Forming in a tax-free state will not save you money on taxes if you live and work in another state.
The reason why so many large corporations form or convert their business to a Delaware corporation is because Delaware has a sophisticated corporate law and a Court of Chancery that only hears corporate cases. Based on these thoroughly-developed statutes and judicial opinions, corporate directors and officers are able to better understand their fiduciary duties and shareholders know what to expect. Delaware also has a reputation of being pro-management.
Nevada has recently amended its corporation law, which now resembles Delaware’s. However, at one point, Nevada touted that it is even more pro-management, limiting director’s and officer’s liability only to violations involving intentional misconduct or fraud. Shareholders may want to be cautious of Nevada corporations.
For most small businesses, these facts are insignificant because they are single member or family-run LLCs. There are no boards of directors or shareholders. However, if a small business expects to grow rapidly and has an eye towards getting venture capitalist funding or an IPO, it may want to consider forming in Delaware. Investors may require that those businesses convert into a Delaware corporation. If it is highly likely that will happen, the business may save some money by forming that way initially. This is a rare case, and converting a business to a Delaware corporation is not very expensive.
So in conclusion, like a lot of things we write about, do not always believe what you hear! There are little to no advantages to forming your business in other states, and it is likely that doing so without guidance from an attorney can result in additional costs to you. Please give us a call if you would like more information.
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