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Where to Incorporate

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IMG_0464When the topic of what state to form your business in comes up, most people immediately say Delaware. In certain situations, this may be the right answer, but the state of Delaware is often thrown around as the answer more than it should. There are many issues to take into consideration when determining which state is the most ideal for your business to be formed in. We will go through a few of these important considerations below.

Where are you located?

Chances are it’s not in Delaware. Delaware certainly has its’ advantages when it comes to the cost of running a business as well as taxes, but it is often forgotten that you will also likely be subject to the fees and taxes of the state that you operate in. For example, a business that is incorporated in Delaware but that is doing business in California will likely need to register as a foreign company in California and will then likely be liable for California fees and taxes. However, Delaware does makes it easy for most small businesses in that if you are registered in Delaware, but are not doing business in Delaware, you will likely not need to pay any Delaware taxes (although certain fees may still apply).

What about the other states?

Delaware has long been held as the state that most people think of when it comes to where companies are from (especially corporations). There are many reasons for this, but one that sets it apart from the other states is called the “Court of Chancery”. Although it’s certainly a fancier name than your normal “Superior Courthouse”, this court’s main focus is business. Cases and controversies that go through this court enjoy expedited case times and are presided over by judges with particular experience in business issues. But at this point, this court is probably not what is convincing you to incorporate in Delaware.

Low and behold, other states saw Delaware’s success in attracting businesses with their low costs, no taxes, and discrete reporting and those states decided to jump on the bandwagon. The two other states who have made a name for themselves as the favorites amongst businesses are Nevada and Wyoming. These states offer similar low or no cost fees and don’t require certain reporting such as shares issued or who the directors are (this can be a big advantage when someone doesn’t want the world to know that they are the owners of the corporation for whichever reasons).

Nevada and Wyoming have even upped the ante with Delaware in that neither state instills any personal tax on a corporation owner and has no annual franchise tax. This is a substantial advantage in particular for other states which do have annual franchise taxes, such as California. California requires that an entity pay a minimum of $800 regardless of whether the company is even running or is operating at a loss. Having no such franchise tax in states such as Nevada and Wyoming is a great advantage unless you run into the issue that I mentioned above…where you still may be subject to the fees and taxes from the state you operate in.

So what does this all mean?

States such as Delaware, Nevada, and Wyoming have been designed as being very business friendly in the hopes of attracting your business to incorporate there. Often, many people will recommend one of these states as the state of incorporation. But the biggest issue that tends to be forgotten is that forming your company in another state does not necessarily leave you free and clear from having to pay the state that you operate in.

For more information on what state to incorporate in, contact Biletsky Law.

 

Is an LLC the best option for me?

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Biletsky Law - LLC Benefits
Relatively speaking, LLCs are one of the newer entity choices that companies may be structured as. But just because it’s a popular entity choice doesn’t necessarily mean that it’s the right choice for you. So let’s explore some of the advantages and disadvantages of selecting an LLC.

 

But first, what is an LLC?

An LLC, or a limited liability company, is a unique entity type which combines different characteristics from other types of business entities. Just looking at its’ name gives you a better idea about what this means. The limited liability part is generally a characteristic of corporations which provide the corporation’s owners with protection from liability. Another characteristic that an LLC has is the way that it is taxed, but we’ll get into that a little later.

 

So what’s the deal with the “limited liability”?

Let’s start off by comparing other business entities. A sole proprietorship or a general partnership are business structures where the individual or partners are held liable for the general business, profits, and losses of the company. Now let’s look at LLCs and certain types of corporations. With these entities, the individuals are protected from liability and the company itself is liable for the business of the company. This is generally speaking and there are many situations where the individual owner may become liable.
Biletsky Law - LLC Taxes

And what about the taxes situation?

Here’s another aspect of an LLC that is particularly alluring to business owners. Again, let’s look at some of the other entity choices. Individuals in sole proprietorships and certain types of partnerships are only taxed once, also known as a “pass-through” tax. This is different from certain types of corporations which may be subject to double taxation. This occurs when the corporation is taxed and then the individual is also taxed. In certain states an LLC provides it’s owners with the choice of how to be taxed. These choices can include being taxed either like a sole proprietorship (or a partnership) or as a corporation.

 

Costs and Investors.

One of the downsides of setting up an LLC is the cost. Sole proprietorships and partnerships have minimal to no cost to set up. LLCs and corporations can cost up to several hundred dollars to set up depending on the state the company is being set up in. For some companies, this downside is offset by the fact that LLCs and corporations are attractive to investors whereas sole proprietorships and partnerships are generally not conducive to investors.

 

Decisions and Changes.

Business planning and selecting which structure is best for you and your company can be complex and there are numerous different issues that you need to consider before deciding which one is ideal for your situation. It is highly recommended that you discuss your business plans with a legal professional before making your decision. However, just because you have already chosen or even already set up your business as a particular entity does not mean that everything is set in stone. Depending on the state your business is in, changing the type of entity can easily be done.

Conclusion

So where does this leave us? LLCs can be very flexible and advantageous business structures depending on the state you are attempting to set your business up in and what your overall goals are. The topics discussed above are just a few of the issues to consider when choosing how to set up your business. Remember, planning, research, and knowledge are essential to the success of your company!