By Jennifer Reuting, author of Limited Liability Companies for Dummies™
If you have been researching corporations or LLCs, you've surely heard that forming your entity in states like Delaware, Nevada and Wyoming can offer you various benefits above and beyond what your state can offer you. While it may be true that these states do have some benefits which I'll discuss below, you have to consider whether or not those benefits even apply to you.
Whenever a corporation or LLC transacts business in a particular state, it must register with that state. This means that it has to pay taxes in that state and file reports, just as if it was actually formed there, so if you are operating a "local" business that caters to customers that mainly live in the state you reside in, it generally would not make sense for you to form your corporation or LLC in a different state only to then need to register in your home state anyway. While there are exceptions, in most cases, you might as well just form your entity in the state in which you live and keep things easy on yourself! Why have the extra fees, taxes and paperwork? It makes no sense!
If you do not have a brick and mortar business, such as an internet-based company or a consulting business, then you may have some more options open to you. Since Corporations and LLCs are entities entirely separate from you - they are like separate people - which means that they can live wherever they choose, which may or may not be the same state that you live in. Some states have more favorable tax laws or better corporate infrastructures. If you have spoken to your attorney and have determined that your business is in fact not transacting business in your state, then you have a decision to make!
Before determining which state you should form your corporation or LLC in, you have to know your business. After all, all businesses are different! You must first have a clear picture of what sort of business you will be transacting and where. You need to know what your future plans are - do you want to go public or stay privately owned? Is your business ingrained in your community or does it exist in the internet realm and have no real territory? What are your priorities? Would you rather save taxes or avoid extra paperwork? What is your budget? Can you afford to go to another state? Can you afford not to? These are all questions that you need to ask yourself before deciding whether or not to form your corporation or LLC in another state.
Once you have a handle on how you envision the future of your business and where you want to go, you can take a look at some popular states and see if they have any benefits that appeal to you…
It is common for people to hear often of Delaware and to think that since it is so popular, it must be a good state to incorporate in. However, this isn't always the case. While Delaware does have a lot of advantages over most states, we wouldn't go so far as calling it a tax haven and it isn't necessarily the best bet for small businesses.
What sets Delaware apart is the Chancery Court. The Chancery Court is a special court the makes decisions upon business matters. Delaware is the only state with such a court. While most states are backlogged - your case my take many years to be heard by a judge and be decided upon - you can bet that your Delaware case will be heard right away. In addition, in most states you cannot be certain of the business aptitude of the judge hearing your case - it could be a traffic judge for all you know! But in Delaware, it's another story. All judges are thoroughly trained in all sorts of business matters, so you know that the person deciding the fate of your company will be someone that knows what they are talking about.
In addition, part of Delaware's allure is the hundreds of years of case law that has developed over so many centuries. Delaware was a pioneer in the 1800's for corporations. Before California was even admitted into the union, Delaware was one of the first states to privatize the then-government-controlled corporate entities. They soon followed by loosening restrictions and lessening the tax burden on corporations. From that day on, Delaware has been a force to be reckoned with. Over 150,000 entities were formed there in 2006.
Whoever said there was more to Nevada than glitz and lights was right! Nevada is quickly exploding as one of the fastest growing states in the country and one of the primary reasons for that is the pro-business environment. Nevada is considered a "tax haven" - and for good reason. Thanks in-part to the gaming industry, Nevada has no business income tax, franchise fees, capital gains tax, state corporation tax or inheritance tax. I repeat - NO TAX. None, zilch, nada. Corporations and LLCs in Nevada don't even have to file an income tax return! Why is this particular state so giving? Because the powers know they will get back all of the money when you take the roulette wheel for a spin!
Not only does Nevada have zero taxes, but there are a lot of other benefits as well, including:
But there's more! One of the advantages that Wyoming offers that Nevada doesn't is that it allows for what is called a "lifetime proxy." A proxy is someone that you elect to vote on your behalf. This opens the door to a common asset protection strategy in which you can hide your identity by having someone else hold your stock (or membership shares) while you still control the vote by having a "lifetime proxy" over them.
Wyoming isn't as popular as Nevada and and I am not certain of the exact reason; however I have a sneaking suspicion that Las Vegas, "The Entertainment Capital of the World," has something to do with it. Wyoming may not be the most glamorous place in the states to domicile your corporation or LLC, however don't underestimate it as a tax haven. The Wyoming state government is working very hard to push Wyoming into the position of being the most business friendly state in the union. They are pioneers in the truest sense of the word. After all, they were the first state to adopt and legalize what we now know as the Limited Liability Company!
