4 Factors to Consider When Deciding Where to Incorporate

In advising start-up companies, the question of where to incorporate arises from time to time. Here are a few things to consider when making that decision:

Note: When I say incorporate, I mean form a corporation or an LLC. Some lawyers would say that forming an LLC is not technically incorporating, but I'll leave that metaphysical distinction on the side, as it is immaterial to this (and maybe every other) discussion.

Where you are located?

This is the choice that will be the simplest for the starting entrepreneur. If you do all your business in one State and your office is in that State, this will confine all your financial and reporting obligations (read: taxes) to that one State. That said, why are there more factors? Read on.

Cost of Filing (plus)

The 50 states vary in how much they charge to incorporate (or establish an LLC). The lowest fee is $50, but Alaska charges $250. A New York LLC has a publication requirement that can cost over $1000. So why would anyone incorporate in a state with high fees?

When you incorporate, the new company needs to appoint an agent for service of process in the State where it is located. If the incorporator or shareholder lives in that State, she can serve as the agent. If no shareholder resides in that State or there is no office in that State, the company must appoint an agent.

This agent can be a paid company that performs this service for many companies—that kind of service costs around $200 a year. So, you can pay the high fees in your home state, or you can pay to have a registered agent in a state with low fees.

Taxes

We can't forget these. As you know, all the States have taxes, and no two states tax in exactly the same way.

One example: A lot of companies like to incorporate in Delaware. Delaware taxes companies that are incorporated in Delaware (even if they do no business in Delaware) on that company's share capital. So, you could be in Delaware and do all your business in California, but Delaware would slap an annual tax on your company.

Although the tax isn't so onerous for small companies, this is worth considering before picking Delaware as a place to incorporate.

State Law

Just like all the 50 states have different taxes, there are differences in each State's corporate laws. The differences are not as great as those in the tax laws, but they can still make a difference.

Take this example: A former client managed two corporations: one in Utah and one in Delaware. They did a certain transaction in Utah and then wanted to do the same transaction in Delaware. One problem: the Utah state corporate law only required approval from the Board of Directors for this type of transaction, but Delaware state corporate law required a shareholder vote. That's a major difference when you have more than a hundred shareholders.

Like the differences in tax laws, this distinction may be hard for the beginning entrepreneur to discern; a lawyer's help could be invaluable here.

Avrum Aaron

US-Israeli Lawyer

avrum@lop-llc.com

054-398-4380