As an entrepreneur, you know that incorporating your business can be a wise move to minimize your liability, protect your personal assets, even provide tax savings in some cases. However, navigating the various logistical and legal requirements isn’t always easy — particularly when you don’t want to spend countless hours buried deep in legal fine print.
I can’t tell you how many times I’ve heard entrepreneurs wonder where they should incorporate their business. And their questions normally boil down to a debate between two states: Delaware and Nevada.
Each time I hear this, I start off asking two simple questions:
Is your business physically located in Nevada or Delaware? Well, no…
Are you planning on opening a bank account? Yes…
And more often than not, the direction of our conversation soon changes course.
But first, let’s take a step back. Nevada and Delaware are both popular states for incorporation for good reason. Many larger corporations choose Delaware because it offers some of the most developed, flexible, and pro-business statutes in the country. And Nevada is increasingly becoming a popular choice for businesses due to its low filing fees, as well as the lack of state corporate income, franchise, and personal income taxes.
However, most small businesses never see these benefits, and end up with a lot more headaches and costs than they ever anticipated. As a general rule of thumb, I like to say that if your corporation or LLC has less than five shareholders or members, it’s best to incorporate in whatever state your business has a physical presence. So unless your company has a physical office in Delaware or Nevada, it’s going to be much easier and less expensive in the long run to incorporate or form an LLC in your home state.
For example, let’s say you run a business in Maryland, but are considering incorporating in Delaware. As it turns out, Maryland has strong rules pertaining to bank accounts. If you’re an ‘out of state’ business from Delaware, you would need to ask permission to open a corporate bank account in Maryland. And opening a bank account in Delaware would be just as difficult without any kind of physical address in the state.
And that’s just one particular (albeit very common) logistical challenge. There are countless other potential hurdles, and added fees.
For example, when a business incorporates ‘Out of State’ (aka in Delaware or Nevada), they may be responsible for additional filings and fees in both the state of incorporation (i.e. Delaware) as well as the state where they live and run their business. These can include:
For the state where a business incorporates:
- Appointing a Registered Agent in THAT state
- Paying filing fees in THAT state
- Filing annual reports in THAT state
For the state of residence (where the business is physically located):
- Appointing a Registered Agent in THIS state
- Paying filing fees in THIS state
- Filing annual reports in THIS state
- Qualifying as a Foreign Corporation in THIS state
- Paying taxes in THIS state
That last point can’t be overstated, as it can be a common misconception for the small business owner. Because let’s face it: throughout the life of your business, the tax burden can seem overwhelming at times. It’s only natural for you to be concerned about taxes — and those state tax laws from Nevada are incredibly appealing.
However, just because you incorporate your business in Nevada does not mean those are the only state tax laws that apply to your business. Nevada may not charge state income taxes for your corporation, but the state where your business is physically located will come after you for those taxes sooner or later. And to add insult to injury, your tax liability may actually increase because you’re viewed as a foreign entity operating in the state.
Pretty soon, any benefits from incorporating in Delaware or Nevada are quickly washed away with the added fees and added paperwork of operating out of state. There’s certainly truth behind the hype of these business-friendly states. However, those benefits are really limited to larger businesses (remember the rule: over five shareholders).
If you’re a small business owner, you’ll have more than your share of paperwork and fees as it is; there’s no reason to complicate your workload by trying to operate out of state. And while you do want to take full advantage of all potential tax breaks, in this case, the simplest route of incorporating in your own state turns out to be best.
Nellie Akalp is the CEO & Co-Founder of CorpNet, Incorporated, her second incorporation filing service company based on the simple philosophy of truth in business and her strong passion to assist small business owners and entrepreneurs.
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