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Lester Bahr CPA, LLC
(484) 707-5934
Allentown, Pennsylvania

As a CPA, one of the questions I've frequently been asked by entrepreneurs starting up a business is: Should your business incorporate in Delaware? In today's world of ecommerce without borders over the web, it seems that more people are asking me that question since the physical state location of their business seems to have less and less relevance to where they ultimately sell their product to an internet based consumer.

So, before I attempt to explain all the facets of those questions, let me begin by first laying some general guidelines as factors that you will want to consider before you select a state to incorporate in.

1. Do you expect to be doing business in more than one state?
2. What is your home state corporate income tax rate?
3. What is your state of residency income tax rate?
4. Do you plan to one day take your corporation public?
5. Will you look for venture capital?
6. What are the state's filing fees and is there an annual franchise tax?
7. Are there any capital requirements for the state you wish to incorporate in?

In general, if you will have a closely held business doing business in your home state, it probably makes sense to incorporate in your home state because it will generally involve less paperwork and cost, not just in the first year, but with each year's tax filings. It will be easier because you will only need to account for income produced in one state and only file one state tax return. Also, you can avoid paying needless franchise taxes and registered agent fees.

If you incorporate in another state other than the one in which your business is located, then by definition, your home state now becomes the "foreign" or out-of-state corporation. In most cases you will then need to file an application in your home state seeking approval to qualify as a foreign corporation. Also, unless you qualify to do business locally, it could be difficult to open a bank account in your company's name.

But, if you will be doing business in more than one state, look at which state requires the least amount of paperwork and has the least cost incorporation fees (not that that is sufficient reason in itself. Remember, those are only one time fees compared to the ongoing extra fees you may incur on an annual basis for making your life more complicated.) You must also consider corporate and personal tax rates and compliance regulations in the state. There are certain rules of state "Nexus" which determine which state gets to claim the tax on income - but, suffice it to say that that is a seperate topic all unto itself and one I have previously covered in another article.

If you plan to expand the business rapidly or take it public, or to go after venture capital, many accountants and attorneys recommend incorporating in  Delaware.

Delaware incorporations have low incorporation and LLC formation fees as well as low annual franchise fees and no state corporate income tax for companies that actually operate outside of Delaware. It also has no minimum capital required for incorporation and one person can hold all the corporate offices. Shares which are owned by Delaware nonresidents are not subject to Delaware personal income tax or inheritance tax. You also don't need to actually have an office or even a bank account in Delaware; although you will need a registered agent there (an ongoing annual cost I might add). An added plus is that the names of initial directors need not appear in public records. Due to its separate "Chancery Court" for business disputes, Delaware's court system does facilitate quicker dispute resolution.

A very large number of the public companies which trade on the New York Stock Exchange are Delaware corporations. So, if you think your business will actually go public one day, the stock market respects Delaware. In addition, venture capital investors tend to favor Delaware corporations because they desire the companies they fund to go public as soon as possible.

Nevada incorporations are another frequently asked about option - the appeal being that Nevada has no state tax on corporate profits, no state franchises taxes or state personal income tax. Also, similar to Delaware, stockholders of Nevada companies are not a matter of public record, so there is the element of privacy. But, on the downside, Nevada companies may need to qualify or register to do business in their local jurisdiction which, again may result in additional fees to the state where you operate the business. Nevada corporation and LLC fees can also be higher than other states.

A corporation with business sites in multiple states will generally incorporate or form an LLC in a single state and then qualify to do business in other states by filing the necessary registrations in the other states, paying additional franchise taxes and filing annual reports. Just keep in mind that your decision as to where to incorporate can affect your business on many levels. If you expect fast growth in many states or want to establish partnerships around the country, you may want to consider incorporating in Delaware or Nevada. This is certainly more convenient than repeatedly starting then dissolving in state corporations as you move around the country - which by the way carries huge tax complexities.

So, if by now you are thinking: All these different state filing must be horendously complicated from a corporate tax filing standpoint in terms of carving out taxable income by state - which by the way all have differences in the Nexus computations - you're right. That's why it's so important to first consult with your attorney and CPA before making any decisions as to which state to incorporate in.


Should Your Business Incorporate in Delaware?