Originally posted 2014-07-24 11:00:07.
By Ann Marie Sallusti | amdlawgroup.com
According to the internal affairs doctrine the state of incorporation will govern dealings and issues that are internal to the corporation, including but not limited to, fiduciary duties, shareholder rights, and other particular corporate issues. On the other hand, issues that are external to the operation of the corporation may be brought elsewhere. Therefore, a business owner’s decision to incorporate in a certain state determines what corporate law will govern the entity. A business owner should take legal issues, taxes, fees and incorporation requirements into consideration when deciding where to incorporate. Recently, business owners have been contemplating three states when determining where to incorporate – Delaware, Wisconsin and Nevada.
Why incorporate in Delaware? Delaware is the most well-respected, developed and established states in business and corporate law. The Delaware legislature has expertise in business law matters and the law is business-friendly. Furthermore, many states mirror Delaware’s incorporation standards into their legislatures. Therefore, Delaware will have the most up to date and advanced corporate laws. The disadvantages of incorporating in Delaware are that fees, taxes, and reporting requirements may be higher. Increased fees may affect certain businesses more than others, but the owner is essentially paying for the protection and prestige encompassed in Delaware law.
Why incorporate in Nevada? Nevada corporate law can protect directors and officers from certain liabilities, Nevada does not impose state corporate taxes and there are fewer other taxes. Additionally, a business may have added protection in Nevada because Nevada does not share corporate information with the Internal Revenue Services. On the other hand, there are very strict business licensing requirements, which make it extremely expensive to incorporate in Nevada as a non-resident. The cost may outweigh the benefit to incorporate in Nevada as a foreign entity.
Why incorporate in Wyoming? Wyoming is becoming a more business-friendly state. Advantages to incorporating in Wyoming are that its laws are very similar to Nevada and they have significantly low fees. Furthermore, Wyoming continues to grow financially and their budget surplus allows for constant fee rates for maintain an entity. Unfortunately, Wyoming’s corporate law is not as advanced as Delaware and Nevada law. Therefore, business owners need to balance the risk of legal protection with the substantially lower fees Wyoming offers.
Lastly, should you incorporate in your home state? Incorporating in your home state is by far the easiest and cheapest way to incorporate. Incorporating at home will allow a business owner to avoid the fees and taxes other states implement for foreign incorporation. Also, it will provide more protection of the company’s assets. Disadvantages when incorporating in your home state may be less protection and corporation accommodations under the law. Also, entities that wish to incorporate in a state that is not their home usually have pay a fee to operate in the state in which they want to incorporate.
When a business is attempting to incorporate, the owners must take into consideration the size of their business. Small businesses will probably want to organize in the state where they operate because it is cheaper and their business will most likely remain in that state. Also, if a smaller business incorporates in another state, that entity will be subject to two state taxes, which may not be fiscally attainable. Bigger businesses will probably have more fiscal freedom and can be more concerned with the law that governs their corporation, rather than nominal taxes and fees.
Delaware has longstanding, elaborate and established corporate law, but higher taxes and fees. Nevada has business-friendly laws that include more protection, but the fees Nevada imposes are high and may not be beneficial to foreign businesses. Wyoming is an up and coming business-friendly state with a bright future ahead, accompanied with substantially cheap fees for incorporation. But, Wyoming does not have the corporate background Delaware and Nevada possess. A business owner will have to weigh the advantages and disadvantages of incorporating in a foreign state versus their home state in order to determine which state’s laws, fees, taxes and requirements will be the most beneficial to the future of the entity.