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4 Factors to Consider When Deciding Where to Incorporate

May 13, 2013

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In advising start-up companies the question of where to incorporate arises every so often. 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 saying 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.

One: Where are you located?

This is the choice that is going to be 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.

Two: Cost of Filing (plus)

The 50 states vary by 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 lives in that state or there is no office in that State, the company needs to 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.

Three: 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 in not so onerous for small companies, this is worth knowing about and thinking about before picking Delaware as a place to incorporate.

Four: State Law

Just like all the 50 states have different taxes, there are differences in each states’ corporate laws. The differences are not as great as the differences in the tax laws, but they can 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, a 1994 graduate of Columbia law school, is the COO of Legal Outsourcing Partners, LLC. He can be reached at avrum@lop-llc.com.

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One Comment
  1. yechiel aaron permalink

    Thank you Avrum. That is a lot of information. I am sure that is just the tip of the iceberg; and that there is a lot more information that we need to know for our business.

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