Law Blog

BUSINESS: Where to Organize your Company

U.S. business owners have choices when they set up a new company, one of the most fundamental of which is choosing the state (or territory) of incorporation/organization.  This article provides an overview of key considerations for determining the best jurisdiction for your company.

You have probably heard that large corporations tend to select Delaware as their state of incorporation.  Why would a company that does business nationwide choose Delaware for its headquarters?  And, what are the hot new “jurisdictions” these days?

Corporations start up by “incorporating.”  All other forms, such as LLCs and partnerships, start up by “organizing.”  It means the same thing.

That is why the governing document for a corporation is called “Articles of Incorporation,” while the equivalent document for other companies is called “Articles of Organization.” 

Tax Implications

Let’s start by dispelling a common misconception.  It is true that some US states charge income tax, while others do not.  However, you should not be under the impression that you can avoid state taxes merely by setting up your company in a state that has no income tax.  That would be a fatal mistake.

Corporate taxation is determined by where the money is generated, not by state of incorporation. 

So, for example, if your company’s office is in California, and you sell widgets to Californians, you cannot escape state taxes merely by organizing your company in Nevada.  If only it were that easy, right?

Therefore, when determining the jurisdiction for domiciling your company, tax implications are not really a consideration.

Confidentiality

This is one of the big differences among the different jurisdictions.  Just how easy is it for the public to see your company’s business information?

Transparent States

Some states, such as Florida, are extremely transparent.  A good deal of business information, including owners’ names and addresses, are easily accessed online.

For lawyers, this is very useful.  When we need to sue a company, we just go online to the Department of State’s website (www.sunbiz.org), and we can get most, if not all, the information needed for the lawsuit right there.  It’s great.

On the flip-side, however, this transparency may not always be the best from an owner/officer perspective.  Besides making it easy for lawyers to prepare lawsuits, Florida companies also open themselves up to “trolls.”

If someone wants to find out whether you have enough assets to be worth suing, they can do a quick search online and see all the ventures you have going in Florida.  Similarly, if you have neighbors or family-members that might be prone to jealousy, they can also easily find out what you have going on financially.

This “concern” is very situational, of course.  For many small business owners, having your information in the public record may be of absolutely no consequence. 

In that case, just go ahead and organize in the state where you are doing business.  That is the simplest and most convenient thing to do.  It will simplify setting up company bank accounts, minimize the need for a professional registered agent, etc.  It’s just easier.

Privacy-Conscious States

There are a number of states that are much more protective of a company’s confidential information.  If you go to the State Department’s website in one of these states, you will be able to see that a company exists.  In some cases, you may even be able to see whether the company is currently active.  But, that is about it.  No other corporate information will be available to the public on those websites.

Most of the states in New England tend to guard corporate information, as do the common “asset-protection” states, such as Wyoming, Nevada and Alaska. 

Again, what is best for individual business owners is situational, but an argument could be made that it is really a better business practice to set up in a state that will protect your company’s confidential information.

There is a bit of a trade-off, however.

Registered Agents

If you are going to set up your company in one state, but then do business in another state(s), you will need to hire a registered agent in the state of incorporation/organization.

Example:  You live in Florida and plan to do business in Florida, but you want to incorporate in Delaware.  At the time of incorporation, you will be required to provide a “registered agent” that has a physical location in Delaware.   So, unless you have a buddy in Delaware that is willing to act as registered agent for your company (not a great idea, by the way), then you will have to hire a professional registered agent in Delaware.

The purpose of a registered agent is to receive official documents on behalf of the company, such as lawsuits, governmental correspondences, etc.  Registered agent services are not particularly expensive (less than $100/year is common), but it is an extra step.

Double Registration

Continuing the example above, hiring a Delaware registered agent is not the end of the initial set up.  Since you are planning to do business in Florida, you will still need to register your Delaware company as a “foreign company doing business in Florida.”

If you live in Florida, you have the option of acting as your own registered agent (also not a great idea), so you do not necessarily have to hire a professional company for those services.  Still, you will need to maintain two registrations in two different states.  So, that too is an extra measure.

Thankfully, in the US, all states make it relatively easy and inexpensive to register a business.  The biggest thing is remembering to file annual renewals in both states and keeping the registered agent paid.  If you miss a renewal deadline, your company will be “inactive” or, even, “dissolved.”  And, to reinstate, there is usually a fairly nasty penalty ($400-600).

Asset Protection States

The main reason big corporations have traditionally incorporated in Delaware has to do with the governing statutes.  First of all, Delaware is the state with the most extensive case precedent when it comes to business matters.  That is advantageous because it prevents surprise.

Since almost every corporate situation you can possibly imagine has been litigated at some point in Delaware, you know ahead of time where the Delaware courts stand on all essential issues.

The predictability of Delaware courts is valuable to companies, especially those doing business on a large scale.

Second, the Delaware laws have traditionally been owner/officer/director friendly.  At some point in history, Delaware made conscious decision to be protective of owners/officers/directors in order to encourage companies to incorporate in Delaware.  It worked.

Simply put, Delaware law makes it more difficult to impose personal liability on owners, officers and/or directors for the bad luck, negligence or, even, misconduct of their companies. 

Owners, officers and directors are the decision-makers for their companies, and they like the protection.  So, everyone flocked to Delaware.

Now, because Delaware has been so successful at attracting businesses, certain other states have basically adopted the same laws.  They don’t even try to be subtle about it.  If you look at the case law, you will find judges openly stating “we follow Delaware law.”

As a result, these days, it is no longer necessary to set up in Delaware in order to get the benefits traditionally associated with Delaware.  I refer to the group of states that actively vie for your company’s business through these kinds of incentives as “asset protection states.”

Best Jurisdictions

Delaware

Naturally, you cannot go wrong with Delaware.  The only drawback is that it is a little more expensive than the competition.  At this point, Delaware sees itself as the “gold standard,” so you have to pay a little more to be there.

Nevada

The first state to aggressively compete for corporate filings was Nevada.  I think Nevada wanted to establish itself as the “Delaware of the West.”  And, it was largely successful in this regard.

Progressive states like California and Washington tend to offer more protections to consumers and employees, and less to owners/officers.  So, that created a great opportunity for Nevada to set itself up as the closer-to-home alternative to Delaware.

Unfortunately, Nevada, your recent overhaul of your Corporate Divisions website, and accompanying fee hike, is a disaster.  Your system has become terribly frustrating to deal with.  Even your own employees hate it.  On top of that, you decided to start charging more???  No, I’m out.

Wyoming

These days — at the moment, at least — my favorite asset-protection state is Wyoming. 

Wyoming has a simple, user-friendly online system for registering companies, and the fees are cheaper than the other jurisdictions I have looked at.  Also, you can get a human being on the phone when you need one, and the human will be nice to you.

As for asset-protection, Wyoming staunchly adheres to Delaware law, so you get the same liability limitation features in Wyoming as you would in Delaware.

Other Options

I know from my research that there are some other good options out there as well, most notably Alaska and South Dakota.  I am sure they are lovely.  I just have not had a lot of personal experience with these other jurisdictions.

Jeff Harrington, Esq.