Why Incorporate in Another State
You want to protect yourself and run your business in the easiest way possible. A good way to ensure this is to think carefully about which state you’ll incorporate in. In this article, I’ll share insight regarding how to incorporate your business somewhere other than your home state and why it might be beneficial for you.
In this article, we’ll cover:
- Why you would choose another state to incorporate your business
- Liability protection
- Convenience
- Restriction on type of business if it is in another state
- Pros and cons of incorporating a business in Delaware, Nevada, Wyoming and New Mexico
- Incorporating side projects or another business in different states
Why you would choose a state other than your current state to incorporate a business
It does make sense to choose your home state to incorporate a business in many cases, if not most. Although, there are a lot of reasons to incorporate other places. The two big reasons to incorporate in another state come down to liability protection and convenience.
For most business types that aren’t state-only licensed, you are able to incorporate outside the state you reside in.
Liability Protection & Convenience
The protection your business is supposed to provide your personal assets is called your corporate veil or your LLC veil. It’s one of the reasons you incorporate in the first place. You want the protection. You don’t want to lose your cars, house, or other assets.
If you’re in California and have a business entity incorporated there, about 25 to 50 percent of the time, the courts will pass right through your business entity and go straight for your personal assets.
They can even go for the assets of other people in your corporation.
This is an extremely important factor to consider, along with convenience, when deciding where to implement your corporation or LLC.
States like New York and California have non-business-friendly courts and laws. However, Delaware, Nevada, Wyoming, and New Mexico have business-friendly laws and courts that will help protect yourself, protect your personal assets, and frankly protect your directors and officers as well.
Most business types can incorporate in other states, even ones that would surprise you like restaurants. The ones that can’t be incorporated across state lines usually require some sort of professional type entity from your home state, like a doctor’s office. But almost every other business that’s not professionally licensed, or some kind of a state-only licensed business, should be just fine incorporating in another state.
So, we’re talking restaurants, t-shirt businesses, manufacturers, service businesses, software–whatever–almost all of these can choose a different state than where they’re currently formed.
Here are some of the pros and cons of operating in each of the most business-friendly states.
Pros and cons of incorporating a business in Delaware
Delaware is known for being extremely business-friendly. They have a large business court infrastructure just for dealing with business cases quickly, and if you ever want to have a funded startup, VCs will almost certainly require that you set up a Delaware C-Corporation.
Around 90% of the Fortune 5000 are incorporated here! Obviously, there are some very good reasons why.
One of the biggest reasons is their massive Chancery Court system that specializes in quickly dealing with corporate legal issues. The infrastructure is there to support businesses quickly and efficiently with strong business protection and a strong business veil.
Large companies like Uber and Facebook may get sued 100 times per day. Delaware has the capacity to handle issues at a large scale, and that’s why this is the top choice for big business.
Pros of Delaware
- Use the business-friendly chancery court
- Prestige of owning a Delaware corporation
- Protection of personal assets
- Efficiency from
Not everything about Delaware is perfect for incorporating every business, however. Someone has to pay for that massive court system, so fees to incorporate here are pretty high.
You’ll also have to maintain a registered agent in Delaware (this is a service we provide for all 50 states). Then you also have to pay their “franchise tax” and file expensive annual reports.
The general complexity of filing and maintaining a Delaware business entity is a challenge as well, and most small companies don’t need this extra work, especially with some of the other states we’re going to talk about.
Cons
- Adds another level of complexity
- Have to pay franchise tax
- More expensive in general
Fun fact: you can get expedited filings of various levels in Delaware, up to a 2-hour filing for $500 extra!
Pros and cons of incorporating a business in Nevada
Nevada built an extremely friendly shareholder set of laws. As recently as a year or two or go, the veil had only been pierced in Nevada once. Nevada represents the “wild west” in terms of business law, in sharp contrast to nearby California. This libertarian approach makes it extremely pro-business with a strong business veil.
Pros
- Shareholder friendly laws
- Strong protection
- Don’t report certain things to the IRS
Of course, by incorporating in a state so lax that prostitution is legal, you may get a bit of a stigma, depending on your type of business. Let’s just say that a Nevada-addressed corporation doesn’t carry the prestige that a Delaware one does.
Because of the rush of companies wanting to incorporate in Nevada for their lax approach to business regulation and taxes, the state has made filing a bit more expensive, so that’s another downside to the state.
Cons
- Some scammy operations
- Negative stigma
- More expensive to incorporate here
Fun fact: all other states have reporting arrangements with the IRS, however the Nevada Secretary of State, department agencies, and taxation agencies do not. So that means they don’t report certain things to the IRS, which basically is a way for the IRS to figure out what you’re doing. This is huge for business privacy.
Pros and cons of incorporating a business in Wyoming
Wyoming created the LLC in the late 70s, based on a simplified corporation business entity concept that existed in Europe at the time. There was no such thing as an LLC not that long ago.
Wyoming also adopted extremely favorable laws for business, similar to Nevada. However, incorporating and managing a Wyoming business is much, much cheaper. It’s about ⅓ the price to incorporate and LLC in Wyoming, and about ⅙ to incorporate a C-Corp. Yearly management fees are much cheaper as well. This is one of the cheapest and safest states you can choose for your business.
Pros
- Very low cost of operations
- Speed to incorporate is very fast
- Strong protection
Cons
- Not super popular
- More difficult to go get a local bank account
- Certain stigma
Fun fact: a lot of people don’t know how great an opportunity it can be to incorporate in Wyoming, it’s called “Switzerland of the Rockies” and “Dick Cheney’s House of Secrets” in some circles because of the favorable business setup.
Pros and cons of incorporating a business in New Mexico
The New Mexico LLC comes with real privacy right out of the box. With an LLC in New Mexico, you don’t have to file an annual report. In fact, you don’t even have to register your name on the business, just a registered agent, which you can hire (we can help with that). There doesn’t have to be proof of any ownership by anyone!
Pros
- Doesn’t list anyone on their formation documents
- Unparalleled privacy
- No record of who you are
As usual, nothing is perfect. If you’re not listed as the owner of your business, a bank will have a hard time verifying you own it and it could be a challenge to set up your business banking with this entity.
Cons
- Banks will have a hard time verifying who you are
Fun fact: since New Mexico doesn’t require an annual report when you file you get essentially a lifetime filing!
States to be avoided
States that tend to lean toward the left generally have less protection for businesses. More liberal states tend to be more likely to rule against a corporation and try to pierce the corporate veil.
The worst states for this of course are:
- California
- New York
In general, a more conservative state, like Texas or Tennessee, is going to be fairly pro-business.
Starting a side project in another state
If you’re thinking of starting a project on the side, it could be great for you to research and look into a side entity. This gives you flexibility and the benefits we’ve discussed if you incorporate in one of the states above. You can set up one side LLC to manage all of your projects under, and when they take off you can split them off into their own, separate entity. We’ve written about this specifically here.
To Recap
- Incorporating in another state can be really great, but it depends on the type of business and specific needs.
- If you want privacy, incorporate in New Mexico.
- If you want protection, incorporate in any of the states mentioned, especially Delaware and Nevada.
- If you want to save money, incorporate in Wyoming.
- Incorporate in another state fast and hassle-free with MyCompanyWorks!