What is the Best State for Business Formation?

One of the unique features of incorporating or forming an LLC is that you do not necessarily have to form the company in the State where you do business. When deciding on which state to incorporate in, there are basically 2 choices:

1. Your Home State
2. Delaware, Nevada or Wyoming

1. Your Home State

For the majority of small businesses, incorporating or forming an LLC in your home state is usually the easiest and least expensive option. This is because virtually every state has laws that require you to “re-register” a Delaware or Nevada company in the state where it is actually doing business.

For example, if you form a Nevada corporation but your physical business is located in Colorado, the state of Colorado will want you to “re-register” as what’s called a “foreign corporation” (a company that was not originally incorporated in Colorado). This is especially true if you intend to get a bank account and business license or rent office space in your home state.

NOTE: We can file a Foreign Qualification in any State, click here to learn more and order online.

In most cases, registering as a “foreign corporation” or LLC will subject you to all the same taxes and fees as an in-state company. So you will probably have not avoided any taxes or fees, plus there is the added expense of registering as a “foreign corporation” in your home state and any annual fees in both states.

This is not to say there are no valid reasons for choosing another State, we just like our potential clients to be aware of the additional steps required when choosing a State outside of their home State. Further discussion with your attorney or other advisor is recommended.

2. Delaware, Nevada or Wyoming

Delaware

Delaware is where most large corporations (Fortune 500, Nasdaq, etc.) are incorporated. The reason for this is that Delaware’s body of law is more business-oriented and they have a large and advanced business court system (called the Chancery Court) to handle complex legal litigation. It is the state of choice for both large corporations, foreign corporations, and many fast-growing or high-potential companies (for example, Venture Capitalists typically require a Delaware Corporation before they’ll invest in your company).

Related Article: Read how an attorney that specializes in startups recommends setting up a Delaware Corporation.

Nevada

Nevada has recently exploded in popularity for both large and small businesses. This is due to Nevada’s very pro-business climate, low-tax mentality, and the lack of an information-sharing agreement with the IRS (all other States share company information with the IRS).

Pros:

• No Corporate Income Tax.
• No Franchise Tax.
• No State Personal Income Tax.
• Stockholders are not a matter of public record (though Officers, Directors and Members of LLC’s are)
• Only 1 Director required (who can also be all the Officers and the sole Shareholder).
• Nevada Corporations and LLC’s are legendary for being difficult to pierce the “corporate veil”. This means that it is extremely difficult for attorneys to go after the company owners, shareholders, officers or directors personal assets in a lawsuit.
• In states like California, the “corporate veil” is regularly pierced in a large percentage of lawsuits – so you could lose your house, cars, etc. in a lawsuit. In many cases, simply having a Nevada Corporation or LLC may be enough to ward off a lawsuit or predatory lawyers.
• Nevada has a very pro-business climate with no information sharing agreement with the IRS.
• Officers, Directors and Members need not be US citizens or residents of Nevada.
• Minimal annual requirements: all you need to do on an annual basis is a) maintain a Nevada Registered Agent and b) file your Annual List/State Business License (both of which we can handle for you).

Cons:

• Nevada has recently raised their filing fees (check our order forms above for current pricing) that now are more than Delaware and significantly more than Wyoming.
• You may have to “re-register” your Nevada company in the state where you operate (if you’re not based in Nevada or have not established “nexus”).

Lowdown: Many times, as mentioned above, you’ll need to qualify your Nevada company in the state(s) where you have physical operations (we can assist with this). There are legitimate ways to obtain “nexus” for your company in Nevada as your primary source of operations, but we highly recommend further discussion with your attorney in this matter. We also offer a Nevada Virtual Office solution to further assist our Nevada clients.

Wyoming

Wyoming has also recently exploded in popularity for its very business-friendly climate and has been called “Switzerland of the Rocky Mountains” by The Economist magazine. It features some benefits compared to a Nevada entity including:

• Wyoming was actually the first state to create the LLC in 1977.
• All the benefits of Nevada listed above but much lower filing fees (Currently only $100).
• Lower annual fees (Currently only $50).
• Minimal annual requirements: all you need to do on an annual basis is a) maintain a Wyoming Registered Agent and b) file your Annual Report (both of which we can handle for you).
• Does not require a State Business License (Nevada does – even if you operate out of state).

Lowdown: Though MyCompanyWorks, Inc. is headquartered in Las Vegas, Nevada, we have an office in Wyoming as well. It has lower fees, less disclosure requirements and the Wyoming Secretary of State is a pleasure to work with. We also offer a Wyoming Virtual Office solution to further assist our Wyoming clients.

Common Reasons for Choosing Delaware, Wyoming or Nevada:

• Prestige: a Nevada or Delaware entity is the chosen business entity of the largest, most successful and fastest growing companies in the world. Wyoming has been called “Switzerland of the Rocky Mountains” by The Economist magazine.
• Protection: predatory consumers or lawyers who attempt to threaten companies may be more hesitant to deal with a Nevada, Wyoming or Delaware company knowing that the body of law protecting the company may be more business friendly and protect the owners/shareholders more effectively. Also the identity of the company owners may be more difficult to ascertain.
• Convenience: in some cases, a business may find itself moving from State to State or having partners all over the country. In this case, some businesses find it easier to simply use a Nevada, Wyoming or Delaware entity as a sort of “headquarters” that maintains the company while it moves or expands to other States. This can be easier than continuously creating and dissolving in-state companies (and changing Tax ID Numbers, Registered Agent addresses, losing company credit profiles, etc.)
• High Growth or High Risk Company: if your company is fast-growing or engaged in a risky industry (such as fireworks or children’s toys), then Nevada, Wyoming or Delaware may provide the liability protection you need. Also, if your company is fast-growing, choosing Nevada or Delaware now may prevent you from needing to inevitably re-incorporate there in the future when your company needs to go public or receive venture funding, etc.
• Holding Property or Independent Contractor: a client who simply needs an entity and a bank account to purchase or hold property, accept payments as a contractor or receive investment money will form a Delaware, Nevada or Wyoming company for this purpose since they are really not “operating a business” in their home State. In fact, many of our clients simply form the company and leave it “on the shelf” until they are ready to engage in business.
• Managing Side Projects: many of our clients like to use a business entity to keep side projects organized under one entity. Read more on our guide to creating a company to manage side projects.