Delaware Incorporations: A Myth Undone
One of the great myths that, as consultants, we encounter every day is that of the benefits of incorporating your business in the state of Delaware. Multiple entrepreneurs have been persuaded by unscrupulous people to establish their businesses in Delaware or Nevada under the premise that they will not pay taxes, when in actuality they don’t get any real benefit by incorporating their business in these states, and may even incur additional expenses.
While it is true that almost every Fortune 500 company is set in these two states, they have very specific reasons for it. The rules of incorporation in these states makes it easier for large public companies with thousands of shareholders to meet certain requirements of the Securities Act.
At the same time, Delaware has a corporation friendly legislature, therefore Big Companies with multiple locations and a great number of shareholders usually have better legal protections in this state.
Regardless, unless you are doing business in Nevada or Delaware, incorporating your business in these states can generate a waste of time and money; and it might potentially be risky for small businesses.
Here are some of the realities by incorporating your business in these states:
You may need to pay state taxes in your state anyway
Several states, including Delaware and Nevada, have no state tax on personal or corporate income. Scammers use this fact to convince owners to incorporate their business in these states. The reality is that if you are a resident or do business in a state with state income tax, then you, and maybe even your company, will have to pay taxes on the profits obtained.
It could jeopardize your personal assets
For your personal assets to be protected from the liabilities associated with your company, you must incorporate your business in the state where you are going to be functioning. If you are registered out of state, there is no protection and your personal assets are exposed.
Increased administrative costs
When small business owners incorporate their business outside of their own state, they quickly find that they have to go back and register into their own state as a "foreign entity." This increases the costs of processing and administrative costs.
Although Incorporating your business in Delaware and Nevada could be potentially beneficial for companies that are looking to operate in multiple states and are expecting to become publicly traded in a short amount of time, for the small to medium size entrepreneur the risks more certainly outdo the expected benefits.
When a new business starts, the delicate equilibrium necessary for it to flourish may be altered by added stress related to incorporating your business in a state far away from where they are doing business. In this case, local is definitely better, as you will have access to more information, and your costs will most likely be reduced.
It is very important that small business owners meet with consultants versed in the various areas needed to create or incorporate a business. You should be aware of current regulations to avoid being a victim of deception and false promises. It is a good practice to always validate the experience and knowledge from other sources. A dedicated consultant that wishes to help you grow as an entrepreneur will have nothing to hide.
Want to know more about incorporating your business? Download our exclusive e-book: “Choosing your corporate structure: a view into the most common legal entities in the United States” for more insiders tips.