Guest post by Nellie Akalp, CEO of CorpNet.com, an incorporation filing service company. Nellie is a strong advocate in educating small business owners and entrepreneurs about the importance of protecting their assets and is responsible for overseeing and managing the daily operations of the business. She blogs regularly at Mashable and Tweets from @Corpnet.
For most small business owners, the process to incorporate or form an LLC is an unfamiliar road to navigate. After deciding which business type is best, the next question is where. And most often, small business owners think they should decide between Delaware and Nevada.
Both Delaware and Nevada are hot choices for incorporation. And there’s good reason. Larger corporations often choose Delaware as their state of incorporation, because it offers some of the most developed, flexible, and pro-business statutes in the country. Nevada is a popular choice for businesses due to its low filing fees, as well as the lack of state corporate income, franchise, and personal income taxes.
To be sure, these are compelling advantages. However, they’re not for everyone. As a general rule of thumb, if your corporation or LLC will have less than five shareholders or members, it’s best to incorporate or form an LLC in the state where your business has a physical presence.
By ‘physical presence’, I mean the state where your business is physically located, or where any property owned by the business is located, or where your employees reside, or where the shareholders reside. So unless your business has some kind of physical office in Delaware or Nevada, it’s going to be much easier (and less expensive) for you to incorporate or form an LLC in your home state.
Let’s take a look at an example. Ginnie owns a sporting apparel company in Maryland and is thinking about incorporating in Delaware. However, Maryland has rather strong rules pertaining to bank accounts. As an ‘out of state’ business, Ginnie would need to get permission to open a business bank account in Maryland. And it won’t be easy to open a bank account in Delaware, as Ginnie’s business doesn’t have any kind of physical address in the state.
In addition to this logistical challenge, there are other added fees to deal with. These can include:
For the state where a business incorporates:
And then, for the state of residence (or where the business is physically located):
I can’t overemphasize that last point, as it is a common misconception among many small business owners. While Nevada may not charge state income taxes for your corporation, the state where your business is physically located will come after you for those taxes sooner or later. Adding insult to injury, your tax liability may actually increase because you're viewed as a foreign entity operating in the state.
As you can see, any advantages of incorporating in Delaware and Nevada are washed away with all the added fees and paperwork of trying to operate out of state. As a small business owner, you’re already contending with enough paperwork and fees as it is. Don’t add more to your workload. Remember the rule of thumb… if your company has less than 5 shareholders/members, incorporate in your home state.
[Editor’s note: To read Nellie’s previous guest post where she shares tips on what you need to know about incorporating your business click here.]
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