Business Formation in Delaware & Nevada
If you are considering incorporating a business or forming a limited liability company (LLC), you have likely wondered about the option of choosing Nevada or Delaware as your state of incorporation or formation. Everyone talks about being a Delaware or Nevada corporation/company and the advantages. So what are they?
The answer’s pretty simple. Tax breaks.
For all practical purposes, however, the tax advantages of incorporation/formation in Delaware or Nevada are generally not worth it to a start-up or small business. It is cheaper to stick to the state where you do business, and for the most part, the tax breaks don’t positively impact the little guys in the same way as they impact big businesses. However, know that the right course to take is fact-specific. To make the right decision, make sure you understand the needs of your business and consult with a knowledgeable business formation attorney.
The following is a brief list of the advantages and disadvantages of incorporating/forming your business in DELAWARE:
Advantages of incorporating/forming in DELAWARE:
- Delaware’s business law is one of the most flexible in the country
- The Delaware Court of Chancery focuses solely on business law and uses judges instead of juries, meaning that the law is more predictable and you will have a better sense of what to expect in the event of a legal dispute
- For corporations, there is no state corporate income tax for companies that are formed in Delaware but conduct business elsewhere (There is, however, a franchise tax)
- Taxation requirements are often favorable to companies with complex capitalization structures and/or a large number of authorized shares of stock
- No personal income tax for non-residents
- Shareholders, directors, and officers of a corporation or members or managers of an LLC need not be Delaware residents
- Stock shares owned by persons outside Delaware are not subject to Delaware taxes
Disadvantages of incorporating/forming in DELAWARE:
- May need to register corporation or company in state where business is being conducted, and keep up with annual fees and/or registrations
- Subject to taxes in state where corporation or company conducts business
- Will need to hire registered agent in Delaware to accept service of process and communications from Delaware Division of Corporations
- Will be subject to Delaware franchise tax even if business is conducted elsewhere
Because of the nature of these advantages and disadvantages, it is generally public corporations or companies that choose to incorporate or form in Delaware, as they are better able to take advantage of the benefits offered by Delaware. For example, over half of the Fortune 500 companies are Delaware companies.
The following is a brief list of the advantages and disadvantages of incorporating/forming your business in NEVADA:
Advantages of incorporating/forming in NEVADA:
- No state corporate income tax
- No fees on corporate shares
- No personal income tax for corporations or LLCs
- No franchise tax for corporations or LLCs
- Shareholders, directors, and officers of a corporation or members or managers of an LLC need not be Nevada residents
- Greater privacy – stockholders of Nevada corporations are not a matter of public record (no information sharing agreement with the IRS)
- Extremely strong protection as it relates to “piercing the corporate veil” – This means that it is hard for corporations’ or companies’ actions to result in personal liability for their owners
Disadvantages of incorporating/forming in NEVADA:
- Nevada’s incorporation and formation fees are higher than they are in most other states
- May need to register corporation or company in state where business is being conducted, and keep up with annual fees and/or registrations
- Subject to taxes in state where corporation or company conducts business
- Will need to hire registered agent in Nevada to accept service of process and communications from the Nevada Secretary of State
- May need to obtain a Nevada business license
As the benefits offered by Nevada are similar to those offered by Delaware, many of the corporations or companies that choose to incorporate or form in Nevada are large and/or publicly traded. This does not mean, however, that Nevada is not an attractive option for smaller businesses – unlike with Delaware, some of the advantages offered by Nevada such as enhanced privacy and difficulty in piercing the corporate veil are equally attractive to small businesses compared with large businesses.
