taxes, business-structure, incorporationI have an app that is making money and I want to incorporate it. I live in New York. From the research I’ve done it seems like everyone prefers incorporating in Delaware because of the tax and law benefits.
I’m making a little bit of money off (< $100,000) the startup and don’t plan on getting investors or selling the company. It’s just a successful side project.
Some people also recommend that I just do it in my home state (NY) even with less favorable tax policies because it will be less of a headache. However, my product is just an iOS app and so I’m not clear if that means I am “doing business in NY” because none of my transactions happen in NY, I just live here. Ideally I want to be taxed as little as possible.
Where should I incorporate my company?
In the US, the most common states in which to incorporate are your home state, Delaware, Nevada, or Wyoming (with Wyoming being considerably less popular than Delaware and Nevada).
First, just to be clear, this has nothing to do with tax. Even if you incorporate in a state that is not your home state, you must also register the corporation with your home state (known as “qualifying a foreign corporation”) to operate in your home state, and you will be subject to the same taxes as if you you were incorporated in your home state. To emphasize this point: it is illegal to incorporate in a state like Delaware, Nevada, or Wyoming, but to operate in another state unless you register your corporation in your home state and pay taxes in your home state. Registering a Delaware corporation without qualifying it in New York and then operating the business in New York can be considered tax evasion in New York and can be considered criminal.
Second, where you incorporate has nothing to do with where you do business. You can be incorporated in Delaware and do business in New York just like any New York corporation.
So why would you incorporate in Delaware, Nevada, or Wyoming? Two words: Liability and Predictability.
Every corporation relies on what’s known as the corporate veil to separate the individuals owning, running, or managing the corporation from the corporate entity itself. The corporate veil is maintained by the state in which a corporation was formed. Some states (New York among them) have activist judiciaries which have been historically more open to piercing the corporate veil and bringing liability directly to individuals behind a corporation.
Delaware and Nevada both have a separate set of courts to deal with businesses. You don’t have the same judges that deal with more emotional issues dealing with corporate issues like in most states. As a result, Delaware and Nevada have well established precedents of protecting the corporate veil in all but the most extreme circumstances of fraud. Wyoming is just a very conservative state that follows more classic traditions and has a population strongly opposed to judicial activism.
So which is best? Delaware is great for big corporations (65% of the Fortune 500 is incorporated in Delaware), investment funds of any kind, and any sort of main-stream business that wants its corporate identity maintained in a predictable way. Delaware is also what investors expect, and often if your company is going to be bought-out or even invested in, the investors may insist on you re-incorporating in Delaware. Nevada has carved out a niche in being particularly friendly to corporate managers running high-liability businesses. They have the best record in the US of protecting the corporate veil in all but the most extreme cases of fraud. Nevada is good for the smaller business whose operations have exceptional concerns related to liability. Unfortunately, Nevada’s demographics are changing and pressure on the corporate-friendly system now exist. Also, Nevada’s corporate fees seem to be skyrocketing every few years. Wyoming, again, is old-school, conservative and if the law says something, their judges tend to feel less entitlement to get emotional and write their own rules.
In your case, incorporating in New York and Delaware are both options. Delaware will cost you a little more because you need to maintain two registrations (New York and Delaware) and an agent in both states. For that you will receive more predictable corporate law, better liability protection, and much less complexity if you end up taking on investors, selling your business, or doing anything else with an outside party.
Most attorneys practicing business law are well-versed in Delaware corporate law as it is de facto standard for corporate law in the US. Personally (I live in Illinois which has similar dynamics to New York), I would not do business in anything other than a Delaware or Nevada entity. But that’s just my opinion.
This is not legal advice. I am not a lawyer.
All content is licensed under CC BY-SA 3.0.