When you have decided to incorporate your startup, there are many important considerations you must keep in mind, especially what corporate structure is right for you and where to incorporate. When asking yourself “Where should my startup incorporate?”, you’ll get plenty of conflicting advice. That’s why it can help to get the help of an an experienced startup lawyer. They will be able to look at the goals and needs of your startup and give unbiased advice about the best options in your unique situation. Through Priori’s curated marketplace, you can connect with vetted startup lawyers to help you make these critical decisions.
Why Does It Matter Where I Incorporate?
Where you incorporate is important, because it determines the corporate laws that will apply to your business. Some states place a higher regulatory burden on companies than others, and some court systems are better prepared to handle business lawsuits in a predictable manner. The state in which you choose to incorporate can have a long-term impact on legal issues that involve your company, as well as taxation.
Your Incorporation Options
The State Where You Operate
Incorporating your business in the state where your company is physically located is called home state incorporation and is a popular option for many startups. That’s because this option will usually minimize annual filing fees and avoid certain additional fees often imposed by states where you do not operate. Depending on your state, you may even enjoy many of the tax benefits sought in other popular jurisdictions.
If you do not plan to expand your business outside of your state, it can often be easier to simply incorporate where you have your business, especially if you will be taxed in multiple jurisdictions and face fees in both states for being a foreign corporation.
Delaware is easily the most popular place to incorporate, due to its pro-business legal underpinnings. Some of the reason Delaware has been historically popular include the following:
- Compliance with corporate formalities under Delaware law is efficient and easy to do correctly.
- Delaware has a predictable, fair and well-developed body of corporate law, which means that legal issues can be settled quickly and the outcome is generally predictable.
- Directors of Delaware corporations are afforded a high degree of protection, making their fiduciary duties clear.
- There is no state corporate income tax for companies that are formed in Delaware but do not transact business there and no personal income tax for non-residents.
Because of these reasons, many investors will insist on Delaware incorporation for the sake of their own protection and the predictability of outcomes. One thing you should be aware of, though, is that Delaware has an annual franchise tax that you will be subject to as a corporation not actually operating there. This must be included in the calculations for your decision, as well as the potential financial strain of dealing with lawsuits and other regulatory requirements in a state not your own.
Other Popular Options
Nevada is quickly becoming another popular state of incorporation, because they are building some of the legal frameworks that made Delaware popular for incorporation in the past. Nevada has no state corporate income tax or personal income tax or any franchise tax for corporations or LLCs and imposes no fees on corporate shares.
In addition, some companies choose to incorporate offshore in a country like the Cayman Islands, the British Virgin Islands, or Bermuda for international taxation reasons, but this is generally not necessary at early stages in your startup and can make other elements of your business more difficult.
If you incorporate in a state other than your own, you may need to file to “do business” in all states in which you operate, including your home state.
An experienced startup lawyer can evaluate your particular situation and advise you on the pros and cons of incorporation in different jurisdictions.
The cost of incorporation can vary based on many factors, including the state where you choose to incorporate. When you hire a lawyer in the Priori network, forming your corporation typically costs anywhere from $300-$3500. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and receive a free price quote from one of our lawyers.
Will I be able to get venture capital down the road if don’t incorporate in Delaware?
Investors like to see Delaware incorporation, because they know that they are protected by the laws of that state. That said, if you incorporate elsewhere, you are not necessarily excluded from venture capital. You should discuss the effect of your particular home state’s corporate laws with a startup attorney to find out how the location of incorporation will potentially affect your chances of raising capital in early stages.