Is forming an LLC or corporation in Nevada or Delaware the right choice for my business?
The states of Delaware and Nevada have become popular destinations for incorporation formations. There are several reasons for this. For one thing, the state of Delaware has very strong history of corporate case law that is very favorable to business. This is why most major US corporations are headquartered there. Another advantage is that each of these states does not levy corporate taxes to corporations and LLCs that conduct business outside of the state.
What many incorporation service providers whose core business is concentrated often leave out is a very important piece of information that can have significant ramifications to the uninformed consumer. A company that is formed in one state and conducting business in another is not officially recognized or authorized to conduct business in that state. A corporation, LLC, or other such entity is organized under the statutes pertaining to business entities within that state and the authority to conduct business does not necessarily extend to any other state.
In order to legally conduct business in a state other than that in which the corporation or LLC was formed, a company must file what is typically known as a foreign qualification in each state where a nexus exists. While this may make sense for a multi-million dollar corporation with locations in multiple states, it does not necessarily extend to small business owners. In order to obtain a foreign qualification in a state as a foreign corporation or LLC additional filing forms and fees must be filed within each target state. Furthermore, upon obtaining rights to conduct business in that state the foreign company is subject to the same taxes and laws to which domestic (in-state) entities are subject, therefore negating the benefits of filing outside of the home state in the first place.
Additionally, both Nevada and Delaware levy annual taxes in the form of annual reports, which cost $125 in Nevada and a franchise tax in Delaware which varies depending on whether the entity is a corporation or an LLC. Another annual fee that is also overlooked by incorporation service companies is the registered agent fee which can be anywhere from $99 to $300 per year, depending on the company providing the service within a given state. Maintaining an agent is mandatory, and if an agent is not maintained it will result in the administrative dissolution of your LLC or Corporation upon the resignation of the registered agent.
The state filing fees to register as a foreign corporation can be quite substantial as well, Texas for example charges $750 to file a foreign qualification while the fee to file as a domestic entity is only $325. The truth is that in the long run filing a company in a state outside of your home state can end up being much more expensive than filing it in the home state to begin with, while providing no financial incentive to do so. In essence, the person who chooses to file in Delaware or Nevada may be required to meet the compliance and ongoing requirements of the two states, instead of just one.
While many individuals choose to file in these states without registering within their home state without incident, they ultimately jeopardize the advantage of incorporating sought in the first place, which is the limitation of their personal liability. If a corporation or LLC is registered in the state of Delaware but conducts business in California and neglects to register they could find that any and all liability could accrue to them personally in the event that a legal judgment was made against the company. This is because the state will not recognize the unregistered foreign corporation legitimacy thus piercing the corporate veil of the company.
While we are merely a filing company and have no personal incentive in swaying our clients to file in one state over another we do feel it is important to disclose this information to our clients and site visitors in the hopes that they will can avoid committing to a decision that for the majority of business owners could be a short sighted solution with potentially negative long term consequences and higher long term liabilities. If you would like to discuss this matter in further detail with one of our incorporation specialists feel free to call us anytime as we would be more than happy to answer any additional questions you may have.