Where to Incorporate?

Delaware, Nevada and Wyoming are considered by many to be the best states in which to form a new corporation because they are “business friendly” and have low fees and taxes.  Below is a comparison of these three jurisdictions.  But note:  While a corporation can be set up in any of the 50 states or D.C. even if there is no other connection with the place of incorporation, it is usually necessary to qualify as a foreign corporation in the state or states where the corporation is “doing business”.   For example, a Delaware corporation with its home office in, say, Minnesota, that conducts all its business in Minnesota will have to qualify as a foreign corporation in Minnesota.  This means payment of annual fees to two states and payment of state corporate income taxes in Minnesota.  In addition, incorporation is a state where the company has no physical presence usually requires the appointment of a registered agent in the state of incorporation, which typical costs around $150 per year.  In contrast, if one of the officers or directors lives in the state of incorporation, he or she can be designated as the registered agent and the cost of an independent registered agent will be avoided. In the example just given, the obvious question is whether anything is gained by incorporating in Delaware rather than Minnesota.

Delaware

More than 850,000 business entities have Delaware as a home state, including more than 50% of all U.S. publicly traded companies and 63% of the Fortune 500.   Delaware is in the forefront of new developments in corporate governance (e.g., email meeting notices), its filing procedures are efficient and not bureaucratic, its website is very easy to navigate (corp.delaware.gov), and it has procedures for almost immediate notice of a filing—for a fee, of course.

The advantages of Delaware incorporation are particularly important to big corporations.  If your corporation is trying to close a multi-million dollar merger with another corporation and you cannot make payment until you have official notice of the filing of the Certificate of Merger, it is possible to get that official notice from the Delaware Division of Corporations while everyone is waiting in a conference room to close.  In contrast, there are jurisdictions that will not provide official notice of a merger filing for a few days.  Similarly, a corporation that is sued by its shareholders, as sometimes happens with publicly held corporations, is probably better off defending itself in the Delaware Court of Chancery.  The state laws in Delaware relating to corporate governance, both statutory and case law, are well developed, having evolved over a period of 110 years, and the judges in the Court of Chancery are very knowledgeable.

The basic filing fee to incorporate in Delaware is $89, although it can vary depending on the amount of stock authorized.  The annual franchise tax for small corporations is $125.  Large corporations pay an annual fee based on a formula that considers both authorized capital stock and assets, and the annual fee can be quite large.   Delaware has a state corporate income tax but it does not apply to Delaware corporations that do not conduct business in the state.

Nevada

Nevada is often referred to as a friendly place to incorporate, especially for small businesses.  Some websites claim that courts in Nevada tend to favor the interests of management over competing interests.   Whether that is true or not, there are other factors to consider.

The annual filing fee in Nevada is $75, although it can higher, up to $11,100, depending on the authorized capital stock.  For the purpose of computing the filing fee, the value (capital) represented by the total number of shares authorized in the Articles of Incorporation is determined by computing the total authorized shares multiplied by their par value (or total authorized shares without par value multiplied by $1.00).  Filing fees are calculated on a minimum par value of one-tenth of a cent (.001), even if the stated par value is less.  Thus, with a little planning the maximum filing fee need not be an issue.  For example, a Nevada corporation could have 100,000,000 shares authorized, par value $0.001 per share, and the fee to incorporate would be only $175.

Nevada corporations and foreign corporations qualified in Nevada are required to file an “Annual List of Officers, Directors and Registered Agent and State Business License Application”.   The annual Business License Fee is $200 (home-based businesses are exempt) and the “Annual List” fee starts at $125, with a maximum of $11,100, calculated in the same way as the initial filing fee for domestic Nevada corporations.

Nevada does not have a state personal or corporate income tax and it does not share information about Nevada corporations with the IRS.  While this latter point may give the IRS less information to use as the basis for an audit, it is a situation that the IRS does not like.  That in itself may trigger IRS scrutiny.

Nevada now requires the Social Security number, date of birth, resident addresses, and telephone numbers of all shareholders, partners, officers, managers and members of all companies formed in the state.   The names of shareholders are not part of the public record.  The names of directors and officers can be concealed from public view by using nominees.  The use of what is commonly called “nominee service” has been practiced in the State of Nevada for around 75 years. Typically, this service, offered by most of the large, well-established resident agents in the state, provides the name and signature of a nominee on the annual list of officers filed with the Secretary of State, the only mandated public record of the corporation. A nominee officer or director, when properly used, has no authority to act in any manner for the corporation except that as a nominee signer. When the Articles of Incorporation and corporate bylaws are formed correctly the Corporation will appoint the nominee signer with specific, limited authority. The purpose of course is only to be the public face of the private Corporation.  While this procedure solves what might be considered an issue, it is an unnecessary complication.

According some commentators, Nevada offers the best corporate veil protection available.

Finally, the website for the Secretary of State of Nevada (www.nvsos.gov), where information about corporations is found, is not easy to navigate.

Wyoming

In Wyoming, unlike most states, it is not necessary to include “corporation”, “incorporated”, “company” or any abbreviation of one of them in the name of corporation.

The filing fee to form a corporation in Wyoming is $50.  The annual fee depends on the amount of assets of the corporation located in Wyoming.  If none, the annual fee is $50 plus $2 if the filing is made on line.   The names and addresses of officers of directors are disclosed on the annual report but business addresses can be used.

Like Nevada, Wyoming has no personal or corporate income tax (and the state has a budget surplus!).

Wyoming is one of only two states that provides for true continuance in its corporate laws.  Many states provide for domestication, but the two concepts are not the same. If a corporation chooses to domesticate in another state it can create a new corporate entity in that state and merger the existing corporation into the new corporation.   The new corporation, which survives the merger, acquires all the assets and liabilities of the disappearing corporation, but the date of corporate formation is the date of the formation of the new corporation.   However, in Wyoming, continuance is a process by which Wyoming creates the legal fiction that the corporation has always maintained its domicile in Wyoming.   That is, the corporation can retain its original incorporation date after becoming a Wyoming corporation. Anyone examining the Wyoming public record would find a corporation dating back to the original date of formation of the non-Wyoming corporation.

Wyoming does share information with the IRS but only information relating to companies with real assets inside the state.  If a corporation has no assets Wyoming, it is as protected in that regard as it would be if incorporated in Nevada.

Wyoming has well-established criteria concerning the piercing of the corporate veil. Where fraud is not present, a Wyoming corporation that does not co-mingle funds and maintains corporate formalities, including holding meetings of shareholders and directors, will not be pierced.   Some consider Wyoming to be inferior to Nevada in terms of corporate veil protection, while others claim the two states are comparable.

The Wyoming Secretary of State’s website (soswy.state.wy.us) is easier to use than Nevada’s but it is not as “user friendly” as Delaware’s.

The forgoing discussion applies only to corporations and not limited liability companies, limited partnerships or other legal entities.

The Corporation Secretary is a Wyoming corporation (www.thecorpsec.com).

 

 

 

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One Response to Where to Incorporate?

  1. Awesome! Its genuinely remarkable article, I have got much clear idea about from this article.

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