What state should I incorporate in?

It depends on the nature of your business. Certain states have a reputation of tax haven. Usually it means that there is no state tax, provided that the company is not conducting business from the state. However, all companies/individual entrepreneurs have to pay federal taxes. When you hear someone calling these states ‘American offshores’, keep in mind that while state taxes or the absence thereof may be lucrative, it does not mean that an entrepreneur/company won’t have to pay taxes at all. Moreover, often these states impose a franchise tax for the opportunity to incorporate there.

Having said the above, incorporating in a state with a certain tax structure may be beneficial for business which do not have a psychical location in another state, e.g. online businesses. The law in U.S. is fact-based, not paper-based. Meaning, if a company is incorporated in Delaware, but has a physical location in New York (office, employees, conducts business from NY, solicits state residents), it’ll be subjected to NY state taxes regardless. This explains why the state of incorporation should be determined in accordance with the nature of the business. It may not make lots of sense for companies that run business from a physical location to incorporate in so called tax heavens. Simply won’t help. The story is quite different with online businesses. Having been experiencing the boom of tech startups for the past five years, we see that more and more companies transfer their commercial activities online. Remember chain bookstores just a few years ago? How many people buy books from a brick store nowadays?

What would be the recommendation for an online business or the one, which conducts its activities in multiple states (cannot be tight to one particular location)? Any other state, which provides certain tax reliefs. It can be Nevada, Texas, New Jersey, Alaska, Florida, Tennessee, Washington, Wyoming, New Hampshire, South Dakota, and, of course, famous Delaware.

What if we talk about a startup, which is going to look for venture capital? Delaware.

Why?

·        Well-developed and predictable body of law

·        A separate Court of Chancery which reviews only corporate claims (accordingly dispute resolutions happen faster and more efficiently)

·        Directors and officers of DE corporations are awarded greater protection from liability

·        Complying with procedural formalities is easier in DE (e.g. was one of the first states which implemented electronic submission of annual reports and other mechanisms of regulatory compliance), and 

·        Investors insist on Delaware.

Nowadays many other states, like New York and California, have well-developed corporate law, which is hardly worse than Delaware one. Delaware continues to be the leading state for incorporating mostly from practical perspective rather than a legal one. Investors insist on Delaware. Why? Mostly often investors are people/companies, which have been functioning in the corporate world for a while. They are familiar with Delaware law, they have their own counsels, who are familiar with Delaware law, and they know all ins and outs, procedures and possible consequences. It is not practicable to educate oneself about laws of other states only because of one startup in which they may have interest. It is not a secret that there are more entrepreneurs looking for investments than there are investors ready, willing, and able to render the cash. Accordingly, startups are advised to make it easier for potential partners to come on board.

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