Should I Form My New Business in Delaware or Nevada?

The inspiration for this post comes from the frequent inquiries we get about starting a business in Delaware or Nevada.

I want to explore why Delaware and Nevada are popular choices for formation, and why those states might not be the best place for a new business.

No matter what, you’ll never be THIS lost.

Delaware has very flexible, favorable laws for the formation of large (read: Fortune 500) companies. These pertain to organizations with large numbers of shares and shareholders, and otherwise complicated ownership. Nevada currently has no corporate or income tax, which, of course, is great news for people living and doing business in the state.

For these legitimate reasons, in addition to liability protection, most Fortune 500 and other large companies have incorporated in one of these states.

Unfortunately, the growing notion that all businesses can reap those same benefits is concerning. Making that claim, many formation services insist on forming in one of these states, giving you bad information and leaving your company at risk.

Unless they are raising enormous amounts of venture capital, and are subject to investors’ demands, a new or small business should consider registering in its home state.

When you register an entity for the first time, your business becomes a “domestic entity” in that state. For example, if you form an LLC in Nevada, you are said to be “domiciled” there.

The confusion arises when you are doing business outside your domicile. In those cases, you have to register for authority to transact business in that state as a “foreign entity,” a process known as “foreign qualification.” For example, if you do business in Iowa (have assets, employees, etc.), but have chosen to form a Nevada LLC, you have to “foreign qualify” in Iowa. This process happens all the time as businesses grow and do work in other states.

For a new or small business, the administrative costs alone can be quite high. You have initial fees for formation, foreign qualification, and initial reports, and ongoing fees in each state, such as annual reports, franchise taxes (which Delaware just increased), and maintaining a registered agent. Also, you’ll probably have to pay taxes in your state anyway. For a new business, staying at home will save you some money.

Most importantly, if you don’t register as a foreign entity where you do business, you do not have liability protection in that state, are not properly protected from lawsuits, and are subject to penalties for noncompliance, including fines and dissolution.

So what’s the bottom line?

It’s a business decision! Weigh the costs and benefits of forming in Delaware, Nevada, and your home state. For questions specific to your situation, please seek the advice of an attorney or accountant.

We register and foreign qualify businesses in all 50 states, Delaware and Nevada included, and would love to help you get started. We also want you to be well informed of state requirements, and the implications for your business. If you have general questions, feel free to ask below or give us a call!