by LawInc Staff
July 10, 2018
Startups and entrepreneurs always grapple with the question of where they should incorporate their business.
“Should I incorporate in Delaware for better protection?” “Should I form a corporation in Nevada to save on taxes?” “In my home state?” “If not, where should I incorporate my business?”
Incorporating in the wrong state is a step in the wrong direction for many business owners.
It can end up costing you much more money in the long run, and even leave you personally liable in case of a lawsuit or audit. Accordingly, carefully consider the drawbacks before making a decision on where to incorporate.
Don’t Be Lured By the Hype
There are a lot of incorporation services that make millions off of uninformed business owners who are misled into thinking that states like Delaware, Nevada or Wyoming are the best places to incorporate their businesses.
These service companies spend a fortune running seminars which push their services onto unsuspecting and eager entrepreneurs.
Don’t fall for the hype. It can cost you, big time.
ALSO SEE: Should I Incorporate in Nevada?
Unfortunately, there are countless business owners who attend these “Nevada Incorporation” seminars run by sales gurus. If you speak with one of them, they almost sound like brainwashed cult members. Don’t become a victim.
You Won’t Be Protected Unless You Incorporate Where Your Business is Headquartered
So many people fail to realize that corporations only provide protection in the states they are registered in.
So if your business is based out of New York, and your corporation is formed in Delaware, the Delaware corporation will most likely not protect you in case of a lawsuit.
You would need to register the Delaware corporation in New York to receive protection.
Where You Incorporate Does Not Change Where You Owe Taxes
Simply put, business owners must pay taxes where the income is earned. Incorporating your business in a different state will not change this.
Furthermore, trying to avoid taxes that you and your business are legally obligated to pay can be construed as tax evasion.
While corporations can provide tax savings, forming a corporation in a different state is not the way to achieve it.
Keep it Simple
When it comes to forming a corporation, less can sometimes be more. Incorporating a business in states like Nevada, Delaware and Wyoming usually make things more complicated and more expensive.
Remember, registering a corporation in two states basically means double the paperwork, double the incorporation fees and double the headache.
Don’t make things more complicated than they need to and focus your time and energy on your running and growing your business.
Do Your Research
There is a wealth of information on the internet discussing the pros and cons of incorporation.
Take some time to read relevant blogs and forums. You can learn a lot from other business owners who have already done their homework.
Don’t be afraid to dive in and participate in forums. Other entrepreneurs are often eager to share what they’ve learned when incorporating their own businesses.
Consider Whether an LLC Might Be Better
Too often, business owners get caught up with the corporate structure with dreams of “going public.” The reality is that out of the millions of corporations, only a small fraction end up going public.
Many successful businesses are Limited Liability Companies (LLCs).
LLCs offer numerous advantages including ownership flexibility, management flexibility and tax savings.
LLCs can even be taxed like corporations.
Consult With a Professional
At the end of the day, it’s always best to delegate the decision to incorporate your business to a trained professional. They have the experience and knowledge to know what will be best for your business now and in the long run. An experienced business attorney will give you the best advice.
Also be sure to consult with an accountant. Taxes play a critical role when starting a business. Tax planning is one of the most neglected items when forming a corporation or LLC. Too often, business owners think about taxes when it is too late and they end up owing penalties.