Where to incorporate? The answer may surprise you!

A question often asked when incorporating is, “where do I incorporate?”  There are many promoters of various jurisdictions, such as Delaware and Nevada and even offshore.

Nevada and Delaware have favorable corporate laws which limited the liability of Directors.  As you may know, corporate directors are often sued for breach of fiduciary duty.  Since the law applied in the case of a lawsuit involving the internal workings of a corporation is the state of formation, DE and NV offer maximum protection from director liability. Nevada is a particularly favorable jurisdiction because it has no personal or corporate state income tax.  Shareholder privacy is protected in NV because there are no state corporate income tax returns filed and no information sharing with the IRS.

In most cases, the benefits described above will not apply to your decision to incorporate, since you will be doing in business in your own state.  If your corporation does business in your own state, it must register as a “foreign” corporation with your Secretary of State.  This involves paying an annual fee in both the state of incorporation and your home state.  In some states, such as Texas, the filing fee for a foreign entity is substantially higher than a domestic corporation. In addition, income earned in your home state is taxable and the corporation must file a tax return. You cannot earn income in a foreign state with a Nevada corporation and expect to avoid paying income tax there.  And, once you file a tax return there, this will require revealing the identity of the shareholders. The only remaining benefit will be limited director liability, which is little consequence if your corporation is made up of you, yourself and you. Thus, in most cases, your best choice for incorporating your small business is your home state. So why do radio advertisements push Nevada and Delaware corporations as the place for everyone to incorporate? Take a wild guess!