Many entrepreneurs or small business owners get persuaded to set up a corporation or limited liability company in Nevada or Delaware after hearing about all the benefits these states have to offer. It is true that virtually all Fortune 500 companies are set up in Nevada or Delaware, but this is for specific reasons that usually do not apply to small businesses.
Large companies have good reason to incorporate in these states, as they are often required to by Wall Street underwriters. The incorporation rules in these states also make it easier for very large, public companies to comply with mandatory laws.
For the average business owner or entrepreneur, incorporating outside of their state is both risky and expensive. Unless you are going to do business in Delaware or Nevada, you will likely not enjoy any additional tax benefits or asset protection, and you will probably be better off incorporating in your home state.
Potential Dangers of Out-Of-State Incorporation
There are actually a few pitfalls you need to watch out for if you are going to incorporate out of state.
1. Your personal assets may be at risk. To make sure your personal assets, such as your home and retirement, are kept separate from business liabilities, your business will need to be registered in the state in which you do business. If you are registered out of state, you do not have this protection.
2. You will likely pay state taxes, anyway. Many states, such as Nevada, do not have personal or corporate state income taxes. This does not mean incorporating in these states will allow you to avoid paying taxes. Being a resident or doing business in a state that does have a state income tax means you will pay the taxes on profit.
3. Your administrative costs can be higher. When you form an LLC or corporation out of state, you will then have to register in your own state as a foreign entity. This means additional filing fees and other administrative costs to worry about.
If you are ready to incorporate or form an LLC, do not be swayed by all of the good things you hear about Delaware and Nevada without talking to an attorney or corporate services company to discuss your options.
Learn more about forming an LLC by visiting USA Corporate Services, Inc.