As you think about where to incorporate a business or form an LLC, you may be considering Delaware or Nevada. More than half of public and Fortune 500 companies are incorporated in Delaware, and Nevada offers attractive tax advantages. Be sure to consider your business type and closely assess the state laws and financial considerations before making a choice for your business.
For large businesses, Delaware holds many advantages—but smaller business may not find it as beneficial. Here are the highlights:
- Delaware’s business law is one of the most flexible in the country.
- The Delaware Court of Chancery focuses solely on business law and uses judges instead of juries.
- For corporations, there is no state corporate income tax for companies that are formed in Delaware but do not transact business there (but there is a franchise tax).
- Taxation requirements are often favorable to companies with complex capitalization structures and/or a large number of authorized shares of stock.
- There is no personal income tax for non-residents.
- Shareholders, directors and officers of a corporation or members or managers of an LLC don’t need to be Delaware residents.
- Stock shares owned by persons outside Delaware are not subject to Delaware taxes.
Typically the court system is not a primary factor when choosing where to form a business, but Delaware deserves a special mention. The Delaware Court of Chancery is often considered an advantageous venue for shareholder lawsuits. It hears only business cases and uses only judges, no juries. For large corporations with thousands or hundreds of thousands of shareholders, this can be a big plus.
For many years, Delaware ruled the incorporation landscape. A few states—including Nevada—are trying to replicate Delaware’s success, hoping to attract business owners to their states. Some of the advantages often cited for forming a corporation or LLC in Nevada include:
- Nevada has no state corporate income tax and imposes no fees on corporate shares.
- There is neither personal income tax nor franchise tax for corporations or LLCs (but initial and annual statement fees and a business license fee apply).
- Shareholders, directors and officers of a corporation or members or managers of an LLC don’t need to be Nevada residents.
Doing business in other states
Another factor to consider is whether you will need to register to transact business in another state (foreign qualify your company). Corporations and LLCs are considered "foreign" in every state other than their state of incorporation:
- Foreign qualification registers a company to do business in a state other than the state of incorporation (the home state).
- Corporations and LLCs incorporated in Delaware or Nevada often need to foreign qualify in their home state, since they have a physical location and employees there.
- If you are considering Delaware or Nevada as your state of incorporation, factor in the initial and ongoing costs imposed on corporations and LLCs, plus foreign qualification costs and ongoing fees in any other state(s) where you are transacting business.
For questions on which state is best for the formation of your business, please seek the advice of an attorney or an accountant.
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