Entrepreneurs often think they need to incorporate in Delaware. In this post we’ll look at whether that’s the best decision (hint – often it’s not).
To “incorporate” means to form a Corporation. If you are forming an LLC, your state may call that an “incorporation” too, or they might call it an “organization” or “formation” or something else. When you form a Corporation or LLC, the state will issue Articles of Incorporation or a similarly titled document.
(What about S-Corps? Well, S-Corps are not a business entity. Read more here.)
Entrepreneurs in the U.S. can incorporate their business in any state in the country. In most cases, you’ll incorporate in the state in which you live or do business. However, sometimes it makes sense to incorporate in Delaware, even if you don’t live or work there.
Below are five tips to help you decide where to incorporate.
1. Formation Fees
Every state charges a fee to incorporate. Generally speaking they are not very high and since they are only a one-time fee, you shouldn’t choose your state of incorporation solely based on this.
Missouri charges $58 for Corporations (although that number can increase based on the value of your authorized capital) and $50 for LLCs. Kansas charges $85 for Corporations and $160 for LLCs. Delaware charges $89 for Corporations and $90 for LLCs.
2. Annual Reports & Fees (Franchise Taxes)
Missouri, Kansas, and Delaware each require some form of Annual Report and annual fee for Corporations (sometimes called a Franchise Tax). The cost in Missouri and Kansas is minimal – between $20 and $55. But in Delaware, the minimum fee is $225 and can be substantially higher based on how your Corporation is structured.
For LLCs, both Kansas and Delaware have annual report fees, $20 for Kansas and $300 for Delaware. But in Missouri, you don’t have to file any ongoing annual reports for LLCs.
3. Operating in Foreign States
If you have a sufficient nexus to states outside your state of incorporation, then you may need to register in those states as a foreign entity doing business in those states. For example, if you are a Delaware Corporation operating in Missouri or Kansas, you will have to file reports in and pay fees to Missouri or Kansas (including annual reports). While not determinative by itself, this is obviously a reason to incorporate in Missouri or Kansas if that is where you’ll be running your business.
4. Statutes, Secretaries of State, & Court Systems
Each state maintains its own laws regarding Corporations and other business entities and obviously each state has its own Secretary of State office and court system. What you should know is that they are all different. Delaware is generally better on all those fronts for business owners, but as between Delaware and Missouri/Kansas, the difference is not overly signifiant except in certain areas.
Because so many businesses are incorporated in Delaware (about two-thirds of Fortune 500 companies), investors tend to like businesses incorporated in Delaware. They appreciate the reduced risk that comes from issue number four above. However, this is not an iron-clad rule and many investors will invest in companies incorporated outside of Delaware provided the business is properly structured.
(Note – the filing fees described in this guide may have changed. Contact the Secretary of State for the most current fees.)
(This article is general in nature and is not legal advice.)
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