Now Let’s Get in Formation

November 2016

Choosing the right state of formation is one of the first decisions a company has to make. One of the primary benefits to business incorporation is the limitation of personal liability to the corporation’s officers, directors, and shareholders. Many large and small companies choose to incorporate in the State of Delaware because of its beneficial corporate laws, while other companies may choose different states, such as Nevada, which has a pro-business tilt, or California (usually because those companies derive a percentage or all of their income from within the state).

The State of Delaware has flexible and business-friendly rules and regulations leading many companies to choose this jurisdiction for formation. The Delaware Court of Chancery is a court of equity using only judges, thereby allowing it to function without the presence of a jury—a benefit to Fortune 500 companies as well as those privately-held companies with thousands of stockholders with deep pockets who want to avoid the vagaries of jury verdicts. Franchise taxes in Delaware are imposed on corporations based on capital structure while a limited liability company pays a nominal amount of franchise tax each calendar year. In addition, the Delaware Division of Corporations functions as an extremely efficient agency offering extended hours and online options for filing documentation.

Forming a company in the State of Nevada offers benefits similar to Delaware. The Business Court in Nevada works to minimize certain risks associated with commercial litigation, such as providing early, comprehensive case management to avoid an interruption in business. And a company will certainly enjoy Nevada’s tax environment, as the state does not impose franchise or corporate income tax (although the state does require an annual report to be filed with a filing fee and payment of the annual business license fee of $200.00). The Nevada Secretary of State offers an online filing portal allowing easy corporate compliance.

The State of California is headquarters for many companies regardless of their size and the revenue that they generate. The easy and affordable formation and corporate compliance processes are two benefits to doing business in the state. California also offers a useful online database that provides links and contact information for the issuance of business licenses and permits. The California Secretary of State requires the filing of annual or bi-annual forms, depending on the type of entity chosen, and the Franchise Tax Board will impose a yearly minimum of $800.00. If a company incorporated in Nevada or Delaware actually conducts its business in the State of California, then it will need to qualify and register as a foreign entity if certain sales thresholds are met and its real property and personal tangible property meet or exceed a certain amount. Even if such entity has less than the threshold amounts in California, the Secretary of State and the Franchise Tax Board may require qualification of the out-of-state taxpayer, in which case the yearly minimum franchise tax will apply.

Since every business situation is unique, it is important to carefully consider which formation jurisdiction is appropriate.