The Real Reason To Incorporate In Delaware: Mobility
Between 1995 and 2000, almost half the US population (more than 120 million people) moved to a new residence; and nearly 10% moved to a new state
. The increased likelihood that you will move during your business career impacts the decision of where to incorporate your business.
In our practice, we see a lot of writers who are, for example, living in New York. Naturally, it makes sense to incorporate in New York. Then, for one reason or another, our writer moves to California.
To operate the the New York corporation in California, our writer must qualify the New York corporation to do business in California. Upon doing so, the corporation becomes obligated to pay the California franchise tax ($800/year) and file a California tax return. Unfortunately, because it is a New York corporation, the corporation also must pay New York franchise taxes and file a New York tax return. That's right - the corporation is obligated to pay franchise taxes and file tax returns in both states!
Although many believe that it's possible to reincorporate in California (because that concept is addressed in the tax code), there is no inexpensive transaction to change the jurisdiction in which a corporation of formation. Even with the enactment of recent statutes that permit conversions of business entities, it's still a ton of work (not to mention legal fees)!
Delaware provides a fantastic alternative. Instead of incorporating in New York, our writer could incorporate in Delaware, where the annual franchise tax is only $125/ year. Then, the corporation can be qualified to do business wherever the principal place of business is located. For example, the corporation would be qualified to do business in New York initially. Later, when the writer moves to California, the corporation would (1) surrender the right to transact business in New York, and (2) qualify to do business in California.
By the way, why not Nevada? Because contrary to popular myth, Nevada is not cheap. The annual fees in Nevada are quite a bit more than Delaware.
Although there are a lot of good reasons to incorporate in Delaware, many of the benefits of Delaware incorporation are applicable primarily to larger corporations. The ability to easily and inexpensively start doing business in a new state, on the other hand, is a significant benefit for small corporations.
by: Jeff Unger
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