Choosing where to form your entity is an important decision. Incorporation costs, taxation and corporate laws vary from state to state, making some states advantageous for certain small business owners.
In most cases, incorporating your business in the state where your company is physically located makes the most sense. No matter what form of entity you choose, you must pay filing fees to the state where incorporation documents are filed, and will be subject to ongoing requirements and fees imposed by that state. Some business owners mistakenly think they will save money by incorporating in a state with low fees, even if their company is neither located nor conducts business in that state. Keep in mind that companies incorporated in one state but doing business in another state(s) must register as a foreign corporation and pay annual fees to transact business in those state(s).
The added costs of fulfilling the ongoing and taxation requirements imposed by the state of incorporation and state(s) of foreign qualification often outweigh the perceived benefits of incorporating outside the home state.
Pennsylvania is a great state to incorporate your business because it is a “business friendly”, Delaware Model state and there are not annual fees (except for restricted professional forms of entities).
Delaware and Nevada are two states in which some small business owners opt to incorporate a business. They offer unique advantages for certain types of businesses.
Some potential advantages of incorporating your business in Delaware include business friendly laws, courts that focus solely on business law that use judges instead of juries and taxation requirements that are more favorable to companies with a large number of authorized shares of stock, no personal income tax for nonresidents. 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).
Some potential advantages to forming a corporation or LLC in Nevada include the fact that Nevada has no state corporate income tax and imposes no fees on corporate shares and there is no personal income tax or any franchise tax for corporations or LLCs (but initial and annual statement fees and business license fees apply).
If you form in Delaware or Nevada but you transact business in another state, it is likely that you will have to foreign qualify your business in that state. In general, only larger entities or corporations that are seeking venture capital should incorporate in Delaware. Although Nevada incorporations have become popular, the tax advantages are almost never worth the additional expense.
For questions about the best state of incorporation for your business, or to determine if you need to foreign qualify in another state, please give Eric Davis a call at 412.434.4911 ext. 11.