Malik Lowry, a Detroit-area entrepreneur, is considering incorporating his hip-hop social-networking Web site in Delaware instead of his home state.
Lowry expects fast growth for his site, Dfonic.com, and hopes for strong profits. While searching the Web, he found a number of financial advantages to incorporating in Delaware.
"Delaware has no sales tax, personal property tax or intangible property tax on corporations," Lowry says. "If I go public, my investors who live outside of Delaware won't pay taxes on stock shares or even inheritance taxes. It just plain makes sense."
Registering a business in another state may offer some enticing legal and tax benefits. This is particularly true in pro-business states like Delaware and Nevada. And depending on the type of business, the process can be simple and straightforward.
But it also could be full of big problems. There’s a lot of bad information around, as Los Angeles-based author and tax expert Eva Rosenberg found.
Incorporating in another state doesn’t get you off the hook from meeting your tax and legal obligations in the states in which you do business, says Rosenberg, author of Small Business Taxes Made Easy (McGraw-Hill, 2004, $16.95).
“I wrote an article years ago that said it was OK to register in another state because it would help avoiding certain kinds of taxes here in California,” she says. “But that wasn’t so.”
Look for Business-Friendly States
Income tax breaks and stronger limited liability protection for corporate officers make registering a business in Delaware or Nevada an attractive option, experts say.
“In Nevada they have improved liability for corporate officers to make it difficult to hold them responsible in litigation,” says Derek Rowley, president of Superior Capital Corp., a Las Vegas-based holding company for incorporation-services firms. “The standard for piercing the corporate veil is much higher in Nevada.”
Lower corporate taxes also makes Delaware especially attractive to publicly traded companies, says Ralph DiLeone, a Raleigh, N.C.-based corporate lawyer with more than 20 years’ experience working with companies that register out of state.
Calculate and Compare Cost Savings
There are some basic housekeeping chores in registering out of state that need be considered when calculating your cost savings, Rosenberg says.
You’ll need a mailing address in the registration state and a service agent – someone who can accept legal and other documents on your behalf – located at a physical address in the state and available during regular business hours. You’ll also need a telephone and, likely, a mail forwarding service, which can slow down your mail delivery.
“If trying to avoid some local taxes, money is coming out another way,” she says. “You’d better have a darn good reason for registering elsewhere because you might not be saving money.”
If, after carefully evaluating the move, you decide to go ahead, here are some steps to getting started:
- Visit the registration state’s Secretary of State Web site and research the specific requirements for incorporating there.
- Familiarize yourself with the state’s tax laws. It will save you a lot of headaches in the long run.
- Put together an advisory team, including your attorney, accountant, insurance broker, banker and possibly your bookkeeper, top vendors and, depending on the business, one of your principal customers, Rosenberg says.
- Rowley recommends hiring an incorporating service. But if you plan to take your company public, get an attorney.
And a lawyer gets the last word. “Get the right professionals involved,” DiLeone says, “because it’s going to save your butt.”