Comparison Between Incorporation-Friendly States

It is commonly recognized today that Delaware, Wyoming and Nevada can all be called “incorporation friendly” states due to their corporative laws, relatively low fees, and limited or nonexistent state-level taxation. However, how would a person choose between the three?

Here we present an itemized comparison between those states, and below a summary and conclusions:

	Delaware	Wyoming	Nevada
No state corporate income tax:
No tax on corporate shares:
No franchise tax:
Minimal annual fees:
One-person corporation is allowed:
Stockholders are not revealed to the State:
No annual report is required until the anniversary of the incorporation date:
No Initial List of Officers/Members is filed with the state:
No general Business License required:
Unlimited stock is allowed, of any par value:
Nominee shareholders are allowed:
Share certificates are not required:
Minimal initial filing fees:
No minimum capital requirements:
Meetings may be held anywhere:
Officers, directors, employees and agents are statutorily indemnified:
Continuance procedure (allows adoption of a corporation formed in another state):
Doesn’t collect corporate income tax information to share with the IRS:

Summary & Conclusions:

In general, Delaware, through its developed legal system and laws protecting shareholder rights, is geared toward the large complex public corporations, whereas Nevada and Wyoming are more attractive to the small privately held corporations and LLCs. Delaware law tends to protect the rights of boards of directors and shareholders, while Nevada and Wyoming tend to favor management.

Does the above comparison mean Delaware is not the best place to incorporate?

Not necessarily. The choice to incorporate in Delaware depends on the long term goals of your company.

Delaware has an excellent body of corporate case law spanning 110 years regarding such matters as management/shareholder issues and mergers & acquisitions, and that’s precisely why the Fortune 500 are drawn to this state. Delaware laws tend to be “pro-management” when it comes to minority shareholder disputes. Huge public companies have literally hundreds of such disputes pending in the courts on any given day.

So if you are aiming to grow your company to become a Fortune 500 company (or at least planning it to attract VC investors and possibly go for IPO one day), Delaware’s case law offers many insights into what you can and cannot do, and what the likely consequences may be.

Unfortunately, Delaware also has corporate income tax, personal income tax, a state franchise tax, reporting requirements and regulations compelling disclosure of substantial amounts of information resulting in far less privacy for you. That makes Nevada and Wyoming much more attractive for small privately owned businesses.

Nevada or Wyoming? Things to consider when choosing between the two states:

1. Information sharing with IRS:Nevada is famed as the only state that does not share information with the IRS. Although that fact by itself is true, there are few things that you should know about it:First of all, Wyoming does share information with the IRS, but only the information given by companies with real assets inside the state. So if you don’t have any real estate in Wyoming you are as protected in that regard as in Nevada.Second, Nevada makes IRS mad. That means if you are in Nevada the IRS is targeting you because you are in a non friendly state.

2. Piercing of corporate veil:The corporate veil separates the assets and liabilities of the company from the assets and liabilities of its owners, thus protecting owners from business risk. Nevada offers the best corporate veil protection available.Wyoming also has well established criteria concerning the piercing of the corporate veil. Where fraud is not present, a Wyoming corporation that does not co-mingle funds and maintains some form of corporate formalities, including holding meetings of shareholders and directors, will not be pierced.Many professionals consider Wyoming to be inferior to Nevada in that regard, with others claiming the differences are negligible.

3. State taxes:There are no state income taxes on individuals or companies both in Nevada and Wyoming.However, Nevada is now considered “the worst state to do business in” by the non-partisan Tax Foundation that has pointed to the new changes to Nevada taxation. Recently, annual list and business license fees which were already the 3rd highest in the nation were increased to $350 for LLCs and a whopping $650 a year for profit corporations. Nevada also has a new “Commerce Tax” on your GROSS REVENUE if your combined gross revenue of all of your Nevada business entities is over $4 million per year! In other words, the state will combine the income of multiple corporations of any common owner and apply the Commerce Tax if the combined revenue reaches the $4 million threshold.Wyoming is not considering any business income tax and does not need to, since Wyoming has a multiple year budget surplus.

4. Continuance (moving your company to another state):Wyoming is one of only two states that provides for true continuance in its corporate laws. Many states provide for domestication, but that is not the same thing.If a foreign corporation decides to domesticate in another state it either creates a new corporate entity in that state or it adds additional domiciles. However, in Wyoming, continuance is a process by which Wyoming creates the legal fiction that the corporation has always maintained its domicile in Wyoming.Your existing corporation can retain its original incorporation date after becoming a Wyoming corporation. Anyone examining the Wyoming public record will see a corporation dating back as far as your current corporation does. You can promptly become a Wyoming Corporation without losing the many benefits of the longevity and continuity of operation.

Why Nevada?

For years Nevada claims to be the “incorporating capital of the west”, and to support that claim it has spent more than a decade developing the appropriate legal infrastructure. Determined to establish itself as a leader in incorporation, Nevada had completely revised its Corporate Code in 1987, and again in 1991, making the entire incorporation process quicker and more efficient, with greater liability protection than ever before.

Unlike Delaware that targets larger corporations, Nevada positioned itself more suitable as a home for small, privately held corporation. With no corporate taxes of any kind, maximum liability protection for corporate officers and directors and ease of establishment Nevada has become the attractive choice for those wishing to incorporate themselves and their business activities.

That being said, recent political and fiscal developments in Nevada, which brough introduction of expensive Business License and Initial List filing requirements, as well as outrageous renewal fees and rough treatement of delinquient businesses, have significantly reduced the attractiveness of the state. Wyoming became the state of choice for many businesses that traditionally incorporated in Nevada, and many established Nevada businesses are choosing to change the corporate domicile to Wyoming, thanks to the friendly domestication laws in Wyoming.

Some Facts

Here are some facts dealing with forming a company in Nevada:

• Nevada has no state corporate taxes.
• Nevada has no franchise tax (but it has general Business License, which must be renewed annually).
• Nevada has no tax on corporate shares.
• Nevada has no personal income tax,
• Nevada provides total privacy of shareholders.
• Nevada is the only state without a formal information-sharing agreement with the IRS,
• Nevada has established case law that prevents easy piercing of the corporate veil.
• Corporate officers and directors can be protected from any personal liability for their lawful acts on behalf of the corporation,
• Stockholders, directors and officers need not live or hold meetings in Nevada, or even be U.S. citizens,
• Only the names and addresses of the officers and directors are on public records. No other information, listings, or minutes of meetings are filed with the State,
• There is no minimum initial capital requirements to incorporate,
• Nevada corporations may issue stock for capital, services, personal property, or real estate. The directors alone may determine the value of any such transactions, and their decisions are final.

Nevada is one of the three states commonly recognized as “corporate heavens”, the other two being Delaware and Wyoming. Before making your choice please see our article that runs a comparison DE vs. NV. vs. WY.

Why Wyoming?

Few people know that little fact, but it was Wyoming that invented the American LLC in 1977, as it was modeled after the 1892 German company law known as Gesellschaft mit beschrnkter Haftung (GmbH). Nevada and Delaware copied Wyoming’s LLC and profited from it most through better marketing.

Wyoming is one of the best places to establish a company, and this is proven by the fact that a very high percentage of the companies dealing on Wall Street are registered in Wyoming.

The popularity of Wyoming as a “corporate heaven” in enhanced by the very liberal Corporation Law which enables companies to be established quickly with the broadest possible powers permitted under the law. There are little or no restrictions on any consequent business activities.

Advantages of Incorporating in Wyoming

Here are some advantages of incorporating or forming LLC in Wyoming:

• Wyoming has no state corporate income taxes,
• Wyoming has no franchise tax,
• Wyoming has no tax on corporate shares,
• The annual fees are based on the value of corporate assets that are physically located in Wyoming, not on assets located elsewhere,
• One person may fill all the required corporate officers and directors,
• Stockholders are not revealed to the State,
• No annual report is required until the anniversary of the incorporation date,
• The articles of incorporation may provide for unlimited stock without a requirement for stating par value,
• Wyoming statute has provisions for bearer script which can be used when stockholders capitalize the corporation in increments less than the par value of the stock,
• Wyoming allows for nominee shareholders,
• Share certificates are not required,
• There is no minimum capital requirements,
• Meetings may be held anywhere in the world,
• Corporate officers, directors, employees and agents are statutorily indemnified from personal liability associated with their corporate activity,
• Additional indemnification is allowed even after suit is filed by a potential judgment creditor,
• Wyoming has a continuance procedure, which allows a corporation formed in another state to change it’s domicile to Wyoming wile maintaining its corporate history.

You can learn more about advantages of Wyoming over other states, as well as get help deciding whether you should or should not choose Wyoming as the state of registration by reading our article Start Your Business in Wyoming.

Wyoming is one of the three states commonly recognized as “corporate heavens”, the other two being Delaware and Nevada. Before making your choice please see our article that runs a comparison DE vs. NV. vs. WY.

Why Delaware?

Delaware is famed to be the “incorporation capital” of America – more than 60% of Fortune 500 companies are incorporated in Delaware. According to Delaware Department of State, Division of Corporation’s 2006 Annual Report the number of active business entities in Delaware has grown 50% in the last six years to a total of more than 765,000. In 2006, Delaware welcomed more than 145,000 new businesses.

The reason why so many Fortune 500 companies are drawn to this state is the fact that Delaware has an excellent body of corporate case law spanning 110 years regarding such matters as management/shareholder issues and mergers/acquisitions.

Some Facts

Here are some facts dealing with forming a company in Delaware:

• Names and addresses of shareholders, directors, officers, members or managers of a Delaware Company do not appear within public records. Moreover, during incorporation process, there is no obligation to provide this information to the State of Delaware.
• No minimal capital investment in the Company is required.
• There is no sales tax in Delaware.
• The Company has no obligation to have a bank account in Delaware.
• The Delaware Company headquarters may be located anywhere in the world. The Company has no obligation to have its headquarters in Delaware, nor to conduct any business in this state. The sole obligation for the Company doing business somewhere other than Delaware is to be represented by a Registered Agent in Delaware.
• The same person can be Shareholder, Director and Officer of a Delaware Corporation. Directors can establish the price they wish for the sale of the Company’s shares. They can also adopt, modify or repeal any Company bylaw.
• If the Company does not do business in Delaware, it does not have to pay any income tax to the state (this is relevant to C-Corporations only).
• If a Delaware Company shareholder doesn’t reside in the state, the said shares are not subject to inheritance tax in case of death.
• The Delaware Court of Chancery is the oldest business court in the country and uses judges instead of juries.
• Delaware adopted a whole set of corporate laws which are very favorable to companies and which recognize contractual freedom. The “General Law Corporation” of Delaware is one of the most evolved and flexible corporate laws in the United States.

With all those advantages in place, Delaware might not be the most suitable place to incorporate your new business. Delaware is one of the three states commonly recognized as “corporate heavens”, the other two being Nevada and Wyoming. Before making your choice please see our article that runs a comparison DE vs. NV. vs. WY.

Choosing The Right Incorporation State

Once you have decided to incorporate or form an LLC, you need to choose the state for your new entity.

Naturally, for most businesses the choice would fall on their home state, i.e. the state where the company will do most of its business. This rule holds especially true for smaller businesses that will likely not expand significantly, or that do not want to conduct business outside of their home state, like shops, dealerships, etc.

As your business grows, and it appears that you may need to conduct business in another state, you can always register what is called a “Foreign Entity“, or a “Foreign Corporation” – technically, a legal “extension” of your business in another state.

Not all businesses need to be organized in the state where you are currently located (especially if you are a foreigner and live outside of USA). Each state has its own legal requirements and registration procedures for new businesses wishing to incorporate. Certain states are famous as favorable homes for incorporating or forming an LLC due to their unique incorporation laws and favorable tax policies. The most notable are Delaware, Wyoming and Nevada.

Some Examples:

• If you are looking to place your real estate assets under a legal entity like an LLC then it makes sense to incorporate in the state where those assets are physically located. It is generally recommended to put each real estate asset in its own LLC in order to limit the liability of each property to itself.
• For those entrepreneurs looking to form a corporation or LLC for their new ventures (like online businesses, or technology start-ups), choosing one of the more favorable states (like Delaware, Wyoming or Nevada) might prove to be a wiser choice. That is especially true if some or all shareholders and/or employees are not located in the same state, often the case with Internet-based businesses.
• Home-based businesses would often enjoy many tax benefits related to maintaining an office in your home, therefore, with some exceptions, it would usually make sense to organize your home-based business in your home state.
• Some specific needs require specific choices as far as organization goes. An example of such specific need would be estate planning. If you are looking for ways to protect your children and spouse from enormous estate tax liability when you go to a better place, there are incorporation tools offered by various states (such as “Close Corporations”, “Close LLCs”, etc).
• Other examples include some more exotic types of entites like Series LLC or L3C – Low-profit LLC (a cross between a nonprofit organization and a for-profit corporation). These types of entities are currently being offered only in few states.

To fully evaluate your incorporation needs and to choose the right state to form your business entity in it is important to consult your tax and legal advisors. Those specialists should have the knowledge and experience to help you evaluate your unique business needs and help you make the best choice.