The Real Reason To Incorporate In Delaware: Mobility

According to census figures, between 1995 and 2000, 120 million people over age 5-almost half the US population-moved to a new residence. Of the 120 million people who changed residences during that period, 8.4% moved to a different state. This high rate of interstate mobility has important implications when it comes to choosing the state in which to incorporate your business.

This is a common situation in the entertainment world. Let’s say that a writer living in New York forms a New York corporation. A few years later, the writer relocates to Los Angeles.

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 it has certainly become easier to convert the New York corporation to a California corporation, there is no simple and inexpensive way of doing so.

Luckily there’s a great alternative if you′re deciding where to incorporate. Instead of forming a corporation in the state where you will be conducting business, incorporate your business in Delaware, and then qualify the corporation to do business wherever the principal place of business is located (in our example, the original place of business was New York). Then, when the corporation moves to a different state, it can qualify to do business in the new state (California in our example) and surrender its home state qualification. That’s it: a very inexpensive and simple solution. This approach does involve a little bit of extra expense, even for a corporation that is still doing business in its original home state, because the corporation has to (1) pay Delaware’s very small annual fee (about ($125/ year)and (2) maintain an agent for service of process in Delaware. However, the marginal additional cost gives the corporation an enormous amount of flexibility where there is any possibility of a move to another state one day.

Why not do the same thing in Nevada? Contrary to popular belief, Nevada is not an inexpensive state compared to Delaware.

Although Delaware laws and its pro-business court system are frequently touted as benefits to businesses, for small businesses, particularly those owned by entrepreneurs who might consider moving, the real reason to incorporate in Delaware is mobility.

Learn more about incorporating in Delaware. Stop by Jeff Unger’s site where you can learn more about the benefit of forming a Delaware corporation.