About half of my new clients wonder if they should incorporate in Delaware or Nevada, probably because they’ve read something online or heard from a colleague one of these two myths.
Myth #1: If I form my corporation or LLC in Nevada, then I can avoid income taxes.
This only works if you’re physically located in Nevada.
Sorry to break it to you, but your virtual business has a physical location. Yes, even if you do business exclusively online—you are a human person who takes up space in a physical location, and that is where your company is doing business, through you.
If you form your corporation in Nevada, you will need to register as a “foreign corporation” in your own state (if you want to comply with their laws, which I generally recommend), and will be on their radar for tax bills.
If you pay yourself, and your state taxes income, then you will be paying income taxes on your personal income.
If your company makes a profit, and the state where your company is physically located taxes the profit of companies, then your company will be paying income taxes on that profit.
Since forming a corporation in Nevada is $650 (after you pay for filing of the article of incorporation, list of officers, and the business license), and you’ll also have to pay someone to be your registered agent in Nevada, it’s almost always cheaper and easier to just form your corporation in your own state.
Myth #2: Real companies are formed in Delaware.
If you are planning to take your company public (and if you’re looking for venture capital), then yes, forming your corporation in Delaware is important to take advantage of Delaware’s business laws about shareholder rights and their judiciary’s sophistication in corporate law.
But, most of us small business owners are not going to go public. We are not shopping for VC.
For us, incorporating in Delaware just adds additional expense, especially considering we will need to register as a foreign corporation in our home states, anyway.
My recommendation: Keep it simple.
For almost all of you, best practice is to form your corporation (or LLC) in your own home state.