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.
In our practice, we see a lot of writers who are, for example, living in New York. Naturally, it makes sense to incorporate in New York. Then, for one reason or another, our writer moves to California.
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.
Delaware provides a fantastic alternative. Instead of incorporating in New York, our writer could incorporate in Delaware, where the annual franchise tax is only $125/ year. Then, the corporation can be qualified to do business wherever the principal place of business is located. For example, the corporation would be qualified to do business in New York initially. Later, when the writer moves to California, the corporation would (1) surrender the right to transact business in New York, and (2) qualify to do business in California.
By the way, why not Nevada? Because contrary to popular myth, Nevada is not cheap. The annual fees in Nevada are quite a bit more than Delaware.
For entrepreneurs considering the possibility of moving, Delaware offers unique flexibility. Although larger enterprises might be attracted to Delaware’s pro-business legal system, for small businesses, the lure 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.