From time to time, I hear advertisements telling people to incorporate in various states. Lately, Nevada seems to be popular in advertising campaigns. I listen to the radio and TV and hear “Incorporate in Nevada, incorporate in Nevada.” Because Nevada is tax-free, there is no personal tax and no corporate taxes. Sounds good, right?
This is misleading unless your business is in Nevada.
Take me, for example. I do business in the state of New York. If I were to incorporate my business in Nevada, I would still have to pay taxes and obey the laws of the state of New York because that is where I do business. So there goes the “tax free status” idea.
Unbeknownst to people who form corporations in Nevada (or Delaware, another popular state in which to incorporate), they are required to register in the states in which they do business. If you don’t register, you have no legal standing in that state, and many times the registration fees for a foreign (formed in another state) corporation are higher than the fees for a domestic (incorporated in the state) corporation.
What does it mean to have no legal standing? Well, if I’m incorporated in Nevada and have done business with a client in New York who now owes my firm money, there is no jurisdiction where I can sue him in New York. Unless I have gone through the registration process, I cannot bring a civil suit anywhere in the state of New York.
The most efficient and cost-effective way to form a business is to form it in the state where you are going to do the majority of your business. If you happen also to do business in other states, then you would register in those other states. In other words, only register in the state of Nevada if you’re going to do business in Nevada, not if you’re going to do business anywhere else.
Rumor has it that there are lots of things that are fun to do in Nevada, but incorporating isn’t necessarily one of them!