The minute you think of starting a business, the first question you are confronted with is where should your business be incorporated. One of the most frequently asked questions that I get from startups based in New York is whether they should incorporate in Delaware or New York. Most of them think that they need to incorporate in Delaware because most big corporations are registered there. So as a New York based business, is it better to incorporate in New York or Delaware?
The answer is not a straightforward one – it depends upon the nature of the business. The primary reason for incorporating a business is to protect personal assets from the liabilities of a business. Incorporating in Delaware does not afford any added protection. But there are situations where incorporating in Delaware may be advisable.
Delaware is known to be corporation friendly and a tax haven. It has well established legal precedents and case laws. Delaware does not tax income earned from intangible assets; so many businesses park such assets in their Delaware corporations to reduce their tax obligations.
The incorporation process is fairly simple and inexpensive. There is no requirement to identify owners or officers of the corporation. Only a business name and registered agent are required.
Most venture capital firms and angel investors prefer Delaware incorporations. So if a business is looking to raise money then a Delaware incorporation may be a better fit.
Delaware allows statutory conversion, which means that an LLC can be converted into a C corp if and when a business is looking to raise money.
New York Incorporation:
If a business is New York based but was incorporated in Delaware, it would still need to register as a foreign entity in New York. This is an added cost.
Forming an S corp in New York is pretty cheap. But it is fairly expensive to form an LLC in New York because of an antiquated law relating to publication. These publication costs can run very high depending on the county in which the business is located.
New York has caught up with Delaware in terms of legal precedents and case law. New York contracts law is very well developed and comprehensive and respectful of the intent of the parties.
New York does not allow statutory conversion. So there is no flexibility of an LLC converting to a C corp if and when required.
As a New York based small business that is not looking to go public or raise money, incorporating in the home state may be the right choice.
These are just some of the features of incorporating in Delaware and New York. If you are a new business and are looking for advice on where to register your business, consult an attorney.
At Nupur Shah Law, we help business owners determine the right structure and place of incorporation. Call us at 646-820- 1366 or email us at firstname.lastname@example.org.