If you are starting a new business, everywhere you go you hear people tell you that you must incorporate in Delaware or Nevada. I have some news for you. They are probably wrong.
As a business law attorney, day in and day out, savvy, smart entrepreneurs like yourself actually speak into their shiny new iPhones 4 and proudly proclaim that they registered their business in Delaware. I’m thinking that the lawyer who defended Kato Kaelin’s housemate who now earns his living by hawking do it yourself legal services just earned another fast buck.
You probably think because all of your favorite big companies are incorporated in Delaware, you should too. But these large corporations have specific reasons why they should incorporate in two states. The primary reason why you should incorporate is because you can protect your personal assets. Incorporating in Delaware will not afford you any additional layer of protection. You may also incorrectly believe that you can save money in taxes.
Here are some more reasons why you shouldn’t incorporate in Delaware or Nevada:
- It’s Less Expensive Fallacy. True, it is less expensive to initially incorporate in Delaware. Nevertheless you have to register to do business in New York.
- Failure to Register Your Business in New York Could be Deadly. If you fail to register do business in New York and your business becomes subject to a lawsuit, your personal assets may become exposed.
- You Still Have to Pay Taxes. Simply because Delaware and Nevada do not have personal or corporate taxes doesn’t alleviate your duty to pay taxes in New York.
- The Less Litigation Fallacy. Some attorneys would argue that since most Delaware corporations do not end up litigating disputes because their professional advisers examine volumes published opinions and construct deals to avoid lawsuits. In New York the caselaw on corporations is voluminous.
- The No Jury Fallacy. In Delaware, your case would be tried by a judge, not a jury. But the simple fact is that 99 percent of the cases settle before trial. In my experience, it is very rare to hear of a runaway jury in New York County.
- Privacy. In the past, many people decided to incorporate their business in Delaware because they do not require director or officer names to be listed in the incorporation documents. However, the IRS have become aware of this and the rules governing privacy or much more strict. Since you need to register your business in New York, you are going to have to disclose your CEO anyway.
The Law Office of Frederic R. Abramson practices Business Law and Civil Litigation in New York. If you have any questions regarding Incorporation, feel free to contact me at 212-233-0666
