We give here some additional insights on the choice of the jurisdiction where to form your entity.
In Part One (here in Italian), we have seen how the choice of jurisdiction is important because it triggers the application of that jurisdiction’s corporate and contract law. We have also seen how a “foreign entity” is subject to qualification statutes in the jurisdiction/s in which it does business; as a consequence, except for specific reasons, it is advisable to consider first the jurisdiction in which you conduct business as a place of formation. In other words, the jurisdiction in which you do business should be the first factor to consider in the choice of the jurisdiction where to incorporate.
The second factor is the choice of law. However, the differences in the corporate and contract law among US jurisdictions should not be overstated – it would hardly ever be sufficient to cloud the importance of the first factor. Furthermore, in a small setting, it might not be cost/effective to investigate the possible applicable laws to “pick and choose” the most suitable jurisdiction. We have also talked about the default rules that apply in the several jurisdictions (corporate law and LLC Act).
We will now go through other factors that could guide your choice – these factors might tip the balance away from choosing the place of business as place of incorporation. In particular, we consider here the requirements and costs of formation, and the privacy factors, while in the following articles we will discuss the law concerning members/shareholders’ liability protection, the personal liabilities of shareholders/members and directors, and taxation issues.
- Ease and costs of forming your entity, i.e. which steps and costs do I have to go through to form a company or corporation?
From an efficiency standpoint, compared to other (especially Civil law) countries, the process of forming a legal entity in the United States is generally easy and inexpensive. It requires only a few steps – in some jurisdictions everything can be done online.
We say “easy” because unlike in Civil law countries, a (civil law) notary is not necessary to form an entity in the US. Also, hiring a lawyer is advisable but not strictly necessary. You might find it useful to hire a lawyer to explain to you the main legal concepts, to help choose the “best” jurisdiction from a legal or tax perspective, to assist with the several steps (including drafting the formation documents), but if you are on a shoestring budget, be aware that it is not required by law. Also, it is not required to have an accountant to file tax returns and to perform bookkeeping, but hiring an accountant is probably also recommendable.
We say “inexpensive” because costs are not particularly high in comparison to many other western countries (note that in the following, when we say that a jurisdiction is “expensive,” the comparison is to other American jurisdictions and not to other countries.) To give some examples: if you record cost as “a percentage of the economy’s income per capita”, including “all official fees and fees for legal or professional services if such services are required by law”, you would find the following value: UK 0.3, US 1.2, Italy 14.1, France 0.9, Germany 8.8, Spain 4.6, Belgium 5, Netherlands 5, Mexico 20. (source)
We give here some examples of costs for formation/maintenance in good standing for corporations and LLCs (vedi qui in italiano for a description of the main features of these entities and for their requirements). We only deal with “filing fees” (i.e. the fees for filing the entity documents with the Secretary of State), annual registrations, (state) license requirements and similar costs. We do not deal with legal fees or accounting fees.
However, because the costs of forming/incorporating an entity in the several jurisdictions are comparable, the “cost factor” should not – with some exceptions – be very important in the choice of jurisdiction.
WARNING: do not rely on this information on costs when you decide to form your entity – they might have changed:
While the cost of forming a corporation in New York is comparable to other states, New York is an expensive state to form a LLC, one of the largest costs being the publication requirement for 6 weeks in two newspapers, which, depending on the county (publication must be made where the company is located), costs a minimum of $1000. New York City is most expensive place where to publish, while some locations upstate New York are definitely cheaper. When the publication is done, there is an extra cost because you need an affidavit that the requirement has been fulfilled (filing fee $50).
Filing fees in New York are comparable to other states: the filing fee for the articles of organization for a LLC is $200 and $125 for corporations, (§402 BCL); biannual filing – $9 for both LLC and corporations. For LLCs there is an annual fee based on revenue: Minimum of $25-max $4,500. For corporations, there is an annual franchise tax. Consider that if you are a foreign LLC, intending a non-NY LLC (see Part One) and you do business in NY, NY requires you to register as a foreign LLC, so you will have to comply with the publication requirement. Consider that, while you cannot form/incorporate totally online in NY, the Secretary of State accepts every document by scanned copies, so you will not need to ask a local to be an organizer, as it used to be the case.
Delaware is cheaper than New York but has some “hidden” cost. Filing fee for a LLC is $90 dollars. For corporations, the filing is “$89+” depending on the number of issued shares (so that, unless you need it, it is not worthwhile to issue more than 5000 shares). Hiring a registered agent is required by law (which can cost somewhere between $50 and $150/year). Certified copy $50. Minimum annual franchise tax is $175 and maximum annual franchise tax can be as high as $180,000. Annual Report filing fee $50. No annual filing fee for LLC.
Wyoming – consider that this was the first American jurisdiction to adopt a LLC statute (in 1977) and since then Wyoming had fought quite hard to be the state where owners would want to incorporate. For this reason, filing fees and annual requirements are not demanding here. In Wyoming the filing fee is $100 for both corporations and LLCs, the annual fee is $50 (or more if assets or employees in state). Wyoming has an initial $60 business license but no franchise tax and no annual business license fees.
Nevada is inexpensive for filing fees ($75 for both LLCs and corporations) but the total cost to form and maintain your entity is comparable to other states because of the need to obtain a business license, which in Nevada is required every year. This requirement means to add another $200 yearly. Nevada requires entities to have a registered agent in the state, and it is also a cost ($100-150 per year). In addition, you will have to pay an annual renewal of information ($150 since July 1, 2015). Therefore, notwithstanding the popular belief that Nevada is cheaper than other jurisdictions, this is not the case. However, because you can form your company totally online, forming in Nevada can be easier than in other jurisdictions. Note that there has been recently some attempt in the legislature to impose a gross receipt tax in Nevada, which has not passed (for now).
- Privacy/confidentiality rules, i.e. which information gets disclosed?
This aspect might be important for some businesses or their owners. For example, some foreigners might want to own real estate in the US without disclosure of their identities, or there might be shareholders who do not want other people to know what type of business they do. Most of the time, however, privacy is not a concern.
If privacy is a concern, you should consider what information is necessary to disclose when forming the entity and when doing the annual registration. Under this perspective New York and Delaware are not the best states to form an entity because in those states (like in many other jurisdictions) you must disclose a great deal of information, while Nevada and Wyoming are generally considered the best jurisdictions where to incorporate if privacy is a concern. A warning: it has been correctly pointed out, however, that the privacy benefits for those Nevada (and Wyoming) entities that conduct business in other states are insignificant (see here). Among other reasons, a Nevada or Wyoming company doing business in another state, will have to comply with the qualification statute (Part One).
Let’s see some examples of which information is necessary to disclose:
– In New York for LLCs, at the formation, you will need to disclose the name of the organizer/s and the business address. In New York the biannual statement must be signed by a member or a manager, therefore if at the formation time only the name of organizer/s was revealed, the member/manager will not escape from the biannual statement disclosure. For corporations, same as before; in addition you will need to disclose the name and address of the chief executive officer. In conclusion, New York is not the best solution if you are concerned about privacy.
– Delaware: you will need to reveal the incorporator’s name and address, name of registered agent and address. There is an annual report and here you will need to reveal all of your directors and officers (unlike NY where only the chief executive officer must be revealed). As said about NY, Delaware is not the best option if you are concerned about privacy.
– In Wyoming and Nevada, privacy is more protected. In Wyoming in particular, there is a very limited disclosure, while in Nevada somewhat greater disclosure is required. In Nevada every year you must list the names and addresses of the corporation’s officers and directors and the LLC’s managers. Wyoming does not require managers or members of an LLC to be listed on a public database.
Unlike Wyoming, Nevada does not have a “IRS Information Sharing Agreement”, i.e., Nevada does not share tax information with the IRS and does not participate in data exchanges (and because it does not have an individual or corporate income tax, Nevada is in fact unable to provide extensive information to IRS requests). This is arguably another privacy plus for Nevada. However, consider that if a Nevada company conducts business in other states, the IRS is able to obtain the information that was disclosed to these other state’s tax authorities.
For more information, Francesca Giannoni-Crystal.
