As of the date of this article, Nevada does not have a corporate income tax or a personal income tax. Contrast Nevada’s 0% with California’s corporate tax rate of 8.84% and top individual income tax rate of 13.3% and Delaware’s corporate tax rate of 8.7% and top individual income tax rate of 6.6%. That should mean forming your startup in Nevada is a slam dunk for the tax savings alone, right? The definitive answer to that question is “No.”
Nevada’s tax advantages and business-friendly reputation might seem extremely appealing on the surface, especially for a startup with limited financial resources seeking to minimize costs and maximize returns for founders and investors alike. Unfortunately, unless you are a Nevada resident operating your business in Nevada, in most circumstances you will not be able to avoid the burden of state corporate taxes or personal income taxes simply by incorporating in Nevada.
Even if you form your company in Nevada, the income of the business will still be subject to taxes in the state where the income is earned, i.e., not Nevada. For example, if you live in California and your business operates in California, your company will be subject to California taxes, even if it is incorporated in Nevada. Additionally, if your Nevada company is operating or doing business in another state, then (depending on the laws of each state regarding what constitutes “doing business” there) you may be required to register or “qualify” the company to do business in the other state(s). In such a scenario, the Nevada company would be considered “domestic” in Nevada and “foreign” in any other state it is doing business. There will be fees and administrative requirements for each state in which you register your company to do business as a “foreign” company. In the scenario where you form a Nevada company but live and work in California, not only would the business still be subject to California corporate taxes (and you subject to California personal income taxes), but you would also have the added compliance costs and administrative hassle of maintaining the company’s qualifications in two states instead of one.
As you can already see by this simple illustration, what at first may have seemed like an effective strategy to insulate your business from higher income tax rate exposure will likely have no impact on your tax liability and actually cost you more in added administrative fees to maintain qualification in multiple states.
If you shouldn’t form your company in Nevada, then where should you form it? The two most commonly selected states selected by newly formed businesses that plan to seek outside investment capital are: (1) Delaware, and (2) the state where the founders live and will run the business.
Delaware is a popular state for incorporation due to its well-established corporate legal framework, specialized courts that deal with business issues, and extensive legal precedents that make for a predictable legal environment that provides confidence for businesses and investors. There is value in the predictability and familiarity of a Delaware corporation. In fact, venture capital investors will likely insist that a startup form as (or convert to) a Delaware corporation as a requirement to making any investment. If you plan on receiving investment from venture capitalists, angel investors, a startup incubator, or other professional or institutional investors, then you should seriously consider forming a Delaware corporation to avoid administrative costs of converting later.
If you are starting a business that will not have venture capital investment or many unaffiliated investors and will primarily be doing business in your home state, then you should consider forming the company in your home state. Your state’s laws are going to apply to the operation of the business, and as mentioned above, even if you form the company in another state, you will have to register the “foreign” company in the state where you are running the business, meaning it will be subject to the same taxes and registration fees in your state. In this case, there is no clear benefit to forming your company in any state other than your home state.
In conclusion, while the allure of Nevada’s tax advantages may seem appealing at first glance, the practical implications of incorporating there can often lead to increased administrative burdens and costs. For startups seeking to optimize their legal and financial landscape, Delaware remains a preferable choice due to its robust legal framework and investor confidence. However, the decision ultimately depends on your specific business needs and where your operations are based. Make a well-informed decision by considering all factors and align your choice with your long-term business strategy and the expectations of potential investors and stakeholders.
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