I often speak to potential clients who have heard they should incorporate or from an LLC in Nevada because there are “no taxes” or in Delaware “because it’s the best place.” They want to know what I think.

Nevada has no state corporate income, franchise or personal income taxes.  Wyoming has low fees.  Delaware has a large, well-established body of corporation law, but can be flexible.

There may be reasons to incorporate in another state when your business will be operated in North Carolina, but for many businesses, this just adds unforeseen layers of complexity and cost.

Even if you incorporate or form your LLC (also known as “chartering” the company) in a no-tax state, your income may well be earned in North Carolina, requiring you to pay personal and business taxes here anyway.

If you are chartered in another state, you are pretty limited in what you can do in North Carolina without qualifying to do business here with the Secretary of State. Doing business without qualifying means you cannot sue in NC courts on behalf of the business (although you can defend).  If you are caught, you will all owe all taxes you would have owed, plus interest, penalties and  a civil fine of $10.00 per day up to $1,000 per year.

Qualifying costs $250.00 per year, on top of annual fees in your state of charter.  You will need to file two sets of annual reports and deal with the Secretary of State and Revenue Department of two or more different states.  You will need to understand and comply with the local and state business regulations in two states that will govern how you do business.

There are some good reasons for choosing to incorporate or form an LLC in another state, such as having a multi-state business, having more than five shareholders or members, being in a highly regulated industry, or planning to seek venture or angel funding.

But most small business owners who think it will be cheaper to file somewhere else are not aware of all the hidden costs of qualifying in the home state and filing multiple tax documents and annual reports.

(Photo credit: Wikipedia).