Starting a C Corporation in Nevada vs Delaware vs New York for Incorporation

[ping]

Question for the accountants in this forum. My friends are planning to start a C corp for a new project. It will be a search related website, initially focusing on the NYC market. The plan is for it to be national, so it will be even less tied to one region/state. The reason for the structure vs a simpler LLC is for specific privacy reasons related to this project.

They don’t plan on hiring any employees for a while, the entity won’t need any licensing, won’t hold any real estate, won’t have a brick and mortar location and won’t be shipping any product. Given this, can they just incorporate in Nevada or Delaware and not bother with a foreign qualification filing in New York? They live in New York, but that's really it. Reference: https://www.incnow.com/blog/2016/02/...qualification/

Secondly, if that is the case, they’re thinking Nevada vs Delaware primarily because they’d rather not have to file any state income tax at all. Both are good for privacy, and allow anonymous or almost anonymous filings we recall.

Delaware: More popular with big companies, special business friendly courts with no juries, no state income tax unless you do business in-state, but still seems like you have to file (8.7% corp income tax if you do biz in state)

Nevada: No state income tax period, which is attractive to be honest as they’d rather not have to file at all

Would love the accounting community's take on this, and if easier, would love to just call anyone about this for a few minutes if you have a little time today. Thank you!

P.S. An additional benefit of the C corp structure they’d hope to take advantage of later is: https://www.hauseit.com/forum/forum/...he-us-tax-code if they’re able to sell of course. From our research, it doesn’t seem like they need to do anything special at time of incorporation / stock issuance. Can easily prove that cash/property at time of stock issuance was essentially.

[aslan]

Very interesting question. My gut would be to just file in your home state, especially if you don't plan on making any income initially, and aren't immediately going to seek VC funding.

Delaware is quite popular and familiar with VCs, so they will want you to do that if you raise capital. But until you do so, it probably doesn't make sense to incorporate there. Especially if you'll need to foreign qualify in your home state. Failure to foreign qualify can lead to some scary late fines and penalties.

And sure the Delaware courts are good, and you won't have to deal with juries or generalist judges who know nothing about business, but keep in mind you'd still need funds to fly out to Delaware if you need to attend court, and hire a lawyer there. So again, likely not so useful if you're just starting out.

The real question for you seems to be whether you should file in Nevada vs New York, so you don't have to deal with filing a state corporate income tax return. That's going to largely depend on whether your activities in New York require you to file a foreign qualification filing, which adds additional cost. Though of course I'm sure having to file a state corporate income tax return adds additional cost in itself even if you don't make any corporate income.

P.S. Another reason why just filing in NY makes sense. If you need to go to the courts or are sued in New York, you'd need to file as a foreign entity anyway to be able to protect yourself. Good article also on why you won't save taxes by incorporating in Nevada, or outside of your home state.

[Benny]

You know, I'll give NY credit in having an easy online filing process and relatively cheap filing fees. With that said, even if you aren't making income or planning on being profitable, you'll still have to file NY State corporate income taxes right? That's going to cost money, even if you won't owe any actual cost, for example accounting fees.

And to be honest, do you really want to be in bed with New York? Just check out the various NY General Business Corporation Tax Forms: https://www.tax.ny.gov/forms/corp_genl_forms.htm

It gives me shivers! To be honest, unless you plan on dissolving the corporation within a year (fail fast), it may not be worth it to go through all these state income tax forms with your accountant.

In that case, I'd rather say F it and go straight with a Nevada C corp. And if you are say a software engineer and you get revenue from many states, that doesn't necessarily mean you are "doing business" in other states, as long as you don't have employees offices etc. Just my 2 cents.

P.S. Alternatively, if you know you're going to make it big on this venture, and will raise venture capital in the future anyway, then incorporating in Delaware may be the best choice. You'll save some money from having to merge entities in the future.

[ping]

Just as a follow up, heard back from the partner at a pretty large accounting firm here in NYC. He says he agrees with our analysis and would use Nevada. He's out on vacation, so my friends are still waiting for him to confirm that the best route would be Nevada, plus no need to register as a foreign corporation here in New York. Here's what my friends responded with just FYI:

Amazing, thank you Ben!

Even though NY surprisingly has a cheap and easy filing process, there seem to be a ton of various corporate income tax filing requirements - huge deterrent.

Just to confirm, foreign qualification in NY seems unnecessary right? Especially with no revenue likely for a while. Only tie to NY is we live here plus initially showing data in NY. Later more national we hope.

Read online that for example a software consultant based in one state earning income from other states even does not need to foreign qualify in other states.

Thank you for responding while away! Amazing to hear from you - it’s very re assuring to get your opinion.

[velma]

It seems like the main question for you then is whether your Nevada corporation's online activities constitute as doing business in New York, and as a result whether you need to file as a foreign corporation doing business in New York. See link at very bottom of this post for NY filing requirements for foreign corporations.

"Foreign corporations that have never done business in New York State must give DOS an Application for Authority, and a $225 filing fee."

"Foreign corporations currently or previously doing business in New York State must obtain the tax commissioner's consent that all tax returns due are filed and all taxes due are paid before applying for authority. To obtain this consent, call the New York State Tax Department Call Center at (518) 485-2639. Send the consent to DOS with your application and filing fee."

To me, it almost seems like the main benefit of registering as a foreign corporation in New York is to be able to defend yourself in NY courts if you get sued here.

Also, not to knock New York, but do you really want to get your accountant involved in this: https://www.tax.ny.gov/forms/corp_cur_forms.htm - Check out the number and complexity of the tax forms in General Business Corporations. Have a headache from just looking at it.

[ping]

Thanks guys. We heard back from the accountant, he confirms that for an online business venture like this with no near term forseeable revenue, you should just file in Nevada and there's no need to file as a foreign corporation in New York. If you hire employees or have offices in New York down the road, that's of course a different story.

Seems like it may be wise to keep it completely separate, meaning they should probably open up a bank account in Nevada as well, or some sort of online bank account.

Lastly, they may be getting ahead of themselves, as they should probably think of a company name with an available domain name first. Otherwise, if your corporate name is different than your website name, you'll have to file a Doing Business As (DBA) - more paperwork...

Thanks for the advice and thoughts guys, my friends really appreciate it. I'll relay all of this to them.

[aslan]

Sounds reasonable. Seems like your next step is to file online for a Nevada corporation: https://www.nvsos.gov/sos/businesses...ss/corporation

And keep in mind that when choosing par value and number of shares, in Nevada "filing fees are calculated on a minimum par value of one-tenth of a cent (.001), regardless if the stated par value is less."

Most companies will file with shares with no par value, or very minuscule par value like $0.00000001 per share. This limits liability, because having a par value of say $10, and your shares are trading for $5, then the shareholder can technically hold the corporation liable for par value, and try to redeem the shares for the full $10.

Also, filing fees are often based on the total par value of all shares, and they go up progressively. Another reason to have no par value or very little par value.

In terms of recurring fees to maintain a Nevada corporation, it seems like it'll be a $500 fee to renew your Business License each year, and the $150 minimum fee to submit your Nevada Annual List (of directors and officers). Plus the cost of a registered agent, which can be pretty cheap and likely under $100 if you shop around.

Fortunately, there's no corporate income tax in Nevada. They do apparently have a Modified Business Tax (MBT) which affects businesses with employees, it's a 1.475% quarterly tax on wages which starts after the first $50,000 of gross wages each quarter. Also, businesses that make more than $4 million in gross revenue must pay a Commerce Tax that varies by industry.

Am I missing anything?

[ping]

Don't forget they will also need a Federal Tax ID number (EIN), which you can easily get online for free. You can find sample corporate bylaws online as well for free, or your registered agent will give you templates for free. These are important to have as it'll determine how your company is governed, even though you don't actually have to submit it to any Nevada agency.

When you open a bank account though, you will need your Federal EIN number, your articles of incorporation and your corporation bylaws.

Initial start-up costs:
PROFIT CORPORATIONS INITIAL FILING FEE (ie Articles of Incorporation): $75.00
Initial List of Officers and Directors: $150.00
Business License Fee: $500.00
Registered Agent: $50-225

Complete list of fees listed at the bottom of the Instructions for Articles of Incorporation.

[ping]

Just for good measure. Just got a call from my attorney. He says that unless you’re running some sort of property management company or either sort of business with tangible ties on the ground, it’s not necessary to foreign qualify in New York. Says in most situations not necessary for an online business with no obvious physical ties.

With that said, from a legal perspective he says that the benefit of foreign qualifying is to be able to access NY courts. Otherwise you literally can’t sue anyone and enforce contracts, nor can you even appear in court if you are sued.

He says that some businesses have dealt with that by just foreign qualifying once they need to use the courts.

Lastly, he says if this is a real estate listings search website, you should be wary of potential copyright or IP infringement if you are scraping data from other sites. Obvious if someone complains and sues you in NY, then you’d need to foreign qualify to defend yourself.

[Benny]

Just something to think about, there aren't many good options for opening up an online business bank account, meaning you'll have to open up a bank account in person at your local branch in your home state. Unless you fly to Nevada to open up a bank account, which doesn't adhere to lean startup practices.

Well known online banks like Ally don't seem to offer business bank accounts that you can open online, and the very few options available seem to be very new "startups" with pretty poor reviews.

This can be an issue as I'm pretty sure the banks will send filings (notice of interest earned) to the federal government at least, not sure about the state government.

Maybe Capital One if you already have a relationship with them? They are an online bank but they also have physical branches in New York.

[ping]

I just realized that you can publicly search in the Nevada entities database corporations and see the list of their officers. This may be a problem if the original intent was privacy no? I can see that you can list the same person for multiple positions, and even for all positions supposedly.

And this officer does not also need to be an owner shareholder. But still. Perhaps it's just better then to go with a home state LLC?

[deyanfrenkov]

Here are some more details that might help you decide between Delaware and Nevada:

• The minimum cost to establish a Delaware corporation is $89. While the state has no corporate income tax, Delaware’s franchise tax runs significantly higher than many states.
• The minimum cost to establish a corporation in Nevada is $400. This cost includes the list of officers and the business license. In Delaware, a business license is not required.
• Neither state requires a company to hold board or business meetings there. Your company’s headquarters can be located in any state, but you’ll need a registered agent based in your state of choosing to receive any official correspondence.