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Think You Can Save Big by Incorporating in Nevada or Delaware? Think Again

Before you pay for an out-of-state registration for your business, consider the pitfalls.
April 4, 2011

Don't listen to anyone trying to sell you on the idea of incorporating out-of-state in Nevada or Delaware. More than likely, it's a scam.

As a tax lawyer advising clients across the country, I meet every week with entrepreneurs who were persuaded by an incorporation service or attorney to set up a C-Corporation in Nevada or Delaware.

It is true that almost every Fortune 500 company is set up in these two states, and they have specific reasons to do so. But for the average small-business owner, this is a waste of money and potentially risky. Unless they are doing business in Nevada or Delaware, most small business owners are unlikely to obtain any tax benefits or additional asset protection.

Fortune 500 companies have a reason to incorporate in Nevada or Delaware because Wall Street underwriters often require them to. Incorporation rules in the two states make it easier for large public companies with thousands of shareholders to comply with some securities law requirements. Scam artists will take this fact and twist it to make small-business owners think that they, too, could benefit from incorporating out of state. But this is not the case.

Related: Business Structure Basics

For example, I recently met with a business owner moving her consulting business from New York to California. The incorporation service she was working with sold her on the idea of spending $3,000 to set up a corporation in Delaware. But the Delaware registration provided her no benefit. In fact, the decision to register in Delaware meant her personal assets weren’t properly protected from potential lawsuits against her business when she moved to California.

My new client is an educated person with an Ivy League graduate degree, but now she was out $3,000, and the hundreds of dollars it took to dissolve the entity in Delaware and register it instead in California. It would have cost her half that amount if she had set up the proper entity in the correct jurisdiction in the first place.

Many U.S. small-business owners want to avoid paying more taxes, and protect their assets. Here are some of the pitfalls involved with falling for the out-of-state incorporation scam:

Rather than believing in what sounds too good to be true, small business owners should make sure that they have legitimate certified public accountants advising them on the tax issues and lawyers setting up entities that are truly tailored to the needs of their businesses. Spending a few dollars on a quality adviser can save you thousands of dollars and hours of heartache later.

Related: What to Look for When Hiring an Accountant