Where Should You Incorporate?
Most startups incorporate in Delaware. Other popular places for incorporation include Nevada and Wyoming. Neither Nevada nor Wyoming charge corporate or income tax and all three states have enacted blockchain-favorable legislation. Wyoming, in particular, has adopted the most comprehensive and blockchain-favorable legislation of any state. While each state lures companies to incorporate within its jurisdiction, touting its own unique advantages, your company may not fully benefit from these laws.
Delaware is one of the most popular states for incorporation and some VCs only invest in Delaware corporations. Over 66% of Fortune 500 companies are incorporated in Delaware.
Companies favor Delaware because Delaware law is business-friendly and Delaware has a separate Court of Chancery solely to hear cases involving corporate law. These disputes are heard in front of a judge with a background in corporate law, rather than a jury. With well-developed body of corporate law, the disputes are resolved quickly and with more certainty. Due to the predictable outcomes in the Court of Chancery, a company can decide whether to settle or litigate.
Other advantages of incorporating in Delaware include privacy and tax benefits. Unlike in some states, the names of directors or officers are kept private and Delaware does not charge corporate tax, royalty tax or taxes on intangible assets.
Formation in Delaware is also extremely fast. If an investor insists that your company is a Delaware corporation before giving you money, you can become incorporated in Delaware in as little as an hour.
On the blockchain side, The Delaware General Corporation Law (“DGCL”) has been amended to explicitly allow companies to use blockchain technology to maintain its stock ledger and corporate records and to provide notices to shareholders.
Nevada is often the choice of incorporation for its tax benefits. It neither charges an income tax nor corporate tax. In addition, it offers strong protections for its shareholders and directors, allowing them to remain anonymous. Nevada also amended its Uniform Electronic Transactions Act to recognize smart contracts and blockchain transactions and prohibits a tax on the use and implementation of blockchain technology.
Wyoming offers similar tax and privacy advantages as Nevada and offers the lower filing fees and annual fees than both Nevada and Delaware. In addition, Wyoming is the first state to adopt comprehensive and favorable blockchain legislation, making it very enticing to blockchain startups.
Some of the most interesting aspects of this legislation include the exemption of virtual currencies from the state’s money transmitter laws and the exemption of the development, sale, or exchange of utility tokens from the state’s securities and money transmitter laws. That means if your company sells utility tokens within Wyoming, your company does not have to apply for a state money transmitter license or be subject to Wyoming’s securities laws. However, most blockchain companies do not limit their sales of utility tokens to a single state.
Despite the possible advantages of incorporating in Delaware, Nevada, or Wyoming, you may not receive the full benefits of incorporating in those states by mere virtue of incorporation.
For example, California requires businesses that are incorporated out-of-state but operate in California to qualify to do business as a foreign entity in California. This means, in addition to the fees you must pay to incorporate in your state of choice, you must also pay California’s fees to qualify to do business in California, California’s annual taxes, any annual taxes of your state of incorporation, and file annual reports in both states.
When you qualify to do business in California, you are required to disclose the identities of your directors and officers, negating the privacy protections you may receive when incorporating in a different state.
In addition, if most of your shareholders live in California and you conduct most of your business out of California, you may be subject to California law rather than the law of your state of incorporation.
This article is also posted on Medium.
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