Private Equity/Venture Services

The state in which you form your business may not seem important now, but it could have consequences in the future.  Administrative expenses, tax issues, attraction of future investors and simply the ease of governing your entity can all be affected by the state in which your entity is organized.

That being said, it is relatively easy to change the state of your company's formation.  As your business develops, the important thing is to periodically evaluate whether it continues to make sense to be organized in the state you originally chose.

There are three main issues to consider when determining where to form your business:

• Location of your business
• Tax issues
• Attracting investors

Particularly with new ventures, the location of your business should be a big factor in deciding where to organize.  Your business has to have a registered agent to receive service of process in each state where it operates.  If you organize in the state where your business is physically located, someone at your company can be the registered agent.  However, if you choose to organize in a state other than your "home" state, then you will have to use a paid service to act as your registered agent.  Generally, the fee must be paid for each state in which the service acts as your registered agent.  As you can imagine, this cost can add up quickly for a new business.

Clearly, a start-up business wants to keep its tax bill as low as possible.  Your company will have to pay state taxes in each state in which it operates.  While these taxes are unavoidable, the business can take steps to limit them.  For example, Delaware corporations are subject to the annual Delaware business franchise tax.  However, many states have no franchise tax, or at least a much smaller tax.  While there are certainly valid reasons to incorporate in Delaware, its franchise tax could hit a new corporation with a large tax bill that may be needless.

If you anticipate raising money from outside investors, Delaware might be a good state to choose.  Investors are generally comfortable with Delaware entities because of the certainty that Delaware's business statutes and courts provide. A lot of businesses have formed in Delaware, and that has led to detailed statutes and a well established body of case law.  Investors and businesses can use the relative certainty of Delaware law to plan their relationships in a way that hopefully avoids potential trouble areas and litigation.

We all know that a business owner has hundreds of decisions to make when starting a new venture, and the state of formation may seem inconsequential.  Yet, with a little forethought and periodic monitoring of its situation, a business could save itself a lot of hassle (and money) in the long run.