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What’s Up With Delaware?

Over the past few years I have worked with a lot of people who want to start LLCs, not-for-profits and incorporations.  Even before we meet, I can guarantee that one of the first things I hear will be: “My friend/relative/acquaintance told me I should file in Delaware because it will be cheaper because of taxes.”

I don’t know who this person is that is spreading these rumors, but I wish he or she would stop.

The truth is that for most businesses filing in Delaware does not save any money. Instead, you should form your business (and file the appropriate papers) in the state where you will actually be running  your business.  Before you buy in to the Delaware hype, consider where your offices will be, where you will be opening your shop or where the majority of your clients will be based.

 Why? 

Your home state (you know, the one where you will actually be operating your business from) will want to see documentation that you are registered to do business THERE .  If you are doing business in New York (for example), meaning opening a bank account, interacting with customers, signing a lease or seeking a license, the State of New York wants you to be registered there (and other states feel similarly).

Only now that you have formed your business in Delaware (and paid Delaware all the filing fees) you now have to register as a “foreign corporation” in order to operate in your home state.  To register as a foreign corporation you will often have to pay the EXACT same amount of money as if you had just formed the company in your home state.  So essentially your business ends up paying the State of Delaware AND your home state.

So how can start-ups save money?

Believe it or not, the most cost-effective choice for most small start-ups is to register their company where they will be doing business.

The idea that you can save money by registering in Delaware is a MYTH! In short, get all the facts before you jump on the Delaware bandwagon.

I hope you find this useful and that it saves you money. I know a lot of people who wish they would have known about this before registering (and paying in Delaware AND then again in their home state).

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How Do You Decide What Legal Structure Your Business Should Be?

Once someone decides to start her own business, one of the first dilemmas she will be faced with is: what kind of legal structure should I form?

The law offers various types of businesses, from sole proprietorships to LLCs to S Corporations to Not-for-profit corporations.  People starting a business may know what they want to do or sell, but they have trouble determining which legal structure is right for them.

When clients ask me this question I always start by telling them”it depends.”  I then pepper my client with a handful of questions to see how she feels about the following key factors:

– Control.  How much control do you want to have over the business you are starting?  If you want exclusive control then your business is going to take a different form from someone who is looking to share decision-making power.

–Liability.  Some legal structures do not protect your personal assets.  If you are concerned that the money you own personally (as opposed to the business funds) remains separate, you need to choose a legal form that provides for this.

–Raising capital. More basic entities (like sole proprietorships) are restricted in how they can raise capital.  If you are planning to raise funds through means like selling shares, you should consider a legal structure that allows you to do this.

–Taxes.  Each legal form is taxed differently.  You should get advice from an accountant and make sure that the form you choose will be the right financial fit for you.

If you are thinking of starting a business these are some great topics to consider before choosing a legal structure.  Do any business owners have other tips or factors they considered when deciding the legal structure their business would take?