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Should You Incorporate Your New Michigan Business in Delaware or Nevada?

Occasionally I am asked by clients if it might be advisable for them to incorporate their new business in some exotic locale such as Delaware or Nevada. Some of these clients have heard that many large Fortune 500 type businesses were incorporated in Delaware, even though their headquarters and principal places of business are located elsewhere. Others have heard radio ads touting the tax and other advantages of incorporating in Nevada or some other remote state. Generally speaking, my advice to those starting small Michigan businesses is to incorporate them right here in the Great Lakes State.

While a business can theoretically incorporate in any one of the 50 states (including Delaware and Nevada), incorporating in another state such as Delaware or Nevada will have the effect of adding additional costs to the incorporation process, while providing almost no benefits to the small business corporation.

What about the supposed tax advantages to incorporating in Delaware or Nevada? While it is true that these states do not require corporations to pay income tax, you will still have to pay income and franchise taxes in Michigan if you do business in Michigan regardless of your place of incorporation.

Another reason clients think about incorporating in Delaware in particular is that so many large companies do so. However, just because large companies incorporate in Delaware doesn't mean that is the best move for a small company. Most large companies incorporate in Delaware because of its sophisticated and business friendly court system. However, a small business corporation doing business in Michigan is unlikely to encounter situations where the differences in Michigan's law or legal system and Delaware law or legal system are really that significant. Plus, the cost for a Michigan small business to litigate a dispute in a Delaware court is sure to be much more expensive than having that same dispute resolved by a Michigan court.

If you believe that there may be an advantage for your small Michigan business to incorporate in a location other than Michigan, be sure to consult with a competent Michigan business lawyer before you do so. He or she will be able to advise you on where it makes the most sense to form your business.

Full post as published by Michigan Business Lawyer Blog on December 05, 2007 (boomark / email).