In my blog post entitled “Tips From A Seasoned Lawyer” I briefly touched on the advantages and disadvantages of forming a corporation or a limited liability company. Frequently, new businesses are advised to incorporate in the state of Delaware. Because so many businesses are incorporated in Delaware, e.g., more than half of the Fortune 500, Delaware has a well-developed body of corporate law governing internal corporate matters. Other touted advantages of Delaware incorporation include the ability to dispense with cumulative voting for directors and to stagger their election. Delaware law also allows for a single-member Board of Directors.
The Illinois Business Corporation Act includes all of the later provisions, although as many less corporations incorporate in Illinois as opposed to Delaware, the body of law governing the conduct of corporations is less.
Another common state for incorporating is Nevada. While Nevada does not have the advantage of having a well-developed body of corporate law governing internal corporate matters, Nevada like Delaware does not require that you pay income taxes if you do business in another state; while Delaware imposes an annual franchise tax on businesses, Nevada does not.
Also, start-up costs for incorporating in each state is relatively inexpensive, around $100.00 in Delaware and $200.00 in Nevada.
Another option is incorporating abroad. Multinational Corporations organized under U.S. law are subject to tax on their worldwide income instead of just the revenue they earn in the U.S. By keeping that income abroad in foreign subsidiaries, those taxes may be deferred and if brought into the U.S., while it would be taxed at up to a 35% rate, U.S. taxes would be offset by any foreign tax paid. From a regulatory standpoint, a Multinational with a foreign corporate domicile is largely subject to the securities regulations of that domicile, although there will be some U.S. regulations applicable to it. There is one catch, however, companies are prohibited from reincorporating outside the U.S. for tax reasons unless there is a sale of control of the entity.
Similarly, for those corporations doing business in Illinois who wish to incorporate or form an LLC in Nevada or Delaware, there is a catch. A Nevada or Delaware corporation with its principal place of business in Illinois will have to fork over $150.00 for an application for authority to transact business in this state in addition to filing a foreign corporation annual report every year thereafter ($75.00/year) plus pay Illinois franchise taxes annually based on Illinois paid-in capital. If it has employees it will have to meet the usual unemployment insurance and workers’ compensation requirements, among others. A Nevada or Delaware LLC will pay $500.00 for an Application for Admission to Transact Business in Illinois and then pay $250.00 annually to maintain the right to do so.
So if you’re an Illinois business seeking the status of a Delaware corporation or the simplicity of a Nevada corporation, you need to consider both the financial and administrative costs involved.