*this post has been updated. read below*
A college friend of mine, Richard Crowley, is one of the smartest kids I’ve ever met, and a phenomenal programmer to boot. My college company actually screwed him over royally when he built us a $40k website for only $4k, and despite this, miraculously, he remained my friend. He went on to become a ubernerd in San Francisco at Yahoo! and then OpenDNS, while I moved on to Boston to do consulting and then marketing at WebNotes.
A few months ago we came up with a fun business side project to pursue (more details to come later, but rest assured, it will be awesome), and obviously we put him in charge of the actual work and me in charge of whatever is left over. This “remainder” work includes fun projects like actually incorporating which is kind of an interesting problem in and of itself. The type of corporation really isn’t a debate, as an LLC avoids double taxation of income, allows us flexibility in our operations and we don’t really need to issue stock to outside investors (ie. Venture Capitalists), but where we incorporate gets tricky. Here’s the situation, and here’s why I am choosing to incorporate an LLC in Nevada:
1) I live and work in Massachusetts
2) Rich works in California
3) Both states are extremely expensive to incorporate in. (State Filing Fees: Cali = $800 and MA = $500)
4) Neither state is particularly pro-business.
Given this, I started looking at two other states which are considerably better: Delaware and Nevada. Both are EXTREMELY pro-business and both are pretty cheap, but here’s the rub; if you incorporate in either state and are defined as having a “business nexus” in Massachusetts (effectively meaning you do a lot of business in MA) then you are subject to a $500 annual foreign LLC fee. Crap. So what does it mean to have a “business nexus”? Glad you asked, and here you can find the MA regulations. If you don’t want to read, here are what I consider the most important requirements to be considered as having a nexus:
1) Buying, selling or procuring of services or property in the state
2) Execution of contracts or exercising/enforcing contract rights in the state
3) The maintenance of a place of business (salespeople working from home don’t count)
4) The employment of labor
5) Maintaining stocks of goods in MA
So now I have to figure out if I qualify. This is an internet business so very little will actually be maintained in Massachusetts. I won’t buy, sell or procure services/property specifically within MA. As an internet business, the contracts that we “sign” with our users will be enforced in the state that we incorporate. I will be working out of my bedroom so no business place will be maintained and I certainly won’t be publicly disclosing my address to anyone. Rich and I are the only “labor” and there’s no “goods” (or tangible goods at least) that we are storing. So we are in the clear!
Now, how did I decide between Nevada and Delaware? EVERYONE seems to incorporate in Delaware, mostly because its been pro-business for so long that every attorney in the world knows Delaware law. Also, in the words of my friend Tom O’Keefe, Nevada Corporations bring up imagery of casinos and bunny ranches. BUT none-the-less, Delaware has annual franchise fees of $250 just to maintain a good standing, whereas Nevada doesn’t have these fees. Couple in the fact that it costs half as much in incorporation fees and we’ve got a winner! If we were looking to take on a bunch of financing, have a lot of employees, etc our decision might have been different, but given our unique circumstances, our business should be good to go.
I’ll be using Intuit’s MyCorporation which is waiving their service fees currently and will allow us to save even more money. [image courtesy of Flikr Creative Commons]
It turns out there were a few fees that I missed in my research. Nevada corporations require you to pay $100 annually for a business license, regardless whether you operate in the state. There is also the requirement that you pay $125 annually to let the state know your membership/partners. Both fees start the year of incorporation, so while there is no franchise tax there are certainly fees. $225 annually for NV vs $250 annually for DE, and Delaware doesn’t make you pay the first year. Sounds like I’m swinging the other way!