A general rule to follow is that businesses with five or less owners should form the entity in the state where a majority of its property, owners, and employees reside. However, there are many factors that may apply in a particular company’s situation that could impact the decision about where to form an entity. Thus, if your company has more than five owners or has particular concerns such as taxes or asset protection, the business owners should seek competent counsel prior to forming an entity in a particular state.

1. Where Should I Form My Business? (A Brief Overview) |
BizTaxBuzz by Trevor Crow
biztaxbuzz.com/bizlaw/where-should-i-f orm-my-business-a-brief -overview/
12thJulyWhere Should I Form My Business? (A Brief Overview)
Posted by Trevor Crow
When working with new entrepreneurs, I often get asked about the best state to
form their new business. For most small businesses the answer is to form your entity in your home state (i.e., the state in
which you conduct your business and the location of most of the business’s property, shareholders/members, and
employees).
If you are researching this issue, you will find a lot information about forming entities in certain states, such as Delaware,
Nevada and even Wyoming. There are definitely advantages to forming your entity in these states, but there are also
disadvantages. I briefly outlined these advantages and disadvantages below:
Delaware Advantages
The main advantage of forming an entity in Delaware is its Chancery Court. The Chancery Court is a special court that
hears disputes involving the internal affairs of business entities. This special court is well-known for its speed, judges
who have been trained in business matters, and the fact that there are no juries. Further, Delaware has the most fully
developed body of case law, created over hundreds of years. Finally, Delaware is known for its flexible and pro-
management entity statutes, which entices business owners to incorporate there. The combined effect of these attributes
is that business owners have more flexibility in how to manage their businesses and because the results of a dispute
litigated in the Chancery Court are more predictable, management has more certainty regarding how to operate the
business.
Nevada Advantages
Nevada is a fairly new player in the entity formation game, but it’s growing fast. The main advantage of forming your
entity in Nevada is that Nevada has low filing fees, no business income tax, franchise tax, capital gains tax, state
corporation tax or inheritance tax. Other advantages of forming your business in Nevada include:
Nevada has no Agreement of Cooperation with the IRS. Under the U.S. tax code, a taxpayer’s return and return
information are confidential. However, there is an exception for dealing with States provided there is an “agreement of
cooperation” with the IRS to exchange information on taxpayers. [Code § 6103(d)]. 48 states have an agreement with the
IRS. Currently, Nevada and Texas do not.
Very little disclosure is required. Many business owners who are interested in privacy or asset protection will choose
Nevada for this reason.

2. Wyoming Advantages
Wyoming, like Nevada, has no business or franchise taxes. In addition, like Nevada, Wyoming requires very little
disclosure when forming an entity. However, Wyoming has the added advantage of allowing a lifetime proxy. This allows
the true owner to hide his/her/its identity while still controlling the vote. These privacy advantages are sometimes
important to certain owners to implement certain asset protection strategies.
Disadvantages of Not Forming your Entity in your Home State
Most of the advantages discussed above provide only minor benefits for small business owners. Many times the hassle
and cost of maintaining an entity outside your home state outweighs the benefits.
The main disadvantage of not forming your entity in your home state is that most, if not all, states require entities that
transact business within its borders to register as a “foreign” entity with that state. Thus, even though your entity was
formed in Delaware, you would still have to file reports and pay taxes in the state in which you operate your business.
Other Disadvantages to consider:
Forming your entity outside your home state opens the door for someone to sue you in your formation state. Thus, you
may be forced to hire out of state counsel and to appear in court outside your home state.
You must have a registered agent in the state where you form your entity.
You may even have an increased tax liability in your home state because you are registered as a foreign entity there.
Bottom Line. A general rule to follow is that businesses with five or less owners should form the entity in the state where
a majority of its property, owners, and employees reside. However, there are many factors that may apply in a particular
company’s situation that could impact the decision about where to form an entity. Thus, if your company has more than
five owners or has particular concerns such as taxes or asset protection, the business owners should seek competent
counsel prior to forming an entity in a particular state.