“I’ve heard….”

Many potential clients have heard they should incorporate or form an LLC in Nevada because there are “no taxes” or in Delaware “because it’s the best place.”

They want to know what I think. The bottom line is it may make sense for some specific situations, but for most small businesses, the extra complexity and costs are a deal-killer.

Nevada has no state corporate income, franchise, or personal income taxes. Wyoming has low fees. Delaware has a large, well-established, and predictable body of corporation law.

Even if you form your company (also known as “chartering” the company) in a no-tax state, your income may well be earned in North Carolina, requiring you to pay personal and business taxes here anyway. The franchise tax rate may be very high in the other state. There may be additional fees we don’t have in NC and that you may not expect.

If you are chartered in another state, you are pretty limited in what you can do in North Carolina without qualifying to do business here with the Secretary of State. Doing business without qualifying means you cannot sue in NC courts on behalf of the business (although you can defend a suit). If you are caught not being qualified, you will owe all taxes you would have owed, plus interest, penalties, and a civil fine of $10.00 per day up to $1,000 per year.

Qualifying in NC costs $250.00 per year, on top of annual fees in your state of charter. You will need to file two sets of annual reports and deal with the Secretary of State and Revenue Department of two or more different states. You will need to understand and comply with the local and state business regulations in two states that will govern how you do business. You will have to keep up with changing laws and fees in multiple states.

There are some good reasons for choosing to incorporate or form an LLC in another state, such as having a multi-state business, having more than five shareholders or members, being in a highly regulated industry, or planning to seek venture capital or angel funding.

But most small business owners who think it will be cheaper to file somewhere else are not aware of all the hidden costs of qualifying in the home state and filing multiple tax documents and annual reports.

Consult your accountant, a business attorney, or an experienced business mentor first.