McStartup

This next question is a somewhat complex two-parter.  Here, I address the question of "what state should I incorporate in?".  In a separate post, I'll address the type of corporation to setup (c-corp, LLC, something else).  I'll try to do part two tomorrow.

Jon writes:

We are looking at where would be the best state to incorporate and I have, of course, always heard Delaware is a great state to do that in.  Nevada as well.  Also, fyi we have determined that an LLC would probably be best for him as I've already done research in that area (unless you have other suggestions).  Anyway, as far as what state to incorp in ... most of the business would most likely be in Cali so do you think it would just be easier to incorp there?  I know Delaware and Nevada have their advantages, but I've also read and heard about the issues/added expenses with doing business in other states as a "foreign corp", which we'd be doing if we incorporated in Delaware or Nevada. 

Additional info you may want to know that could stir some advice from you:

1. He will probably have 3 or 4 private investors
2. Will obviously start out small but will never get very big.  Probably a max of 10-20 employees when it is in full stride.
3. Will probably open an office in LA in a year or so
4. I will be doing the accounting from Indy
5. He may do some work in NC and Florida as well

Well Jon, the first thing I'd suggest your client do is to follow my earlier advice and find a good law firm.  In this case, you may want to look to an entertainment focused firm, of which many are based out of L.A.   Keeping in mind what I had said earlier about attorneys, one of the value-adds you get out of your law firm is another set of eyes and ears in your industry, and they might turn out to be a great source of leads and other industry insights if you were to get the right firm.

All that said, you question is one that is best answered by a lawyer who can explain all of the details and help you make your decisions.  I'll do my best here to provide some high level advice and things to think about.

In general, I would lean toward setting up in Delaware.  The law there favors corporations, they make it very easy to setup and maintain your business, and the annual fees and things for it are inexpensive.  In the future, if someone were to acquire the business, there are pretty good odds that the acquiring business is also setup in Delaware, helping to make the transaction a bit smoother.

That said, in my experience that various tax advantages and things that you hear about are really not there.  Delaware itself will be favorable, but then when you're setup in Indiana, or California, or wherever, you're going to have to file in that state as a foreign entity, and they're going to take their piece of the action as well.  So, for example, just because you setup your LLC in Delaware for say $100 a year does not mean that California (if that's where your office is) is going to sit back and not make you pay the $800 minimum LLC fee every year to them. 

(As a side note, I can tell you from experience that the California state government is a slow moving, technologically  backwards, over-charging behemoth who, for this business, you're going to inevitably deal with.  All the more reason to find a California-based law firm, even if they're not your main one.)  

Clearly, here's a case where the company will need to rely upon the expertise of their attorney and accountant to wade through the red tape.  It can be a mess, believe me.  However, in my experience setting up in Delaware, or not setting up in Delaware, doesn't change the amount of garbage administrative work hardly at all.  Delaware is very cheap and easy, and it's the other states that seem to add the complexity.  

 Also, keep in mind that from a contract standpoint, you're going to be signing contracts that will almost always state that, for that contract, you'll be governed by the laws of the state that your client is in.  So, you indicated that you might have business in California, Florida, and North Carolina.  You'll invariably be under those state laws when it comes to contract enforcement.  Since you're going to be dealing with numerous states anyway, I don't believe this should really effect your decision on where to incorporate, but it's something to keep in mind.

So if it were me, I'd ask my attorney, but I would be inclined to setup in Delaware because it's cheap, it might help down the road, and that's what most other companies are going to do.

You also asked about setting up as an LLC vs. a C-Corp or otherwise.  I'm going to save that for another post here, because I think it's a topic worth of some discussion. 

Thanks for stopping by the site, I hope this helps!