A question we often hear is: Where do I incorporate my business? We’ve listed a few factors below which you should consider in your decision. Bear in mind that each case is different, and what works for one business may not work for another. We have included information for New Hampshire, Massachusetts, and Delaware.
Filing Costs
The cost of filing incorporation paperwork can vary by state, and for some founders, those costs can be significant. In Delaware, filing a Certificate of Incorporation will cost you at least $89. In Massachusetts, filing Articles of Organization will cost at least $275. And in New Hampshire, filing Articles of Incorporation will cost $100. In Delaware and Massachusetts, the filing fees may increase based on the number shares of stock listed in the incorporation document.
Foreign Qualifications
The cost of incorporation may increase if your business will be physically located in another state or will derive its income from another state. If you incorporate in one state but are doing business in another, you may need to file what is called a foreign qualification or foreign registration. In Massachusetts, the Certificate of Registration for a foreign (non-Massachusetts) corporation is $400. In New Hampshire, the Certificate of Authority for a foreign (non-New Hampshire) corporation is $100. Remember that filing as a foreign corporation in another state depends on whether your business will have a physical address in that state, like a storefront, or will derive a substantial amount of business from that state. For example, if you advertise in, and expect many of your customers to come from, a particular state, then you’ll likely need a foreign qualification in that state.
Registered Agent
Many states require that a business either (1) keep a physical location in the state of incorporation or, (2) if the business headquarters is located out of state, provide the name of a registered agent (which must have a physical address in the business’ state of incorporation). A registered agent accepts official correspondence on behalf of the business (such as court filings or notices from the secretary of state), and serves as a connection between the business owner and the state of incorporation. There are many companies which specialize in acting as a registered agent, and they usually have offices in all fifty states. For instance, a company incorporated in Delaware but which has an office in Massachusetts can pay a company in Delaware to serve as that business’ registered agent. The cost for professional registered agents can run from less than $50 per year to several hundred dollars per year, but the range of available services (and the quality of service) can vary widely.
Investment
If you think your business might accept investment money at some point in the future, it could be a good idea to incorporate in Delaware, but it will depend on the type of investment. Venture capital firms, which offer capital in exchange for equity in your company, are sophisticated investors who want to see that your business is incorporated in Delaware. This is in part because many standard investment documents are based on Delaware law. If you’re certain that your business might accept only limited investment from friends and family or angel investors, or never accept equity investment at all, then Delaware incorporation may not be needed.
The Delaware Court System
Many founders cite the established Delaware business court system as a reason for incorporating in Delaware. Their reasoning is that court decisions are more predictable and the judicial process is more streamlined. Although it is generally true that businesses can more better prepare for a lawsuit by using a greater variety of judicial decisions, we would encourage founders to think of it more as a benefit of incorporating in Delaware instead of a driving force of the decision.
Founder Example
Below is a fictional scenario which illustrates some of the points we discussed above. Please note that any similarity to actual people is purely coincidental.
Sergio is a recent graduate of the Massachusetts Institute of Technology’s (MIT) Sloan School of Business and has a master’s degree in chemical engineering, also from MIT. Over the past two years, Sergio has developed an environmentally-friendly coating which can be applied to the undercarriage of cars and trucks to prevent corrosion from winter road salt. Sergio has several patents for his invention held in his name, and is working with a couple of MIT colleagues to develop a business plan for marketing and selling his product. Sergio expects his product will be a hit with investors, and has a friend at Dolphin-Safe Ventures, a venture capital firm specializing in investments to ecologically minded early-stage companies. His friend has indicated an interest in investing in Sergio’s business. Sergio has been in talks with the owners of two different chemical plants who are interested in manufacturing his product, one in Massachusetts and one in New Hampshire. He determines that the New Hampshire plant can manufacture his product on better terms, and he also decides his corporate office will be based in New Hampshire. Sergio needs to get an agreement in place with the plant and also lease commercial office space, but before he can sign any contracts, he needs to incorporate his business. Where should Sergio incorporate?
Based on what we know, it seems Sergio would be best suited to incorporate in Delaware and qualify as a foreign corporation in New Hampshire. Sergio’s business – a highly technical and innovative chemical engineering company – is exactly the sort of thing that would interest venture capital firms. A venture capital firm would expect to use Delaware-based investment documents, so incorporating in Delaware would position Sergio’s company well for this type of investment. However, Sergio’s business will be physically located in New Hampshire, not Delaware. Because Sergio doesn’t live in Delaware and his business is not based there, he will need a registered agent. He could hire a professional corporate services company like Corporation Service Company (CSC) as the registered agent, and they would work with Sergio’s law firm to process incorporation paperwork. Sergio’s filing fees are going to be $189 for both the Delaware incorporation and New Hampshire Certificate of Authority. He will also need to pay for ongoing services through CSC. Sergio’s business needs a New Hampshire foreign qualification because it will be operating out of New Hampshire and because Sergio will maintain a physical office location there. Sergio has decided to commute to New Hampshire from northern Massachusetts, where he currently lives. Because Sergio lives in Massachusetts as an individual and does not operate his business there, no Massachusetts foreign qualification is necessary.
This example has been simplified to demonstrate how a number of factors are used to resolve what can often be complex legal issues.
As you can see, incorporating in Delaware can be helpful for companies who expect to receive investment, but should not be used a default. The specific needs of each company will decide on the best state for incorporation. As a founder, it is important to consider your company goals and business objectives when deciding where to incorporate.
Bob Baker is a founding partner of Peak Corporate Counsel. He has worked with numerous founders on a variety of issues specific to startups. When he’s not advising innovators, he can be found at networking events, playing rugby, or hiking with his kids.
This article is for informational purposes only, and may not be considered legal advice.