Special Guest Blog: Where to Incorporate in the United States?

One of the first issues facing a UK company that wishes to expand and do business in the United States is, where to locate its business. Often in these considerations questions arise such as, Should I incorporate in Delaware? The answer, of course, depends ultimately upon a companys particular circumstances. But, as a very general rule, unless your company has much more than just a handful of employees, it is simplest, least expensive and best, to incorporate in the state in which you intend to actually run your business.

Delaware has obtained something of an appeal for business that has reached all the way across the pond. While the attraction is in many respects deserved, most of the advantages of incorporating in Delaware will likely never apply to the vast majority of UK SMEs venturing into the USA market. This is because such advantages apply primarily to publicly-traded companies and late-stage start-ups that are on the verge of going public. Delawares flexible corporate laws are well known in helping to shield entrenched management and so are favoured by investors such as venture capitalists who often try to maintain as much control as possible over their portfolios. Similar reasoning applies to management of public companies as well. Delaware also provides tremendous flexibility for preferred stockholders who control a corporation, such as venture capital investors, and may wish to engage in mergers or acquisitions without the approval of those who own common stock. Needless to say, most SMEs will never be faced with such complicated scenarios.

Another major advantage of incorporating in Delaware, is an extensive body of business law going back over 100 years. The Delaware Chancery Court, recognised as one of the finest courts in the country, hears only corporate cases for Delaware based entities. As much of this concerns mergers, acquisitions and management shareholder issues, it again will likely have little application to the average small UK business expanding to America.

On the other hand, simplicity usually indicates that the best place to incorporate for a small UK business is the state where the business will have its physical presence; where property is owned or leased; and where employees and shareholders are more likely to reside. Some of the on-going administrative obligations attendant to incorporation include appointment of a registered agent, paying state filing fees and filing state annual reports. Where a business incorporates in one state but operates from another, those burdens and their costs will have to be met in both states. Further, the company will additionally have to qualify as a Foreign Corporation in the state where it conducts its business, which can lead to unexpected tax consequences.

Some companies have incorporated in another state, such as Nevada, to take advantage of that states lack of corporate income tax. They are often surprised to find, however, that the state in which they operate subsequently pursues them for the taxes, but at a higher rate because of their foreign status even though the owners live in the same town as their business!

The chief concerns of a UK company establishing itself in the American market should revolve around access to its suppliers and customers, marketing, operational and financial efficiency and risk management. Only few, and relatively rare, circumstances would justify complicating these challenges with the additional administrative layers attendant to incorporating outside the companys home state.