An early decision in the birth of a company is the jurisdiction in which to incorporate or organize.  Actually, I see this as a very easy question.  However, there is no shortage of legal advice (sometimes bad, which usually is free) out there.  For whatever reason, choice of jurisdiction seems to be a popular target and Nevada seems to be the darling (with Wyoming the first-attendant).  I thought it would be worth quick discussion.

As far as I am concerned, an entreprenuer generally should only consider incorporating or organizing her company in one of two jurisdictions: 1) the state of your principal place of business or 2) Delaware.  If you are based in Utah, form a Utah company.  Otherwise form a Delaware company.  The only exception for this (again, in my opinion) is you might consider forming the company in another state if you foresee moving the business in the future to that state.  There are certain reasons to favor Delaware over Utah (e.g., certain investors — typically VCs — might request or require it), but for a number of reasons, Utah is the natural choice for a Utah-based company.

Now you have my position, let me explain.  Incorporating (and for convenience, by “incorporating” I am including forming all non-corporate entities), in a state where you are not principally located comes with certain costs.  These costs can be monetary, time, administrative, risk, etc.  For one, you likely will need to hire a service to act as registered agent in that state.  You may need to use that service (or some other) to make all your state filings for you.  If you don’t, you need to deal remotely with the office of the Secretary of State of the state in which you incorporate.  You will need to qualify (and maintain the qualification) to do business in the state where you actually conduct your business.  You will need to find an attorney who is licensed to practice in the jurisdiction or is at least familiar with the business statutes and laws of that jurisdiction.  It is unusual to find lawyers in Utah who are licensed in and familiar the laws of other states (with the possible exception Delaware, California and to a lesser degree New York).  Finally, some states tend to be more difficult to work with than Utah administratively speaking.

Costs are costs.  They are not bad, per se, but the costs of incorporating in a foreign jurisdiction may not be worth it when compared to its benefits.  Probably the most commonly touted (and usually false) benefits of incorporating in a foreign jurisdiction are tax savings.  If somebody tells you that you can avoid income tax (either from the employee or company perspective) by simply organizing your company in Nevada, Wyoming, Texas or any of the other handful of income tax-free states, you likely are getting bad advice.

Generally speaking, employees are taxed by the state in which they performed the services for which they earned their wages.  The jurisdiction of formation is a separate question from employee income tax.  For instance, if you work in Utah, Utah will levy income tax on your Utah-source wages.  Incorporating or organizing in a income tax free jurisdiction will not get you out of those taxes unless your wages are tied to work performed in that state.  Many of us work for companies incorporated in a foreign jurisdiction (e.g., DE, CA, etc.).  However, none of us are receiving a tax bill from those states unless you perform work there.  The same is true for avoiding taxes. 

The same is also true for corporate income tax.  States generally weigh three items in determining whether an company owes income taxes in a state: location of property, location of sales, location of employees.  Realistically speaking, there is little or no tax benefit for a company based in one state to incorporate in a tax-free jurisdiction unless it has some actual business nexus with that state.

Another benefit touted for states such as Wyoming or Nevada are the company-friendly corporate laws.  While there may be some beneficial aspects of the laws of those states, in my opinion, they are relatively small for the average company compared to the costs of incorporating in those states and probably not worth the costs of doing so.

To be sure, Nevada and Wyoming are fine states and their laws are equally fine.  Indeed, were I an attorney located in Wyoming, I predict I would be saying to incorporate in only in Wyoming of Delaware.  In addition, incorporating in a foreign jurisdiction certainly will not destroy your company, but the costs associated with doing so are real and the benefits largely are immaterial.