Good day fellow reader, and welcome to Part 2 of this series called “Law for Entrepreneurs, A Crash Course.” where we are lighting the path for you to start your own venture, leave your nine to five, and be the owner of your own future. We are answering questions about the what, the why, and the which. In this post we jump to the where.
Where should I start my business?
Well, most likely you will start your business from the comfort of your house, because working from home is the dream, and you make your own schedule (or perhaps it’s because the money is scarce and there’s nothing better than working in shorts). But we are not talking about where your business will be born, rather where your business will have its birth certificate, or as the government calls it, your business’s “Articles of Incorporation.” For better or for worse, there are as many as 50 options for you to choose from.
To narrow it down, we ask ourselves:
What is the nature of our business?
Am I expecting to hire employees? Where?
Will I have an office or offices? Where?
Am I going to have dealings with state or local government? Where? ?
Where will my customers likely be?
You don’t need to know these answers for all time. Just have a sense of what you expect for the next 3-5 years. The answer to those questions will guide you to where you should probably create your business entity (aka entity formation or incorporation).
Let's review a few popular options, so you get a sense of how to compare the options
Delaware: the State with More LLC’s than People
Delaware is the place to go for most entrepreneurs. It’s like that $1 a slice pizza place from your college years, that friend who’s always ready to go with you anywhere and do anything, no questions asked, That mystery meat that hotdogs are made of. Their website is user friendly, the fees are low, and the forms are fairly simple, asking things like:
the name of your business,
the type of business (LLC, Corp, Non-stock corp, etc.),
the amount of stocks (if needed), and
who is incorporating.
You won’t need to disclose your board of directors or your stockholders. (For the Corporate Transparency act you will, but that is wheat from another field.) So Delaware offers a lot. It gets you low fees, a lot of privacy, and easy access to the creation of your LLC.
Now it’s not all sugar, spice and everything nice. The amount of businesses who open in Delaware is massive, which causes delays on their turn-around times, a 10 day process might as well take over 30. Their customer service is also frequently slammed. They do offer live chat assistance but for most complicated matters you need to give them a call, and that will take some time.
Massachusetts: the State of Patriots, Pilgrims and Parking Tickets.
Massachusetts might be your first thought for entity formation if you come from MIT or Harvard, and even if you didn’t, there are a ton of potential cofounders, team members, partners, and customers in MA. MA is an awesome place to start. Beware, MA is a bit more expensive than Delaware, but it gives back through excellence service and fast communication. Their portal is so well built that you do the whole thing online, no need to create a PDF file and do all the shenanigans other States require, and their turnaround time is incredibly fast.
Now MA does require a lot more personal information when forming a business. MA is like a good parent. It lets you go out but wants to know where, how, and with whom you are going. MA will ask you the names, addresses and ownership of those who hold stakes at your business. It will also ask you to provide information about the nature of your venture.
California: The Golden State of Red Tape
California is both the land of opportunity and the land of bureaucracy. Having one of the huge economies and energetic startup cultures, many businesses would want to get a start in the place. Interestingly, setting up a limited liability company or corporation in California offers unique challenges and considerations.
Starting a company here is among the most expensive options in the U.S. California has some pretty high annual franchise taxes, starting at a minimum of $800 a year for LLCs. Requirements are tough: you are to disclose highly personal information of the business owners and managers and the nature of your venture. The state also requires annual reports and adherence to strict regulatory and tax compliance, which raises administrative costs.
South Carolina: Because Who Needs High Fees and Cold Winters, Anyway?
While South Carolina may not be the first place most people think of when it comes to incorporation, but it has a lot on offer, and that is especially true in case of smaller businesses or startups that need an inexpensive entry point.
The Good: South Carolina has very low incorporation fees, and the ongoing costs are pretty low, too. It has a pretty painless process, and the Secretary of State's office can be helpful with new business owners. It is ideal for those who do not need Delaware-level privacy protection but want an affordable, pro-business state.
The Not So Good: For all intents and purposes, South Carolina doesn't offer the same kind of voluminous case law and legal business protections that Delaware does. If you're the kind of business owner who anticipates a lot of litigated disputes,requires detailed shareholder protections, or whose investors want tried and true jurisprudence you might find South Carolina unsettling. But for most small businesses, ease, affordability, and Southern hospitality prove to be an excellent fit.
Pan back and you’ll see that many states offer affordable fees and online processing. The geography that your business touches is what will narrow down the choices for you. If your business will have a significant presence in many states, then Delaware or your business’s home state are the first two to look at.
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