A couple times each month, we are asked by a client whether it is better to form a Delaware corporation, or a Nevada LLC, rather than an Indiana entity. Here is a common Q & A we experience when helping a client chose a state in which to form a new business entity.
CLIENT: I live in Indiana, near the state border, and I do business in Indiana, but mostly in Ohio and Kentucky. Shouldn’t I have three companies- Indiana, Kentucky and Ohio corporations?
GRIFFITH LAW: No, in your case, it would be best to form and operate just one entity formed in one state. We will then file a document with the Secretaries of State for each “foreign” state where you also do business, and that “foreign” registration will place everyone in those other states on notice that you are from one state but operating in multiple states.
Also, there is high probability that the courts would view three separate corporations- one in Indiana, one in Kentucky and one in Ohio- as a single business operation under a concept called “Affiliate Liability.” In essence, your three separate entities would be so closely affiliated that the courts would treat them as a single corporation or LLC.
Finally, you have no plans to sell your operations in Kentucky or Ohio, or to run those operations separately from your Indiana entity. However, it might make sense to have your accountant keep separate financial records on each state’s operations. That would enable you to utilize “Cost Accounting” techniques to determine which of those three state operations is the least profitable and why.
For all these reasons, we think it makes more sense for you to form and operate a single business structure at this time.
CLIENT: Does it ever make sense to have multiple companies in different states?
GRIFFITH LAW: Yes, that can makes sense at times. Each client’s situation is different, which is why business owners should talk with a lawyer before forming a company. We do have clients with separate operations in multiple states. We also have clients in highly regulated industries or who might be subject to different labor laws in different states. For those clients, it can often make sense to form separate Indiana entities to operate in separate states. For example, we have a client for whom we formed an Indiana company to operate in Michigan, while the client will maintain a separate Indiana corporation to operate just in Indiana. This plan made sense for that client, due to labor contracts and labor laws that differ from state to state. Those are not your circumstances, however.
CLIENT: Because I do more business in Kentucky, I should form a Kentucky business, right?
GRIFFITH LAW: Actually, we would prefer that you form an Indiana entity, because you reside in Indiana, have an office in Indiana, and have hired employees from Indiana. If there is ever an issue with your Indiana entity, we can easily drive to downtown Indianapolis to the Secretary of State’s Office to meet with Indiana officials to resolve any issue. There’s no advantage to forming an entity in Ohio or Kentucky. Indiana is a business-friendly state with significant asset protection and limited liability rules to protect owners and officers from liabilities arising from the business. Other states offer essentially the same protection provided under Indiana law, with slight variations state by state. Because you are already subject to Indiana law, there is no reason to form an entity outside of Indiana. You gain nothing but might subject yourself to additional laws and risks.
CLIENT: I’ve heard that it is better to form a corporation in Delaware.
GRIFFITH LAW: Delaware corporate law once offered advantages over other states, but the gap between Delaware law and Indiana law has been narrowed over the years. Because you do not operate in Delaware, it makes little sense to subject your business to the government oversight and the jurisdiction of Delaware officials. Indiana law will serve your interests just as well.
CLIENT: I’ve also heard that I can save income taxes by forming a Nevada entity. Is that true?
GRIFFITH LAW: No, because you live and work in Indiana, you will be subject to Indiana income taxes. You cannot avoid income tax liability, simply by forming a Nevada entity. In fact, unless you are doing business in Nevada, forming a corporation or LLC in another state where you do not operate does nothing but (1) cost you registration and registered agent fees and (2) subject you to laws, regulations and jurisdiction of another state.
Also, you must have a registered agent in each state you operate in, and that costs money. If you are registered in multiple states, you must have multiple registered agents to be served with lawsuit papers and notices. You then run the risk of being sued, but your registered agent from one state fails to notify you. The fewer places you can be sued, the better.
CLIENT: I’m thinking about buying a building in Kentucky for my business. Does that change your analysis?
GRIFFITH LAW: No, we should stick with your Indiana entity, which can purchase real estate in any other state.
CLIENT: Okay, I now understand why it makes more sense for me to form and operate one entity- an Indiana corporation or LLC. I understand that circumstances might change, and I’ll come talk to you then, but for now, I just need an Indiana entity.
GRIFFITH LAW: Great. Now, let’s talk about why you should have us form an LLC that will be taxed as an S-corporation. . .
