Incorporating? There’s No Why in Wyoming
There is no reason why you should incorporate your company in Wyoming if you are operating your business in California.
Your two state options for incorporating a California-based business should be California and Delaware – period.
Starting and building a company is not easy, but the process becomes even more difficult if you make poor decisions for your company at the start and along the way.
In the past two months, I have met a surprising number of entrepreneurs with businesses in California who have formed corporations and limited liability companies in Wyoming. When asked why, they typically respond that someone they knew had recommended Wyoming as a place to incorporate. But why? Some say privacy reasons. Others say tax reasons. And others just shrug their shoulders. In all cases, they don’t give the impression that they have done their homework and consequently have made a bad decision.[Important: Before you read further, please know that we have nothing against the great state of Wyoming and I look forward to traveling there one day. The same incorporation analysis holds true for a California-based business that incorporates in Nevada or any other state outside of California and Delaware.]
Let’s break down why Wyoming is not the best option for your California-based business:
1. California Rules
Let’s assume that your company’s principal place of business in in California and most of its shareholders and assets are located in California. In this case, if you incorporate outside of California, then your new corporation is considered to be a foreign corporation in California and it therefore must qualify to do business in California as a foreign corporation. Your corporation then will have to pay related franchise taxes in California, so that, as a practical matter, the Wyoming incorporation decision has increased your company’s taxes relative to just forming your business as a California corporation.
There are many situations, however, when it makes sense to incorporate your California-based business in Delaware and incur the additional franchise taxes in California. For example, many investors prefer investing in Delaware corporations, so a Delaware corporation could facilitate your company’s future financing efforts. Also, your startup as a Delaware corporation may have certain corporate governance advantages relative to starting out as a California corporation.
2. Rookie Move
People who are experienced in launching and funding startups may question you about your reasons to incorporate in Wyoming. Of course, it is not the end of the world. Yet, when I come across someone who is operating a California-based business as a Wyoming corporation, a little red flag immediately pops up and I start to have doubts about judgment, rigor and decision making ability. Even though I focus on these startup issues, I am not the only one who will have this type of reaction.
3. Management Privacy
I don’t understand the logic behind incorporating in Wyoming for privacy reasons. As a business looking to raise money, get customers, hire employees, etc., you want to tell them that you are the CEO of your company. And if you are out in the open about your company and its business (which you should be doing), then there is no need to keep private who is managing and running your company.
4. Professional Help
What will you do when your company encounters some legal complexity, such as a preferred stock financing? What legal issues will be triggered under Wyoming law? To advance your transactions, you likely should hire Wyoming counsel (in addition to the California attorney that is helping you on day-to-day corporate finance and contractual matters), so that your company moves ahead legally in accordance with the laws of its state of incorporation. You’re doubling up on expenses and it may be difficult to find the right professional help to assist your company as its legal issues become more complex.
5. Bottom Line
Don’t waste your time. And don’t waste your money. As a California-based business, launch your new company as a California or Delaware corporation. Do your research and get the right advice for your startup. Remember: you’re shooting for the moon (not Wyoming).
How are you making your decision to incorporate your business? Is there a reason why Wyoming (or Nevada, etc.) should be used to incorporate your California-based business? I don’t think so, but I appreciate your input because it will help other entrepreneurs make the right decisions for their startup companies.