Startup idea testing - incorporate LLC in New York or Delaware?

Michael: Okay, you ask very good questions and let me see if I can answer them. Firstly let me congratulate you on thinking about legal entity before starting your business.  I have had clients that got in trouble because they ran their business before incorporating and have had huge liability issues. 1.  Selecting a jurisdiction to incorporate in is as important as the type of entity that you are incorporating.  Delaware is well-known in the venture community and in the IPO community because the laws are so well established.  For a long time, Delaware was a incorporation friendly jurisdiction, and most large banks and credit card companies set up shop there.  Because there were so many businesses set up in Delaware, the case law and the legal precedents are well established.  My honest opinion is that it really doesn't matter.  Other jurisdictions, including New York have caught up in terms of legal precedents and fees are comparable.  I also believe that New York has established a Start-Up program where Governor Cuomo’s groundbreaking initiative, is creating tax-free zones across the state for new and expanding businesses. Now businesses can operate 100% tax-free for 10 years. No business, corporate, state or local taxes, sales and property taxes, or franchise fees (http://startup-ny.com). If, however, your goal is to attract venture capital money or to go IPO in the next three to five years, then you're better off forming in Delaware, as the venture team will likely change your formation if you aren't formed properly - as you mention in your initial paragraph. 2.  To properly do business in any state, you should get a certificate from the Department of Corporations of that state.  For example if you are incorporated in Delaware and plan to do business in New York, you should file your Delaware corporation in New York and get apply for a certificate of authority to do business in New York. A foreign business corporation may apply for authority to do business in the State of New York by filing an Application for Authority pursuant to Section 1304 of the Business Corporation Law. Interestingly, the New York Department of State does not give opinions as to what activities constitute doing business in New York State for qualification purposes. You may wish to review a Legal Memorandum entitled http://www.dos.ny.gov/cnsl/do_bus.html for further clarification.  3.  Each state will have their own statutes and unfortunately, you will have to review each state's statutes, or hire a start-up attorney to help you review each state's statutes.  The good news is that most of these states have a free or very cheap filing fee to get an authority to do business in their state. 4.  The advantage of an S-Corp over an LLC is formation cost.  Incorporating as an S-Corp is really forming as a C-Corp, but then electing to be treated as an LLC for tax purposes (you file a form with each of the IRS and NYS).  Filing an S-Corp does not require publication, while an LLC is an archaic legal structure that requires within 120 days after the effectiveness of the initial articles of organization, a publication in two newspapers a copy of the articles of organization or a notice related to the formation of the LLC. The newspapers must be designated by the county clerk of the county in which the office of the LLC is located, as stated in the articles of organization. After publication, the printer or publisher of each newspaper will provide you with an affidavit of publication.  Typically for my clients, I will incorporate in an upstate county where publication is cheaper than in New York City and then move the corporate address after publication is complete. However, the advantages of an LLC over an S-Corp is that you have a lot more flexibility in the rules and ownership of your entity than an S-Corp.  Lastly, it is probably interesting but not important at the stage that you're at, but New York City does NOT recoginze S-Corp pass through status.  Therefore, if you are an S-Corp, for local tax purposes, you will not be treated as a pass through and will be taxed twice (this may be superceded by Governor Cuomo's new law, see above. Best of luck! Alastair +1-646-+402-5267 This answer is not a substitute for professional legal advice....

Short AnswerFor most small businesses, it makes sense to incorporate in whatever jurisdiction you are going to be doing most of your business in.Your Questions1. Does it make more sense to incorporate in Delaware or New York? Which option is less cumbersome, more flexible for future, and more cost effective?It is fairly expensive to form an LLC in New York, because of an antiquated law requiring you to "publish" the formation of the LLC in two newspapers (a daily and a weekly). The price of this will depend on what area you are in - for instance, New York City is more expensive than Albany, because the price of media is more expensive. The last time I formed an LLC in New York (around 2010, in Suffolk County), I spent about a $1,000 between formation fees and newspaper publication costs. 2. If I incorporate in Delaware, do I need to register my online business as a foreign LLC in NY (especially, while I am not charging anyone for services)?New York State Department of State says the following on their website: "The New York Department of State does not give opinions as to what activities constitute doing business in New York State for qualification purposes. You may wish to review a Legal Memorandum entitled http://www.dos.ny.gov/cnsl/do_bus.html for further clarification." That link is: http://www.dos.ny.gov/cnsl/do_bus.html You may be able to avoid registering in New York until you have business, but this really won't save you that much money. The Application Fee for authority to do business in NY (for an LLC) is $250, while it only costs $200 to form an LLC in New York by filing the Articles of Organization. http://www.dos.ny.gov/corps/fees_llc.htmlForeign LLCs still have to publish in the newspapers, the same as a domestic corporation, under Section 802 of the New York State Limited Liability Company Law. After you have published and paid the newspapers their fee, you have to pay New York another $50 for a Certificate of Publication. http://www.dos.ny.gov/corps/llccorp.html#forpub As a sidenote: you don't "incorporate" an LLC. LLCs are "unincorporated" business entities. 3. Since I will likely be dealing with NY, NJ, CT and PA - do I also have to register my online business as a foreign LLC in each of those states? What if we expand into more states?Tricky question. You would have to look into the laws of each state. I wouldn't worry about it until you start to have substantial business in the state - i.e. you have employees there, property, etc. 4. Based on my research, in the beginning (before looking for funding) an LLC would be more flexible / convenient to set up (vs. S-Corp). Do you agree? Are there any major advantages of S-Corp over LLC at this very early stage?S corporations are pretty cheap to form in New York. You first form a corporation by filing a Certificate of Incorporation. You can do this in about 15 minutes online: https://appext20.dos.ny.gov/ecorp_public/f?p=201%3A17 The default tax classification of a state-law corporation is to be taxed as a C corporation. In order to become an S corporation, you file Form 2553 with the IRS, and Form CT-6 with New York. Do this as soon as you form the corporation, so that you don't forget.S corporations are more favorable from a tax perspective if your personal gross income is under $200,000, because you can structure some of the income as dividends, and avoid paying social security and medicare on that income (approximately 15% tax). This benefit phases out (kind of) as your income increases.S corporations have ownership restrictions (no foreigners, for instance), and you can't be as creative with stock allocations - but it's not likely you'll need any of that for a new company, unless you really plan on going big one day. If you're lucky enough to get to that point, you can probably just convert to a C corporation: better (I say) to plan for today.

1) I'd incoporate in the state that you do the most business.  If it is a small startup then any addition problems that you have in keeping up with the paperwork outweighs the usefulness of a out-of-state incorporation. 2) You will once you start "doing business" in NY.  3) This is a state by state thing.  The good news is that it's quick.  The bad news is that this is just one more thing that you have to worry about. 4) Just FYI S versus C and LLC versus corporation are separate issues.  There is something called "check the box" which means that the tax status is a separate issue from the corporate form.  Whether to do an LLC versus a regular corporation depends on the particular state filing requirements. Also Federal S-status is different from NY state S-status.

Incorporate wherever you live or work.