Earlier this month, San Diego-based biotechnology firm Lpath Inc. (NASDAQ: LPTN) decided to move their business incorporation from Nevada to Delaware. The company held their annual stockholders meeting on June 27, and an overwhelming majority of stockholders voted for reincorporation “as soon as reasonably practical.” This move provides additional perks for the company and its shareholders.
It is legal to incorporate your company outside of your home state, and it can potentially be in your best interest depending on the taxes and fees in your state, as well as the size and nature of your business. Nevada and Delaware are both states that provide advantages for companies to incorporate, even if the business is not based within state lines. 58% of Fortune 500 companies have incorporated in Delaware, and there are multiple tax advantages to incorporating in Nevada.
The first thing you must consider is the type of incorporation your business is: C corporation, S corporation, limited liability company (LLC), limited liability partnership (LLP), limited partnership (LP) or a nonprofit corporation. The type of entity will determine your requirements, including taxes, liabilities, and what you can and can’t do with shares of stock.
Lpath is considered a C corporation, and achieved savings in several ways from incorporating in Nevada rather than California. The cost to incorporate in California is $100 plus a $15 handling fee and a $75 service fee. California state income tax rate is at 8.84% of your net income, and 10.55% on income over $1 million. The minimum tax is $800, but this is waived in the company’s first fiscal year.
Nevada has no corporate or personal income tax, which makes it an alluring state to incorporate in. It also boasts no taxes on corporate shares, and the ability for businesses to purchase, hold, sell or transfer shares of their own stock. Delaware has even more benefits for businesses. It’s $89 to incorporate, no sales tax, low franchise tax, and corporations can deduct the cost of health insurance.
In order to qualify to incorporate in these states, your company must do business there, which could mean have an office or employees in the state, or earn revenue there. If not, you’ll still be subject to paying taxes where your business truly operates, and may increase your administrative costs trying to juggle the legal fees between your home state and the state you incorporate in.
Incorporating and Nevada, and now Delaware, is beneficial to Lpath because it is a large, publicly traded company. They can benefit from the “management-friendly” corporate laws, asset and privacy protection, and tax allowances much easier than a small business can. Before incorporating in either Nevada or Delaware, you’ll want to consult a professional, such as a lawyer and certified public accountant, as to whether or not incorporating in any other state aside from where you live and operate your business is the right decision for you.