Random State Incorporation is a Bad Idea


When I think of businesses that incorporate in any state other than their home state or Delaware, the expression that comes to mind is “too clever by half.” Unless there is a law prohibiting your business from operating in your home state or Delaware (for example, Amazon refuses to allow companies incorporated in certain states to participate in its affiliate program) this decision will create more problems for you than it will resolve.

Here is a non-exclusive list of the reasons why you don’t want to incorporate in a random state.

Problem #1. Your lawyer probably doesn’t know the laws of whatever random state you’ve incorporated in. This means one of two things, you’ll have to pay to get that lawyer up to speed, or you will be flying blind with respect to any corporate actions taken in your state. Not smart.

Do you want to select a lawyer at random from Cheyenne, Wyoming to help you start your business? Nothing against Wyoming. My brother lives there, and it’s beautiful in places. That said, the startup scene is, shall we say, underdeveloped.

Problem #2. You will have to file a foreign entity registration in whatever state you are operating in, in addition to whatever filing fees you file in the state you choose. This is usually one of the most expensive filings.

This is also true in Delaware, but at least you’ve incorporated in a state where your attorney does or should know the law, and you can grow into a larger corporation without having to convert later.

Problem #3. Depending on how you draw up your agreements, if there is a dispute related to your corporation, you may have to litigate in a state where you aren’t headquartered. That means massive unnecessary expenditures.

Problem # 4 . When a sophisticated investor develops interest in your company, they will insist you move to a state with which they are familiar. Because even if you are ok with flying blind with respect to the random state’s corporate securities laws, a serious investor won’t be. This means added legal expenses and potential hassle if any of your shareholders disagree with the idea.

If your business is never successful, this won’t matter much. You’ll incorporate in a random state, the business will fizzle, and that will be that. But many times I have had to convert business entities from random states to Colorado or Delaware. Never once has anyone asked me to do the reverse.

For Colorado entrepreneurs, my rule is this: if you stand a reasonable chance of attracting venture capital in the first 18 months, incorporate in Delaware. If not, choose Colorado. It’s cheap and it’s easy.

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