Why Delaware Is The Best Jurisdiction for Actors and Creatives
Census figures indicate that between 2010 and 2015, about five million people moved to a different state every year. With that much interstate migration going on, it makes sense to consider carefully what state a corporation should be formed in, especially if the owner knows that a move may be likely in the near future.
For example, suppose you are a writer, screenwriter, or actor who currently lives in New York, but does work in California and thinks a move to California may be in the cards sooner rather than later. It makes sense to incorporate, but the question is where? Your best option is to form a Delaware corporation, and here’s why.
The obvious choice is to incorporate in New York since that is where you’re already located. You form the corporation in the state where you have to file corporate tax returns and pay franchise taxes. But what happens when you move to California? You can keep the New York corporation, but you’ll still have to file corporate tax returns and pay what could be substantial taxes just “[f]or the privilege of exercising [your] corporate franchise” in New York. You’ll also have to register your New York corporation as a foreign corporation doing business in California, and then start filing tax returns and paying franchise taxes there, too.
What about dissolving the New York corporation and forming a new corporation in California? You could do that, but the transaction costs are increased. And you’re starting over with a new tax identification number, new bank account, etc., and the logistics of assigning rights (e.g., royalty payment streams) to the new corporation are substantial. You could also form a new corporation in California and then merge the New York corporation into the California corporation. But you have the same practical problems as with dissolving the old corporation and forming a new one, and the transaction costs are even higher. Finally, California allows a foreign corporation to be “converted” into a California corporation, but only if such a conversion is authorized by the laws of the state of incorporation. New York does not allow any conversions, so that is not even an option in our scenario (or the reverse scenario of a California to New York move).
Here is the better alternative: form your corporation in Delaware from the outset, then qualify the corporation to do business in New York. There is an increased transaction cost at the beginning, since you have to file formation papers in Delaware and qualification papers in New York. But you more than get that back when you move to California, at which time all you have to do is surrender the corporation’s authority to do business in New York and have the corporation registered to do business as a foreign corporation in California. You were going to do that in our first scenario anyway, and it’s a much cheaper option than either (1) forming a new corporation and dissolving the old one, or (2) forming a new corporation and merging the old one into it. And you’re avoiding the practical problems associated with both of those options.
Another cost associated with starting out in Delaware is that you have to pay Delaware’s annual franchise tax even though you haven’t even moved yet. But the tax is relatively modest, with a minimum of $225 (a $50 fee for filing the annual report and a minimum franchise tax of $175). And you once again more than make that up after you move from New York to California. In our first scenario, you end up filing corporate tax returns and paying taxes in New York and California, both of which work out to be much more than the $225 annual franchise tax and report fee in Delaware. But if you form a corporation in Delaware and don’t actually do business there, then the $225 annual franchise tax and report fee is all you have to pay to Delaware, since corporations that maintain a statutory corporate office in Delaware but do not do business within the state are exempt from taxation there.
In sum, there are some increased costs at the beginning if you form your corporation in Delaware while registering the corporation to do business elsewhere. But if you think there is a good chance that you will be moving your business to another state sometime, then forming a Delaware corporation is a great option for eliminating most of the hassle from what could otherwise be a costly and complicated process.
See id. §§ 502, 503. The annual franchise tax is $175 where the corporation’s authorized capital stock does not exceed 5,000 shares, and $250 where the authorized capital stock exceeds 5,000 shares but is not more than 10,000 shares, plus $75 on each additional 10,000 shares or part thereof. Id. § 503(a)(1). With the small corporations we are talking about, there is no reason to authorize more than 5,000 shares of capital stock.
See id. tit. 30, § 1902(b)(6); R. Franklin Balotti & Jesse A. Finkelstein, Delaware Law of Corporations and Business Organizations § 18.12, 2006 WL 2455671 (3d ed. 2016). Delaware corporations that don’t do business there are also exempt from business license fees and gross receipts tax. Balotti & Finkelstein, supra, § 18.12. You also have to maintain a registered agent for service of process in Delaware, but that is true of any state in which you form a corporation or register a foreign corporation to do business, although New York does give you the option of allowing the Secretary of State to act as your sole agent for service of process. See Cal. Corp. Code §§ 1502(b), 2105(a)(5); Del. Code Ann. tit. 8, § 132; N.Y. Bus. Corp. Law §§ 304, 305.