Should You Incorporate a Business Outside of NJ?

Should You Incorporate a Business Outside of NJ?

Deciding where to incorporate a new business is a big decision. When consulting with entrepreneurs and start-ups, we often suggest looking outside the states of New York and New Jersey. The most common recommendation is Delaware.

Why Delaware?

Delaware is considered one of the most attractive locations to incorporate a business in the United States due to its corporate-friendly laws, including in particular its General Corporation Law, and the responsiveness of its State Legislature in modernizing its corporate laws and keeping them up to date. Over the past several decades, there have been more companies incorporated in Delaware than anywhere else. In fact, more than half of public and Fortune 500 companies are incorporated in Delaware.

The higher number of corporations has led to more well-developed and clearly defined case law interpreting Delaware corporate law than anywhere else. While many states have since copied Delaware in a number of ways, they can’t compete with its extensive case law on corporate matters, making it easier to find precedents and predictive rulings covering a wide range of corporate actions, including mergers, financing, structural issues, and shareholder disputes.

Forming a Delaware Corporation

Before forming your Delaware company, it is always wise to make sure your desired name is available, which can be done online via the Delaware Department of State, Division of Corporations (DOC) website. The name must include one of the following words: association, company, corporation, club, foundation, fund, incorporated, institute, society, union, syndicate, limited, or abbreviations thereof.

Although not required, the DOC allows for the reservation of an entity name prior to incorporation, which will guarantee that your name is held for you for a period of 120 days. You can reserve your entity name online, and the fee is $75.00.

The next step is to file a Certificate of Incorporation with the DOC. For a stock corporation, the fee to file the Certificate is a minimum of $89 for a one-page Certificate (plus $9.00 for each additional page); the authorized stock listed in the Certificate, and whether the shares are par value or without par value, will determine the exact filing fee. The Certificate must include the name of the corporation exactly as you wish it to appear in the state’s records. It must also list the total number of authorized shares for the corporation and the par value assigned to such stock (or if none, a statement to that effect), as well as the name and mailing address of the Incorporator for the corporation.

Delaware law requires that every business entity have and maintain a Registered Office and a Registered Agent in the State of Delaware. The registered agent may be the corporation itself or either an individual resident or business entity that is incorporated or formed, or is authorized to do business, in the State of Delaware. In any such case, the registered agent must have a physical street address in Delaware or, if a business entity, must maintain an office in the State. Although not required under Delaware law, corporations should also draft by-laws to govern their operations.

Each Delaware corporation must file an Annual Report by March 1 of each year following the calendar year in which its Certificate of Incorporation becomes effective. Franchise Taxes based on the stock listed in the Certificate of Incorporation are due at the time of filing of the Annual Report. The fee to file the Annual Report is $50.

Forming a Delaware LLC

Delaware is also home to many limited liability companies (LLCs). State law mandates that an LLC name must contain the words “Limited Liability Company” or the abbreviations “L.L.C.” or “LLC”.

To legally conduct business, an LLC must file a Certificate of Formation of a Limited Liability Company with the DOC. Like corporations, Delaware LLCs must also list in their Certificates of Formation the name and address of their registered offices and registered agents in Delaware. Although not legally required prior to or at the time of filing of their Certificates of Formation, LLCs should have a written limited liability company agreement that sets forth how they will be managed and operated.

The fee to file the Certificate is $90. Annual Taxes in the amount of $300 for the limited liability company are due by June 1 of each year following the calendar year in which its Certificate of Formation becomes effective.

Conducting Business Outside Delaware

Corporations and limited liability companies (LLC) are only considered “at home” in the state in which they are incorporated. In any other state, they are considered a foreign entity. For example, if your company is registered in Delaware, you are a domestic Delaware Corporation and considered foreign in other states, such as New York or New Jersey.

Each state has its own procedures for qualifying to do business. However, corporate and limited liability company laws generally require a company to complete required forms, pay a filing fee, place a notification in the newspaper, establish and maintain a registered office in the state, and appoint a local registered agent to accept service of legal documents. It is imperative to file the proper paperwork and obtain legal authority to operate your company in a state before engaging in any business transactions. Failing to do so can lead to a number of legal headaches, including the imposition of late fees and the inability to file legal action.

Registering to Do Business in New Jersey

Pursuant to N.J.S.A. 14A:13-3, a foreign corporation may be authorized to do any business which may be done lawfully in New Jersey by a domestic corporation, to the extent that the corporation is authorized to do such business in the jurisdiction of its incorporation. The counterpart provision applicable to foreign limited liability companies is found in N.J.S.A. 42:2C-58. To procure a certificate of authority to transact business in New Jersey, a foreign corporation or foreign limited liability company must file an application with the New Jersey Division of Revenue. The foreign business entity must also submit with the application a certificate of good standing from its home jurisdiction that was issued no earlier than 30 days prior to the filing of the application. The filing process can be completed online. All foreign corporations and foreign limited liability companies must pay a statutory filing fee of $125.

Registering to Do Business in New York

In New York State, a foreign corporation or limited liability company must become “authorized to do business.” The process includes completing an application for authority and paying the prescribed filing fee.  The application for foreign corporations is available here, and the filing fee is $225. The application for foreign limited liability companies is also available on the New York Department of State website and the filing fee is $250. Each application must include a Certificate of Existence (often called a Certificate of Good Standing) from the state in which the corporation or LLC was originally formed. If the true name of your company is not available, you must select a fictitious name under which your company will do business in New York.

Key Takeaway for Entrepreneurs

As highlighted above, New Jersey entrepreneurs and startups have a lot to consider when deciding to form a new business entity. For guidance, we encourage consulting with an experienced business attorney who can walk you through the process.

If you have any questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Charles Friedrich, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.