Deciding what type of business entity to form and what state to form the business entity in can be especially troublesome choices for business owners. Florida business owners tend to pay much more attention to the differences between the business entity types and overlook the significance of the state of incorporation. Yet, these choices are two sides of the same coin—different, but inextricably linked.
The state you choose to incorporate in is not a trivial choice. It’s very easy for Florida entrepreneurs to be misled into assuming that they should incorporate in Delaware, Nevada, or even Wyoming based on some tacit entrepreneurial dogma. I’ve personally spoken to hundreds of Florida business owners who thought it might be a good idea to do so, but they didn’t know exactly why—they just knew that’s what a lot of companies do.
Depending on the goals of your company, there can be good reasons to form the company in another state. However, the bigger issue is that Florida business owners overlook the hidden costs of incorporating outside of Florida. These are the costs that you don’t see until you look a little further down the line. Simply put, forming your business in another state doesn’t exempt you entirely from Florida laws and regulations; rather, it often adds an additional layer of compliance.
The point isn’t that you should never form your business in Delaware or Nevada. Instead, it’s just good business to have a full accounting of the range of costs that are associated with incorporating in another state. So, let’s pull back the curtain and look at the hidden costs of doing business in Florida.
Third-Party Registered Agents
When you incorporate a business, you have to designate a Registered Agent. Registered Agents are persons or legal entities that accept service of process and other official state correspondence on behalf of a business. Importantly, they have to have a street address in the state of incorporation.
In order to fulfill this requirement in Delaware as a Florida-based business, you will have to employ a third-party service. There are literally hundreds of these to choose from, but the important point is that their services are not free. Registered Agent services can charge annual fees anywhere from $100 to $400.
Even taking a low-end estimate, you’re adding $100 in corporate maintenance fees for the year. You may also have additional costs if you use these services to submit annual reports or other state-mandated corporate filings. And don’t forget: These fees are usually per entity. If you have a holding company structure, double everything.
Delaware Corporate Upkeep
As a Delaware entity, your business will have to comply with Delaware business statutes. A big compliance statute in most states is some form of “annual report.” Delaware has two versions of this that Florida entrepreneurs who are thinking about forming their entity in Delaware should be aware of.
Corporations
First, Delaware requires all corporations to file an Annual Report and pay the “Corporate Franchise Tax” by March 1st. The annual report filing fee is $50. The minimum Franchise Tax is $175, but the actual amount is based on the stock and/or the par value of the stock and can go as high as $200,000!
Your minimum yearly corporation upkeep costs will be $225.
LLCs, et al.
Limited liability companies (and general or limited partnerships) have it a little bit easier insofar as they aren’t required to file an Annual Report. However, Delaware LLCs and partnerships are required to pay a flat $300 annual tax by June 1st.
Welcome to Florida!
Another aspect business owners overlook is that they will still be conducting business in Florida. As such, your business will have to comply with the relevant Florida business statutes. This will manifest itself in a number of different ways that can tack on considerable additional costs.
Foreign Entity Registration
Entities that incorporate and exclusively do business in the same state are known as “domestic entities.” When a company does business in a state other than that in which it is incorporated, it is known as a “foreign entity.” This nomenclature can be confusing at first. But if you incorporate in Delaware and intend to conduct any business in Florida, you will have to register in Florida as a foreign corporation or foreign LLC.
Fortunately, the steps to do this aren’t overly complex, but they do cost money. You will file a torturously named “Application by Foreign Entity to Transact Business in Florida” with the state. You will also pay the $70 corporation registration fee or the $125 LLC registration fee (Note: these are the same amounts for domestic entities).
More Annual Reports
Not only will you have to register the Delaware company as a foreign entity in Florida, you will also have to submit Florida annual reports like every other Florida business. These reports are due every year on or before May 1st. For corporations the filing fee is $150 and for LLCs it’s $138.75.
Also, remember that it’s not just the ever-mounting monetary costs—there are opportunity costs to consider as well. You are piling extra paperwork and filings onto an already overloaded plate. The more you have to focus on regulatory formalities the less time and energy you have to devote to running and growing your business.
Naming Restrictions
When you file for foreign entity authorization you will also have to disclose your business name. However, states have different business entity naming restrictions, and you will have to comply with Delaware’s and Florida’s.
Florida has three primary legal requirements for a business names:
- Must include an Entity Designator (e.g. Inc., LLC, Co.)
- Cannot imply that the business entity is a different type of business entity
- Must be distinguishable on the record.
Unfortunately, if your Delaware company name doesn’t also satisfy the Florida requirements, you will have to file a “Resolution to Adopt an Alternate Name.” Filing for an alternate name will cost $35 if you’re a corporation, but it’s free for LLCs.
If you’re preferred name isn’t in use, you can file a Foreign Name Registration for $87.50, which holds the name you want to use temporarily until you can formally file to do business.
Neither of these is the same as registering a fictitious name or d/b/a, which you may also need to file if you prefer to do business under a tradename. That’s another $50!
Costs and Benefits
Let’s stop and take stock of what we’ve covered. How exactly do these costs and fees compare when all’s said and done?
As you can see in the table, both for corporations and limited liability companies the yearly costs for Florida-based businesses to incorporate in Delaware is considerably higher than to incorporate in Florida.
It’s also important to remember two things about the amounts calculated above for Delaware:
- They are your minimum formation costs. Be prepared for higher costs depending on your Registered Agent, whether you need to form a holding company, or if your corporation will issue more than 5,000 shares of stock.
- They are only entity formation costs. New businesses have many other costs like attorney’s fees (even for the formation itself), lease payments, marketing and ad buys, etc.
Cautionary Tale for Business Owners
Because the state of incorporation is so vital to the structure and function of your business, you should get legal advice from an experienced business attorney to ensure you’re making the best choice. I’ve seen too many instances where, in their haste to get the ball rolling, Florida entrepreneurs jumped the gun and cost themselves thousands of dollars.
I want to bring it all home with a quick story about an entrepreneur named Frank. While Frank’s personal details are fictional, the story is cold hard truth.
Delaware Mistake, LLC
Frank planned to start a manufacturing business. He took it upon himself to create two Delaware LLCs in preparation for getting business operations off the ground. Then, a month or so later, after conferring with his business lawyer (me), he realized that the two-company structure with Delaware LLCs wasn’t the best option for his situation.
Frank was then faced with a choice: Dissolve the two Delaware entities and form new entities in Florida or convert the Delaware entities to Florida entities. Either way, I told Frank, the costs were going to rack up quickly! In the end, we ended up dissolving the Delaware entities and reforming the entities in Florida.
How much did this hurt Frank financially? Well, the fee to dissolve each of the Delaware LLCs was $204. Frank also had to pay the $300 annual taxes, despite having not begun business. To dissolve the two Delaware LLCs Frank had to pay $1,008. If we toss in the $180 for the original formations, Frank wasted $1,188 of precious startup capital on Delaware entities. We still had to form the correct entities in Florida too. So, all told, with the original Delaware filing fees, the dissolution fees, and the Florida incorporation fees, Frank spent $1,438 to get his business entities formed. Ouch!
Remember, also, that these are only the costs and fees from the states for the entity formations. Frank had to pay (luckily, pro-rated) Delaware Registered Agent fees and our attorney’s fees, as well as other startup costs for the business. Not only that, but Frank had to put the business on hold for months while the situation was resolved. Things could have gone much worse for Frank and his new manufacturing business, but they also could have gone much better had he sought out qualified legal advice before going ahead with the out-of-state business formations.
Choose Wisely
Starting and running a business is hard work. The choices to be made at the beginning of a business venture require a range expertise that no single person has. While forming and maintaining your business entity in Delaware may cost more than incorporating in Florida, the cost may be outweighed by other benefits you’ll receive. However, you must be fully aware of all of the costs and benefits in order to make the right choice. Business owners can help themselves by making sure they use the support systems and professional advisors around them to avoid making costly legal mistakes.
Helping Business Owners Make Smarter Legal Choices
Here at Alexander Abramson, we focus exclusively on business-related legal matters. Our attorneys have advised closely held businesses and business owners for decades on business formation issues including entity choice, state incorporation, and partnership agreements.
We would love to speak with you directly about how we can help you start and grow your business successfully. Call us at 407-649-7777 or email us to speak to a team member or to set up an initial consultation.
