Hey everybody, I'm trying, with a group of like-minded people, to start a software development worker's co-op (to make games and other things). We're distributed across the US, so really we have a number of states where we might base the organization. My question is, to those in the know, what are the pluses and minuses of starting a software development company based in one state as opposed to another? FWIW I think we are leaning towards formally establishing it as a corporation, though that is not set in stone for sure yet either.

It depends on what you're looking for. If you're looking for cheap, pick any state that has virtually no software companies and a small population and you'll surely get a deal on rental space, employees, etc.

If you want to be in a state that has a lot of talent and like-minded individuals, the major two that I'm aware of are Washington and California. I think New York and New Jersey have their fair share of software/media/etc companies. The state with more companies similar to yours will probably have the most people that can work for you. The downside is that you have a lot of competition with other local companies and you're probably going to have to pay your employees a good deal more.

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Original post by Danathus My question is, to those in the know, what are the pluses and minuses of starting a software development company based in one state as opposed to another?

For a startup it is best to incorporate in the state you live.

You must have a proper registered agent in that state. You must file assorted documents in that state, and also in your current state. If you have legal issues you might be requiring yourself to travel to that state for an extended amount of time. Since you have an office in your home state, you will still have to pay taxes and follow the laws of your state, in addition to the need to follow the laws of the registered state. I'm sure a few minutes on a search engine will give a much longer list than this.

Unless you are planning on having offices in that state, you are basically spending/risking a lot of money in an attempt to save a small amount of money.


The reason that many large credit companies originated in certain states is that those states used to have very lax lending laws. Some other large companies will look for similar loopholes. Generally this is limited to large companies that already have offices in many states.

Delaware for incorporation [wink] It wouldn't matter where you are based at, unless you actually already lived in Delaware.

As for headquarters, the state Texas is nice. There is lots of space here and we do not have personal income taxes, which is a serious plus. We also have quite a few large cities (Houston, Dallas, Austin, San Antonio) in which numerous industries are based giving you a potential large user base depending on the type of work you do. For the gaming industry, there are some serious names around Dallas (id, gearbox, ion storm for example) but even so in the other cities (NCSoft's US based branch, NC Interactive, is in Austin).

Investment wise, Texas currently is one of the hot spots. Here is a 2005 report from Wachovia that describes how the employment growth in Texas was leading the nation. Of course, you can find lots of more recent information on this, but I'm not just pulling this stuff out of the air.

Climate wise, it just depends what you fancy. North Texas gets cold, nowhere as cold as the east coast gets it, but cold enough to where it shocks people who don't expect it. Anywhere around Dallas to the OK border, you will see snow and ice in winter. 4 hours south to Houston, it is totally different due to the Gulf. It gets really hot and humid there and can be uncomfortable until you get used to it. Normally Houston doesn't get much snow or ice but every few years. I'm not too certain about West Texas besides the fact it's hot and more or less a giant desert (said in a joking tone).

Anyways, I'd seriously suggest to check out possible opportunities here. Being located in the middle of the US does have its perks, especially in terms of distribution. There are several internet backbones that run through Dallas as well, so internet services are good around most areas here. Only in the far corners of rural areas will you have to worry about internet problems. I don't forsee myself moving anywhere else for business outside of Texas, so I'm happy to call it home.

For companies that are privately held (i.e., not publicly traded), there are few substantive differences between the laws of incorporation among varying states. You will save yourself a lot of hassle by incorporating in the state where you plan on doing most of your physical business-- i.e., you won't have to apply as a foreign corporation in the state where you are doing business, and you only have one state's laws to deal with. Theoretically. In your case this is tricky, because you potentially have your principals all over the place. As you do seem to have some options here, there are other factors you may want to consider.

The best example is tax treatment. A lot of states try to bring businesses into their state by offering tax incentives and credits for digital media project. This means that the taxes you must pay out to operate your company may be entitled to a more favorable tax treatment or entitled to a tax credit depending on how much you spend in that state. I would definitely do some research-- currently I believe Georgia is the front runner for tax credits in games, but many states are competitive.

Bear in mind that incorporating is only really a better business model if you want to defer income-- corporations are double taxed: once on income/profits, and again when dividends are paid out to shareholders (in other words, you're being taxed on those profits twice). You may want to look at LLCs, LLPs, etc. The tax treatment of profits for those business entities flow through to the members/partners, so they're only taxed once. The exception is an S-Corp, which gets the same tax treatment as an LLC.

[Edited by - madelelaw on January 31, 2009 2:09:01 PM]

One serious problem with the S-corp though is that all stock must be common stock and you can't have more than 100? share-holders. If you ever go to venture capitalists or any other savvy investors they will likely want preferred stock. LLP is a bad plan... it is impossible to unwind it later. You almost certainly want an LLC. Make sure you set up a proper charter though. You really want to talk to someone that know that stuff well though. Also, you absolutely need to set up an entity before you start making deals otherwise you are automatically in a regular partnership. You both have unlimited liability and it is hard to get out of. Just a warning. Good luck! It isn't that tough, don't worry too much just be careful.