After carefully weighing the advantages and disadvantages of each business entity type, you’ve decided that sole proprietorship is not for you. Whether you’ve chosen to open a limited liability company (LLC) structure or one of the various types of corporations, you still have decisions to make. The next thing you need to consider is where to incorporate. While you have plenty of options available, the information below will help you identify the best states to incorporate in.
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If you are a small business owner with a storefront located in your hometown and no plans to expand into other regions, the answer to where to incorporate is pretty straightforward. The advantages to incorporating in another state may not be worth the investment of time and money.
Incorporating in your home state may be the simplest and smartest thing for you to do. But even mom-and-pop businesses will benefit from careful consideration of incorporating in a business-friendly state. Read on to learn the factors that need to be weighed.
Are you incorporating or forming a limited liability company for a small business with no intention of expanding beyond the borders of your home state? If so, then the most sensible option for you is probably to incorporate it in the state where you operate your business.
If you incorporate in your home state this will be a straightforward process, but if you incorporate in any other state you may be required to register as a foreign entity everywhere that you operate. This will entail additional expense and complication
Businesses looking for a tax-friendly state quickly find that Delaware, Nevada, and Wyoming are considered the most attractive options, though there are others that offer tax benefits. Here are the factors that bear consideration:
There are a few states that charge neither state corporate income taxes nor individual income tax. This represents a significant saving that may be worth the additional steps required to incorporate.
If your business operates and generates revenue in multiple states, then finding a state with low, business-friendly corporate tax collection makes a lot of sense.
In most cases, the states where you operate will only collect taxes on the revenue you generate within their borders, and in some cases only if your revenues exceed a certain percentage or volume. Careful selection of a state in which to incorporate can achieve significant savings.
If your business is seeking investment from venture capital firms or you’re vulnerable to frequent litigation, you will be well served by incorporating in a state where shareholders’ privacy is protected, where they don’t need to be residents of the state, and where their stock shares are not subject to the state’s individual income taxes.
Some states offer significant advantages in terms of their business laws and the way that corporate litigation is managed. Both Nevada and Delaware are noted for having the best business laws in the country.
In light of the factors listed above, there are a few business-friendly states that offer the greatest advantages for those looking to incorporate there. They are Delaware, Nevada, and Wyoming. Let’s look at each to see what makes them the best states to incorporate
Wyoming was the very first state in the country to offer individuals the opportunity to incorporate, and the state’s continued efforts at attracting corporations has resulted in the Tax Foundation’s State Business Tax Climate Index calling Wyoming “the most business-friendly tax system of any state” for ten years in a row.
Wyoming welcomes limited liability companies and corporations of all types, offering multiple options for how an entity is structured and several highly beneficial incentives and business-friendly laws.
Though the tax structure in Wyoming makes it a wonderful place to run a business, many of the advantages of incorporating there disappear when you are not a resident or operating your business locally. For those who live and operate in another state, it may not be the best choice.
The state of Nevada offers significant incorporation benefits. Companies seeking relief from taxation and regulation will pay high fees, but in exchange they escape paying almost any state taxes.
Though Nevada offers incorporating businesses many tax advantages, small businesses may find their tax savings are offset by extremely high registration fees, business licensing fees, officer filing fees, and more.
Additionally, recent changes in the state’s laws have meant that corporations with revenues over $4 million will be required to pay a corporate gross receipts tax, with no deductions allowed.
Check the financial records of nearly any big brand and you’re likely to find that they’re Delaware corporations. The state has a well-deserved and long-standing reputation for being the most corporate-friendly and investor-friendly in the country, offering tax advantages, flexibility, corporate laws written with businesses in mind, and a dedicated litigation system designed for speed and efficiency. It's no wonder it has proven so attractive to publicly traded companies.
Though Delaware is the most popular state for large organizations to incorporate in, the advantages realized by multi-million-dollar public companies may not be as beneficial for small or mid-sized businesses, which are not as likely to have need of the state’s business law advantages.
The state does charge a corporate income tax, and fees for incorporation can add up, though this depends upon your circumstances and needs. The state also charges a franchise tax based upon the value of corporate shares and requires that annual reports be filed. This is true even if annual reports have already been filed in the business’ home state.
As is true whenever incorporating in a state outside of where you conduct business, a new business incorporating in Delaware will also need to register within the states where they do business as foreign agents, apply for an employer identification number, and will need to pay all associated fees and state taxes.
Though Wyoming, Nevada, and Delaware are most frequently named as best states to incorporate in, there are others that offer notable advantages, including: