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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Making the Right Decision Based on Your Business’ Needs
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.
Why Home State Incorporation is Often Best for Small Local Businesses
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.
Almost every state requires businesses that operate within their borders to register and apply for a business license. This is particularly true if you are a member of a profession or business that’s regulated by a state licensing board or a certifying board.
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
Corporate Taxes and Fees
Closely held companies or those without significant tax liabilities are unlikely to gain many benefits from the extra effort and complexity involved with incorporating in another state. If you do so, you’ll still need to pay taxes and annual fees in the state where you are operating, even if the other state where you incorporate charges no corporate taxes.
Incorporating your business in a state other than your own requires due diligence to ensure that your chosen business name is available and meets that state’s criteria. If you’ve been operating under a specific name that you’ve cleared in your home state but find it’s unavailable where you wish to incorporate, you will need to change the name of your business.
If you choose to incorporate in another state, you will have the additional expense of having to hire a representative to receive important legal and tax documents on your behalf.
When a Tax-Friendly State Is A Better Choice
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:
Paying No State Income Tax or Personal Income Taxes
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.
Doing Business in Multiple States
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.
When You’re Seeking Investors
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.
When Your Business is At Risk for Litigation
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.
States with Advantageous Corporate Taxes, Personal Income Tax, and More
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 Has No State Corporate Income Tax, Franchise Tax, or Individual Income Tax
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.
Wyoming has no corporate state income tax, franchise taxes, or individual income tax.
The state charges very low annual report filing fees, no business licensing fees or officer filing fee, and boasts a sales tax that, at just 4%, is among the lowest in the country.
Wyoming offers significant privacy, with no public listing of the names of members or managers in an LLC, stockholder names not revealed to the state.
Liability protection, with officers, directors, employees, and agents statutorily indemnified.
There is no minimal capital requirement.
One-person incorporation is permitted.
Disadvantages of Incorporating in Wyoming
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.
Nevada’s Business-Friendly Benefits Include Strong Corporate Protections and Minimal Tax Reporting
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.
Nevada has no corporate income tax, no personal income taxes, no estate tax or gift tax, no unitary tax, no admissions tax and no franchise tax.
The state offers significant privacy benefits for shareholders, directors, and investors, who do not need to be residents of the state. There is also no requirement that any of their names be included within corporate documents.
Nevada provides complete protection of shareholders’ personal assets, as the corporate veil in the state is robust. Corporate assets are similarly protected, as they are not required to be listed within state documents.
When Nevada’s corporations face commercial litigation, their cases are heard in a dedicated business court designed to minimize business disruption, save time and legal costs, encourage settlements, and assure predictable outcomes made by a member of the judiciary rather than by a jury whose members have limited understanding of business law.
There is no minimal capital requirement for forming a corporation.
One-person incorporation is permitted.
Disadvantages of Incorporating in Nevada
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.
Why Delaware is the Best State to Incorporate
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.
Delaware is known for its corporate-friendly business laws and its Court of Chancery. This system is dedicated to the quick resolution of business issues.
Delaware’s courts rely on a case law history that spans over a century. Cases are heard exclusively by judges rather than by juries. This eliminates the significant time and legal costs and removes the element of emotion or bias.
Delaware offers robust liability production to shareholders and corporations.
Corporations that conduct business outside of the state pay no state corporate income tax, and there is no personal income tax on non-Delaware residents and no inheritance tax on stock held by non-Delaware residents.
Delaware has no state sales tax.
Shares of stock owned by non-residents are not subject to the state’s taxes.
Businesses incorporating in Delaware but not conducting business within the state are not required to obtain a state business license.
Corporations are able to incorporate in Delaware without making the names of owners or their personal information public unless requested by law enforcement or needed for a legal proceeding.
There is no residency requirement for incorporation in Delaware, nor is a physical address within the state required. Corporations only need a registered agent within the state.
Delaware permits one-person incorporation.
Delaware has no minimum capital requirements.
Disadvantages of Incorporating in Delaware
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.
The Other States Known for Business Friendliness
Though Wyoming, Nevada, and Delaware are most frequently named as best states to incorporate in, there are others that offer notable advantages, including:
Rhode Island – The state offers numerous sales tax exemptions, pass-through taxation for S-corporations, and several small business incentive programs.
New Mexico – Corporations pay no inventory tax, can benefit from a high-wage jobs tax credit, a rural jobs tax credit, and a manufacturer's investment credit, as well as other competitive incentives.
South Dakota – Whether you have a new business or one that has existed for a while, he state offers significant tax advantages, including no corporate income tax, no personal property tax, no personal income tax, no inheritance tax, and no business inventory tax. The state also offers significant incentives for startups and for companies that relocate there.
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