Congratulations on your new business! After determining what type of business structure to create, the next most important decision is determining which state to incorporate. There are many factors you will want to consider when making this decision, and the experienced business attorneys at Ferlito Law Group can help you weigh your options. If you are interested in learning more about how to determine the best state to incorporate in based on your business’ particular needs, consider contacting Ferlito Law Group for a confidential consultation.
Rules Regarding Incorporation
As a business owner, you might assume that you have to incorporate your business in the state where you reside. However, you can establish a business, S or C corporation or limited liability company (LLC) in any state within the United States without actually living in that state. If you have a physical location in one state such as a restaurant or office and your service area in that state, it is generally simpler to register your business in that state. However, if you have an online business or do business in more than one state, you may want to register in another state than where you live, based on specific legal and financial factors that matter to you.
The state where you incorporate your business is where you will ultimately legally file formation documents for your business. If you make the decision to operate your business in a state that is different from the one where you formed it legally, you will need to register your business in that state, a concept generally referred to as “foreign qualification.” This allows you to form your business in one state while conducting business in another.
Many business owners carefully consider the state in which to incorporate their business. Each state has its own laws regarding requirements, fees, and tax responsibilities for businesses incorporated there.
Factors to Consider for the Best State to Incorporate
There are various factors business owners may want to consider before deciding which state to incorporate:
Incorporation or Formation Fees
One important consideration is how much it will cost to incorporate in the state. Business owners must generally pay a filing fee when submitting their incorporation or LLC formation papers. This fee can vary greatly. For example, the Arkansas Secretary of State says that this fee is only $50 in Arkansas. Meanwhile, Connecticut’s fee to incorporate a business is $450.
You may also want to consider that publication and registered agent fees vary from state to state (even sometimes by town and county).
Incorporation fees are paid once. However, your business will likely have to pay annual fees to keep your business registered. Therefore, it is important to consider these costs since you will continue paying them over the course of your lifetime’s business. You may have to pay an annual fee, along with a franchise tax. The annual fee is typically paid along with the completion of an annual report. An annual report can articulate any change that may have occurred in your business, which could include updated authorized agents, a change in your address, any other substantial changes in the business, and stocks that were issued from the business. Alabama and Ohio are the only states that do not have a requirement to file regularly. Nevada has an yearly filing fee of $325. California’s annual fee is as low as $25.
A franchise tax is the fee you pay to the state for allowing you to conduct business there. In California, the franchise tax alone is $800. A franchise tax is usually paid each year and is not based on the profits of the business. In fact, this tax can be imposed even if the business loses money.
A significant factor that can affect the profitability of your business is the tax treatment of the business. Common taxes that may be applied to businesses include specific state income taxes, actual corporation taxes, and (if applicable) franchise taxes. State income taxes apply to S-corporations because owners must pay taxes that are ultimately based their ownership of the company when they file their personal income taxes. Corporation taxes are imposed on C-corporations. LLCs can be affected by either of these types of taxes.
Many business owners opt to incorporate in Nevada, Wyoming, or South Dakota. These states do not have either corporate or state income tax. Nevada now has a gross receipts tax, which assesses on money that comes into the business when there are gross receipts of $4 million or more in Nevada.
However, it is important to note that businesses only benefit from the no-tax structures if they operate their business within that state. If a business operates their business in another state, the business will be subject to that state’s tax laws.
Another important consideration for determining the best state to incorporate based on your specific needs is the legal system. Some states are more corporate-friendly than others. For example, Delaware has some of the most corporate friendly legal systems. It even has its own special court where judges here corporate cases instead of having juries decide the outcome. This helps cases to be handled more quickly and efficiently. This feature makes Delaware one of the most popular states for incorporation.
Best States to Incorporate
The best state to incorporate depends on a particular business’ needs. Some of the states that business owners may want to consider include:
- Nevada – Nevada has low filing fees, no franchise taxes, and no state income taxes.
- Wyoming – Wyoming has low filing fees, no franchise taxes, and no state income taxes. Wyoming allows businesses to form a single-member LLC.
- Delaware – Delaware has one of the best legal systems for corporations. It also has no state income tax for non-residents or state corporate income tax for businesses that are formed in the state but do not conduct business there.
- South Dakota – The state does not have state income taxes or corporate taxes. It also has low filing fees and pro-business laws.
- Your Home State – While every states’ fees, taxes and laws vary, filing in your home state could save you from being require to obtain foreign c=qualification (and pay the additional fee)
A knowledgeable business lawyer form Ferlito Law Group can discuss a business’ preferences and views for the future and make recommendations on which state would be best to incorporate in.
Contact a Business Lawyer for Help Determining Where to Incorporate
If you would like help determining the best state to incorporate in based on your business’ unique needs, consider contacting Ferlito Law Group. We can discuss our recommendations for favorable states to incorporate your business based on the criteria that are most important to you. We can then help you execute your incorporation. Consider contacting our legal for help with your incorporation needs.