Once you’ve made the decision to form your business as a corporation or LLC, you may find yourself asking a common question, “Which state should I incorporate in?” There are countless stories of people incorporating in different states for tax benefits and other reasons, but reality is often different than story.
Many people choose to remain and incorporate in their home state, and there are many different factors to consider before incorporating in a state other than the one in which you live just for tax rates and lower fees.
Below, you’ll find the questions to ask yourself in order to make the best decision.
Is my state business-friendly?
Look at states like Delaware and Nevada. These are considered some of the most business-friendly states in the US because of their statutes and developed corporate law. Delaware has a Court of Chancery, which exists purely to rule on business-related cases and issues, and Nevada has followed Delaware in creating specialized business courts, specifically designed to settle business disputes. However, these factors are generally more attractive to bigger, well-established corporations with many shareholders, as smaller businesses hopefully aren’t spending a lot of time in court.
Is my business online?
If you operate an online business and do not have a storefront or physical location, your business does have more freedom where it can incorporate, since it is a virtual business. But the virtual existence of your company will be negated once you hire employees. At that point, you could fall victim to many of the pitfalls listed above.
However, it could be beneficial to pick and choose which state you incorporate in. You can save money on filing fees and taxes if you choose to incorporate in states like Wyoming, Florida, South Dakota, Nevada, and Texas as long as you don’t register it in your home state. Online businesses tend to be more mobile and maybe you want to move someday or have partners or investors from other states. Choosing a friendly state like Wyoming will make it easier to manage the company behind the online business.
Before you begin incorporating your business outside the borders of the state in which you live, know this:
Every state will want the tax revenue of a business operating within its borders. So, if your business has employees or a physical location in your state, and you incorporate in a different state, you’ll still end up paying business taxes on revenue made in your state.
If you form a corporation in a state where you have no physical address, you’ll have to hire a registered agent service to act as your legal representative in that state.
If you have a physical location in your home state or hire employees, you’re going to have annual reports and fees in your state of incorporation as well as your home state where you actually work.
If you live in a place like Washington, DC, which is rife with fees, taxes, permits, and licenses, it might make sense to incorporate elsewhere. But prior to making that decision, factor the variables above into whatever choice you make.
The Bottom Line
If you’re starting a small business with a physical location and you plan on hiring employees, it’s almost universally recommended that you form your LLC or corporation in the state where the business is located. But, if you’ve considered all the factors above and have decided to form your corporation or LLC in a different state, look for one with low taxes and annual fees; Wyoming, Texas, Nevada, and South Dakota (these states have no personal income tax, and with the exception of Texas, which has an extremely low rate, no corporate taxes either).
Have a question about which state you should incorporate in? Connect with a SCORE mentor online or in your community today!