Choosing a State for Incorporating a Business

An important decision when incorporating a business is which state to incorporate your business in. You should ask yourself a few key questions when incorporating a business.

Will you do business in more than one state?
What is your home state corporate income tax rate?
What is your state of residency income tax rate?
Do you plan on taking your corporation public?
Will you need venture capital?
What is the state’s filing fees or are there any franchise fees?

For a small business, there are advantages to incorporating a business in your home state. It is usually the least complicated and least expense option if you plan to only do business in your home state. You can avoid paying franchise taxes and filing annual reports in the state of incorporation. It can make filing annual taxes less complicated. You would only need to account for income produced in one state and only file one state tax return. But if you plan on doing business in multiple states, your home state may not be the only or the best option when you form a corporation.

You should look at which state requires the least amount of paperwork and has the lowest cost incorporation fees. If you plan on growing you business quickly, going public or need venture capital, business friendly states like Delaware, Nevada or Wyoming may be worth looking into. Incorporating a business in Delaware has been a favorable choice for many years. Delaware is recognized as a pro-business state due to low incorporation and LLC formation fees, low annual franchise fees and there is no tax on out-of-state income. Over half of the companies listed on the New York Stock Exchange are incorporated in Delaware. Another plus, Delaware’s “Chancery Court” for business disputes makes for quicker dispute resolution. Wyoming and Nevada have also become poplar states to form a corporation. Favorable tax laws and lack of formal information sharing agreements with the IRS make Wyoming and Nevada prime for incorporating a business.

When you form a corporation, choosing which state to incorporate in can be as important as choosing the right name. Re-incorporation can be both costly and time consuming to your business. No two businesses or situations are truly alike, so please be sure to check with a tax advisor and attorney to assist you in making the right decisions for your business.

by: Blair Woods

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