So you’ve decided to incorporate, time to pick the right state. Where exactly a new business decides to incorporate can impact the business in a variety of ways. The taxation, cost and corporate laws vary from state to state, making some states advantageous for certain small business owners.
The Basics
Incorporating your business in the state where your company is physically located is called home state incorporation. No matter if your business is a C corporation, S corporation, limited liability company (LLC), limited liability partnership (LLP), limited partnership (LP) or nonprofit corporation, you must pay filing fees to the state when incorporation documents are filed, and will be subject to ongoing requirements and fees imposed by that state.
State laws govern the mechanics in which corporations are formed. These laws dictate what papers have to be filed and where, and the things your corporation will have to do in order to maintain corporate statute. These requirements include what records you have to keep and how many shareholder meetings you are required to hold. All of these factors are critical in determining where to incorporate.
Remember, that companies incorporated in one state but doing business in another state must register to transact business (foreign qualify) in those state.
Things to Consider
When deciding your company’s state of incorporation, research those states’ corporate or LLC statutes to determine if any may be best for you.
- Consider how corporations and LLCs are taxed by each state (and the taxation requirements imposed on foreign-qualified businesses). Does a state impose an income tax on corporations and LLCs? Does it have a minimum tax or a franchise tax?
- Try calculating your company’s projected revenue for its first few years of existence and then evaluate states in terms of the true amount of taxes required, to see if there may be an advantage.
Delaware & Nevada
Remember, you’re not required to incorporate in the state where your business operates; you can choose from any one of the 50 states or the District of Columbia. Delaware is by far the most popular in which to incorporate. It is the corporate home for more than half of the Fortune 500 companies and more than 40 percent of the corporations listed on the New York Stock Exchange. Both Delaware and Nevada offer unique advantages for certain types of businesses.
Advantages of incorporating in Delaware:
- Delaware’s business law is one of the most flexible in the country.
- The Court of Chancery focuses solely on business law and uses judges instead of juries.
- For corporations, there is no state corporate income tax for companies that are formed in Delaware but do not transact business there (but there is a franchise tax).
- Taxation requirements are often favorable to companies with complex capitalization structures and/or a large number of authorized shares of stock.
- There is no personal income tax for non-residents.
- Shareholders, directors and officers of a corporation or members or managers of an LLC don’t need to be residents of Delaware.
- Stock shares owned by persons outside Delaware are not subject to Delaware taxes.
Advantages of incorporating or creating an LLC in Nevada:
- Nevada has no state corporate income tax and imposes no fees on corporate shares.
- There is no personal income tax or any franchise tax for corporations or LLCs (but initial and annual statement fees and business license fees apply).
- Shareholders, directors and officers of a corporation or members or managers of an LLC don’t need to be residents of Nevada.
Remember, if you form in Delaware or Nevada but you transact business in another state, it is likely that you will have to foreign qualify your business in that state.