What’s The Best State to Incorporate?

There is no one U.S. state that can definitively be called the best state in which to form a corporation or LLC. That said, most experts agree that if you're a small business with just a handful of shareholders or members, you're probably best served by forming your company in your home state, where you and your physical business are located.

A corporation or LLC in the United States is under no legal obligation to form in any particular state. While you may save costs such as corporate state tax by forming in a certain state, you will have operating costs - including taxes - in every state you qualify as doing business in, so adding an unnecessary state to the mix may not be a cost-saving move.

If you're just getting started, unless there's a large amount of investment about to come into the company, it may make sense to start at home and grow the business first. If the time comes to seek the advantage of a different state to be registered in, you'll be better positioned at that time to form a new company in your chosen state, take over your existing brand and dissolve the old company.

BUSINESS FILINGS

A corporation or LLC has filing obligations to its home state. In addition, if you form your business in another state – such as Delaware or Nevada – you will need to file a “foreign qualification” to do business in your home state. Likewise, you will need to file a foreign qualification in any state in which you do business. You may need to consult your attorney to determine which states you're doing business in, especially if you have an online business or one that doesn't require a physical location. This may enlarge your options, but your accountant can best advise you what your liabilities are and where.

Paperwork involves effort and filing fees. For each state in which you have to file for foreign qualification, you'll also need to file annual reports, and retain a registered agent.

LEGAL MATTERS

If you form your company in a different state from your principal state of business, you will fall under the jurisdiction of that state. Even a minor legal matter such as a difficult creditor may require your presence in that state. The state laws may be very different from ones you're used to, and you may need a local attorney. Even with a professional registered agent service, you may experience delays in receiving forwarded timely notices.

And even the simple matter of opening a business bank account in your company's name may run into legal obstacles if your company's registered address is in a different state.

TAXES

Even if you form a corporation in a state with no franchise or state income tax, such as Nevada, you still must pay state income taxes in your own state, which may even be higher because you're now a foreign entity.

In general, you'll need to pay company and franchise taxes in every state in which your business generates revenue, if that state has such taxes. You'll also have to collect sales tax, if appropriate to your business.

Organizing your business as an LLC or an S corporation can eliminate state corporation taxes (but not franchise tax) in many states. But your choice of business structure is complex, and should really be driven by factors other than your choice of state.

FAVORABLE STATES

Delaware has long been regarded as the most corporate-friendly state in the United States. It has a long and extensive body of case law, which offers precedents that help prevent surprises in court. This can save thousands of dollars in legal fees. The Chancery Court specializes in business entity cases and is highly regarded. Delaware isn't necessarily cheap on its filing fees, but it's fast and very efficient. For large corporations with complex litigation and matters of investment, merger, governance and so on, Delaware has earned its reputation.

Click here to form a Delaware corporation.

Nevada is known for its lack of business taxes, including franchise, gift, corporate income, share and transfer taxes, as well as having no personal income tax. Its filing fees are low, and its case law is relatively well established. Nevada is also accommodating in matters of management and governance, and tax privacy.

Click here to form a Nevada corporation.

Wyoming is a rising star with features on a par with Nevada, going even further with privacy protections. The state government is committed to being friendly to business. It was the first state to allow an LLC entity, and is friendly to single-member LLCs. However, while its legislature is pro-business, its case law is still relatively new.

Click here to form a Wyoming corporation.

Many other states vie for recognition as business-friendly and having a favorable tax climate. This matters if you're planning to locate physically to a state and form your company there. But in such a case the criteria given here won't be adequate to the decision. You'll need to judge a host of demographic elements as well, such as labor force, markets and quality of life.

NEXT STEPS

To incorporate in your home state, click here to incorporate in California, New York, or any other state. 

SunDoc Filings can help you in all 50 states with matters of filing, reporting and registered agent services.

Regardless of which state you choose, we recommend seeking professional advice for all matters discussed here. Nothing in this article can be construed as legal, tax or accounting advice.