How to select a state for incorporation

Part of the decision about selecting a business entity, whether a corporation or LLC, is choosing which state you would like to incorporate in. Different states have different costs, tax effects, and laws for corporations.

Staying Home or Choosing Another State?

Home state incorporation is the choice to incorporate in the state where the business is physically located. You will have to pay filing fees for any form of business when you file with the state, and there are annual or other regular requirements and fees. Because of the expenses in some states, business owners might choose to incorporate in a different state that has lower fees—even one where the company doesn’t actually do any business. However, there is no guarantee that this will actually save money, because if a company incorporates in one state and does business in another, it must qualify as a foreign corporation in order to conduct business transactions there.

Factors to Weigh

There are a number of factors you should consider when you are choosing where to incorporate your business. The corporate and LLC statutes will help you identify where is the best place. Consider these factors when choosing your state of incorporation.

  • How does each state tax corporations and LLCs? Are there additional tax requirements for foreign corporations? Is there an income tax on various entity types, or a minimum tax or franchise tax?
  • Compare the cost of tax and ongoing filing requirements for each state of incorporation, along with the cost of qualifying as a foreign corporation; the added expense of qualifying might eliminate any financial advantages of filing in another state.
  • Depending on what you project for revenue over the next several years, what are the estimates of your total taxes to pay?

Why Businesses Choose Delaware or Nevada

The two most popular states for businesses to incorporate outside their home state are Delaware and Nevada. Each has a particularly favorable environment for incorporation for different types of businesses.

Delaware’s advantages include:

  • Flexible business law
  • Court of Chancery where judges (not juries) focus exclusively on business law
  • No state corporate income tax for companies formed in the state that do not transact business there (Note: there is a franchise tax)
  • Favorable tax requirements for dealing with complex capitalization structures or high volumes of shares of stock
  • Non-residents pay no personal income tax
  • Non-residents can still be shareholders, directors, or officers of a corporation, or members or managers of an LLC
  • No state taxes for stock shares owned by non-residents 

Nevada’s advantages include:

  • No state corporate income tax, and no fees on corporate shares
  • No personal income tax or franchise tax for corporations or LLCs
  • Non-residents can still be shareholders, directors, or officers of a corporation, or members or managers of an LLC 

While Delaware and Nevada offer these clear advantages, don’t forget that if you’re incorporating there from another state, you’ll still have to qualify as a foreign corporation in the states, including your home state, where you conduct business. Consult an attorney if you are uncertain where might be the best state to incorporate, weighing all the different factors.

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