Once you’ve made the decision to form your business as a corporation or LLC, you might 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, and it certainly isn’t an unheard-of practice, but it’s important to realize that these stories often exaggerate the benefits of incorporating in other states.
Most entrepreneurs incorporate in their home states, and there are many different factors to consider before incorporating in a state other than the one in which you live.
Below, you’ll find some important questions to ask yourself in order to make the best decision.
Is the state business-friendly?
Delaware and Nevada are known as two of the most business-friendly states in the US because of their innovative state statutes and developed corporate law. Delaware also has a Court of Chancery to rule on business-related cases, and Nevada (along with several other states) 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. If you want to incorporate your small business in a so-called “business-friendly” state, in other words, be sure your business will actually reap the benefits you’ve heard so much about.
Is my business online?
If you operate an online business and do not have a storefront or physical location, your business definitely has more freedom when it comes to where to incorporate, but the virtual existence of your company will be negated once you hire employees. However, it could still be beneficial for your online business to pick and choose which state you incorporate in. You might save money on state filing fees and taxes, for instance, if you choose to incorporate in states like Wyoming, Florida, South Dakota, Nevada, and Texas.
Online businesses are typically (and naturally) more mobile, and maybe you want to move someday or have partners or investors from other states. Choosing a business-friendly state like Wyoming could make it easier to manage your online business as it changes and grows.
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. 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.
Furthermore, if you form a corporation in a state where you have no physical address, you’ll still have to hire a registered agent to receive service of process and other legal notices at an office location in that state. And if you have a physical location in your home state and hire employees, you’re going to need to submit annual reports and pay annual fees in your state of incorporation (technically, your “home state”) as well as in the state where you actually live and work.
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 your business is located. But if you’ve considered all the questions and factors above and decided to form your corporation or LLC in a different state anyway, you might look for one with low taxes and annual fees (and no personal income tax) such as Wyoming, Texas, Nevada, or South Dakota.