If you’re thinking about starting a business or are trying to take it to a new level, you may decide to incorporate. The act of incorporating offers several benefits — it formalizes your company, makes you look more official to potential customers and partners, and opens the business to investment. It could also lower your tax bill.
But this depends on where you incorporate. Different states have unique corporate laws. As a small business owner, it’s worth taking the time to decide on a state that fits your business and specific needs.
Some things to consider include charges for filing and incorporating, state corporate taxes, ongoing fees, and other requirements.
Where in the US can you incorporate in?
You’ve got three main options for incorporating your business. Here’s how they break down:
- Incorporating in your home state. This option is the simplest, though it’s not always the most cost-effective. If you’re physically located in a state, you can choose to incorporate there. However, if you have business transactions in other states, you’ll likely need to register as a foreign corporation in those states.
- Incorporating in a state where you conduct business. Do you live in one state and work in another? For example, a business owner who lives in Indiana but has office space in Chicago could incorporate in Illinois. However, they may have to register the business as a foreign corporation in their home state.
- Incorporating in a corporate-friendly state. Some states are more beneficial for corporations, with flexible corporate laws, friendlier business breaks, and enhanced privacy. These states will let you incorporate there, even if you don’t live or conduct business in the state.
No matter where you decide to incorporate, also register as a foreign corporation in your home and operating state (or states). You’ll still need to keep up with tax obligations there — you don’t want to get a surprise come tax season comes!## Top 3 states to incorporate in
When deciding to incorporate, you should certainly consider your home state and the state you do business in. However, if your business industry and goals don’t suit either of those two states, you might look to other options.
Here are three corporate-friendly states for incorporation, along with their notable benefits.
Incorporating in Delaware
A whopping 67.8% of Fortune 500 companies and 1.5 million businesses are incorporated in Delaware. While Wayne’s World may not see the perks of the state, there’s a reason so many businesses incorporate there — several reasons, in fact.
Perhaps the most appealing: Delaware offers flexible laws for corporations. In most states, you’d need multiple people to fill company roles like director, officer, or shareholder. However, in Delaware, the same person can be president, director, treasurer, secretary, and the only stockholder of a Delaware Corporation. Similarly, one person can be both the manager and member of a limited liability corporation (LLC). This flexibility is beneficial for a small business, where you may not have several people working for the company.
Non-Delaware residents don’t need to pay personal income tax, and stock owned by non-residents won’t be taxed, either. Delaware also uses a Court of Chancery to determine business disputes, and state laws favor companies with complex capitalization structures and a significant amount of stock shares issued.
If you don’t conduct business in Delaware, you don’t have to pay state corporate income tax. However, you must file an Annual Franchise Tax Report and pay a franchise tax by March 1 each year. And if you do conduct business in Delaware, you’ll file a Corporate Income Tax Return. Delaware is speedy, too — for an extra fee, it can process your filings the same day it receives them.
Incorporating in Nevada
Nevada is another state that’s friendly for corporations. There’s no state or corporate income tax, and unlike Delaware, Nevada doesn’t charge a franchise tax for corporations or LLCs. Through the state’s online portal, it processes most transactions on the same day for no extra fee.
On top of that, there’s no personal income tax in Nevada. If you’re looking to relocate your business’s home base, that could be an attractive reason to consider Nevada.
Even if you don’t want to move, Nevada could still be a smart choice. Any corporation shareholders, directors, and officers don’t need to reside in the state. And managers or members of an LLC aren’t required to be residents, either.
Nevada collects a good portion of its revenue from fairly high sales and gross receipts taxes, with excise taxes on items like tobacco and alcohol factoring into the mix.
Incorporating in Wyoming
Aside from some gorgeous scenery, Wyoming offers several advantages for corporations. The initial and ongoing costs of incorporating are lower than most states. Wyoming charges $100 to incorporate ($50 for nonprofits) and a minimum annual fee of $60, plus a $2 online convenience fee in both instances.
Wyoming also doesn’t have corporate income, personal income or franchise taxes. The state’s sales tax is relatively low at 4%, and Wyoming offers tax exemptions on certain purchases, such as manufacturing equipment or data processing service centers.
If privacy is a big driver for you, Wyoming is an excellent state for incorporating a business. With one of the strongest asset protection laws in the whole country, you won’t have to worry about creditors forcing the sale of your assets, which is a potential risk in other states. Wyoming’s privacy laws also mean you don’t have to include business owner information on the state’s public database. In the case of an LLC, you don’t need to list manager or member information.
|State corporate Tax||8.7% for corporations doing business in Delaware||No corporate tax||No corporate tax|
|Franchise Tax||Yes (for all Delaware incorporated businesses)||No||No|
|State sales tax||0%||4%||6.85%|
|Gift, capital gains, inheritance or estate tax||6.6% capital gains, no gift, inheritance, or estate tax.||No||No|
|Incorporation/filing fee||$89 (may vary based on stock)||$100||$225 ($75 incorporation fee which may vary based on stock, $150 initial annual list fee)|
|Processing times||Same-day processing available for extra fees||Online: Same-day processing
Paper: Up to 15 days
|Online: Same-day processing
Paper: 2 weeks
|Annual filing/license/report fee||$50||$60 or two-tenths of 1 mill on the dollar ($.0002), whichever is greater||$650 ($500 business license fee, $150 annual list fee)|
|Number of shareholders required||One||One||One director and one incorporator required|
Conclusion At first glance, it seems easy to pick a corporate-friendly state to take advantage of lower incorporation fees. However, making that move without taking the time to research your options can backfire. Ongoing state requirements for corporations can often lead to a larger tax bill than if you incorporated in your home state.
While these three states are generally friendly to corporations, every business is different. Since incorporating is a legal process, speaking with a legal professional or online legal service will give you guidance to ensure you comply with a particular state’s incorporation requirements.
A CPA or tax professional can also offer advice. At Bench, our bookkeepers and Bench Tax Advisors work to understand your specific business needs and challenges. They can provide support every step of the way, setting you up for success long after you’ve incorporated. See how they can elevate your business — book your free trial.