Having a choice is a luxury. This luxury is not restricted to when you go shopping for clothes, watches, and cars. You can also choose which state in the US to incorporate your business in!
You could incorporate your business in your home state, or you could incorporate it in a business-friendly state. Each and every state of the 50 has its own share of building blocks and stumbling blocks. Some could provide a better labor market, whereas others could have better labor laws.
Let’s have a look at what criteria you would have to consider when you are looking to incorporate your company in the US.
Factors to consider before incorporation
- Formation costs and fees – After deciding the structure for your company, you will need to look into the fees charged by the different states. This is generally a one-time expense. It ranges from $50-$800. There are internal variations depending on whether the structure is a C-corp, S-corp, LLC, or non-profit.
- Annual fees and filings – Although the initial registration fees are a one-time expense, companies must pay annual fees to maintain the registration every year. Ohio and Alabama are the two states that do not charge any such fees.
- Legal and court system – It is best to familiarise yourself with the court system in the off-chance that you get into a business dispute. There are some states like Delaware that resolve business disputes much quicker than other states. This is because Delaware has a separate court to resolve business disputes alone. If you are somehow embroiled in a complex litigation process, it will be resolved more quickly in Delaware than in any other state. This factor need not be taken into account if the business you will be establishing is fairly small since the chances of being involved in litigation will be nearly zero.
Apart from Delaware, Maine and Connecticut also have business-friendly legal systems.
Maine was, in fact, named the most business-friendly state in 2021 because of its straightforward regulations and readily available capital. However, it faces challenges due to its limited labor force and tourism-related economic fluctuations.
Connecticut has a good legal system and a high concentration of STEM workers. But, it takes a beating when it comes to factors like access to capital, and technology and innovation.
- Investors – This is a particularly crucial factor if you want to give your business wings, regardless of whether you want to take it public or keep it private in a few hands. Most investors prefer it if a company is incorporated in Delaware because of its corporation-friendly laws. If venture capital financing is a primary goal, Delaware is the best choice.
- State-specific incentives – States are always looking to attract new businesses as they are a good source of income for the state government. Some states make themselves attractive by offering tax breaks to “green” companies. State and local governments are always keen on giving out fiscal incentives like cash grants, rebates, and tax credits. Nebraska offered Angel Investment Tax Credit to early-stage high-tech companies that were based in Nebraska and had fewer than 25 employees. States with higher incentives usually tend to have higher corporate tax rates as well. But there are states like Nevada, Texas, Washington, Wyoming, and South Dakota that have zero corporate income tax revenue but spend $44 per capita on incentives.
- Corporate income tax – some states have a corporate income tax that businesses are required to pay apart from the federal corporate income tax. Alaska, Illinois, Iowa, Minnesota, New Jersey, and Pennsylvania levy corporate income tax rates of 9 percent or higher. New Jersey tops the chart at 11.5% followed by Pennsylvania at 9.99%. North Carolina levies a rate of 2.5% which is the lowest. As mentioned above, Nevada, Texas, South Dakota, Washington, and Wyoming do not levy any state corporate income tax; but, Nevada, Ohio, Washington, and Texas impose gross receipts tax.
- Franchise tax – This tax is over and above the registration fees, annual fees, and corporate income taxes. Some states have it, while others do not (Nevada and Wyoming). Each state that does have a franchise tax calculates it differently. For example, California charges it based on income and Delaware charges it based on the number of shares and the par value.
- Nexus study – a nexus study is done to evaluate and assess all the business activities of the company and check whether a company has nexus to a specific state. Each state requires a business to register with the Secretary of State agency, State corporate income tax and even payroll, if it is found to have a nexus with the state. For eg: If a business domiciled in Boston hires an employee in California creates a nexus with the State of California and requires itself to register with California Franchise Tax Board.
- Sales tax – Sales tax varies from state to state (no federal sales tax). It ranges from 2.9 to 7.5. Apart from state governments, local governments also impose an additional sales tax. Click here to read more about sales tax!
The super 10!
Right off the bat, Nevada and Delaware seem like the only two great options. But there are others as well depending on various factors. There is no single best as each brings something different to the table.
|S.No||State||Formation fees*||Annual filing fees*||Corporate tax||Base Sales tax (without local surtax)|
|1||Delaware||Minimum $90||Minimum $300||8.7%||0%$|
|2||Nevada||Minimum $150||Minimum $350||0%||6.85%|
|3||Wyoming||Minimum $100||Minimum $60||0%||4%|
|5||Alaska||Minimum $250||Minimum $100||9.4%||0%$|
|6||Florida||Minimum $100||Minimum $130||5.5%||6%|
|7||New Hampshire||Minimum $100||Minimum $100||7.6%||0%$|
|8||North Carolina||Minimum $125||Minimum $200||2.5%||4.75%|
|9||Utah||Minimum $70||Minimum $18||4.85%||5.95%|
|10||Montana||Minimum $70||Minimum $20||6.75%||0%$|
*formation fees and annual filing fees are subject to variation depending on the structure.
$ Gross receipts tax applicable in states with 0% sales tax. It includes the business’ total revenue without deductions. It applies to B2B transactions as well. Gross Receipts tax liability depends on the business, the state, and the revenue earned.
# Franchise tax is imposed on each taxable entity. It is a fee for the privilege of doing business in that state. In Texas, businesses with receipts less than $1.18 million don’t pay franchise tax, and those with more pay a franchise tax of 0.375%
- Delaware is the default option for most businesses because of how attractive it is to the investors, the legal system, and the sales tax. But Delaware is not particularly suitable for small businesses. The fees for incorporating would only be added expenses and cannot really be seen as a long-term investment because of the size of the business.
- Nevada is attractive because of the lack of state corporate income tax, estate tax, gift tax, income tax, and franchise tax. A huge advantage that incorporating in Nevada brings is that the liability incurred by the business is kept with the corporation, and that protects you/directors from being held responsible. This kind of complete protection is not available in other states as there are a few loopholes
Nevada also provides an added sense of privacy as it doesn’t require businesses to list their directors, investors, and other parties involved. But there is a stigma attached to Nevada because of this privacy that the businesses are involved in illicit and illegal operations.
- While Delaware and Nevada take the cake, Wyoming holds a good position too. Incorporating in Wyoming has its own benefits. It has been consistently voted as one of the most business-friendly states. It has no corporate income tax or franchise tax. The sales tax is also low at 4%. It provides a lot of economic incentives to start-ups and entrepreneurs. The incentives range from grants to loans, from workforce training to industrial development bonds.
Wyoming also offers the ease to move the business to Wyoming even if it was established in the home state. It also offers strong privacy laws. The information pertaining to owners and directors is not made available on the public database.
- Incorporating in Texas is favorable because of the 0% corporate tax. The biggest advantage of incorporating in Texas is the Texas Enterprise Fund. TEF is a financial incentive tool where a cash grant is provided to those projects that promise significant job creation as well as capital investment.
It would not be fair to say that there is one best state to incorporate your business in the US. As seen, each state has its own pros and cons. Not every business will be well suited to every state. It will take an even further look into the legalities of each state to find the one best state that would tailor-fit your business and its needs. Use the services of a CFO consultancy to make the best choice for your business.