As you prepare to launch your business, one of the questions you might consider where you should incorporate your company. Some entrepreneurs wish to simply incorporate in their home state, while others decide to incorporate in states they deem to be more business friendly.
There are numerous factors to examine, including the fees and taxes associated with incorporation. The following are some key considerations:
Formation fees: Whenever you form a limited liability company (LLC) or a corporation, you must pay a filing fee to the Secretary of State’s office in the incorporating state. This one-time fee is lowest in Arkansas, Colorado, Hawaii, Iowa, Oklahoma and Mississippi, at just $50. The highest incorporation fees are in Connecticut, at $455. This is a one-time fee, so it likely won’t have a long-term impact on your company.
Annual fees: Most states require you to pay an annual fee to maintain a corporation or LLC. Along with this fee, you must usually submit a one-page report to the Secretary of State’s office. Only Alabama and Ohio do not require this report. Annual fees are low in states like New York and California, and high in states like Nevada and Delaware.
Court considerations: Perhaps surprisingly, the court system where you incorporate could make a difference. Delaware, for example, is where 64 percent of Fortune 500 companies are incorporated, in large part because the state has a court specifically dedicated to resolving business disputes with judges instead of juries. Judges are more experienced and knowledgeable on business matters.
Investors: If you find that investors are more willing to fund your company if you incorporate in a certain state, it could be a major factor—especially if the possible investment is significant.
Franchise tax: In many states, there is a separate franchise tax levied, in addition to the annual fees and state income taxes for which businesses are responsible. This tax is levied simply for the privilege of being able to conduct business in that state. The way these taxes are determined differs from state to state. In California, annual taxes are based on income (with an $800 minimum), while in Delaware, the franchise tax is based on total number of shares and par value. Other states have no franchise tax at all.
State corporate income tax: Although six states do not levy any corporate income tax, others have taxes that are quite high. However, these taxes are based on where the business is located. If a business is operated in a state with corporate income tax, but incorporated in a state without such tax, you likely won’t be able to avoid paying corporate income taxes.
These are all factors to consider when determining where to incorporate your business. Again, the cheapest state in the short term might not be the best long-term decision, so be sure to do your research and look at all angles before filing your paperwork. A skilled financial advisor will be able to provide further guidance on this and other issues.