Incorporating a business is a strategic decision that can shape a company’s future trajectory. Part of incorporating is choosing a jurisdiction, or the state where the corporation is formed. This choice can impact the amount of taxes owed, owner privacy, and how the firm is perceived by potential investors.
State-specific tax provisions, legal protections, and business environment can make certain states particularly attractive for incorporation. For example, over 68% of Fortune 500 companies are incorporated in the state of Delaware, although many of those businesses do not physically operate there.
The decision about where to incorporate could affect your bottom line, shape the direction of your company, and influence the options available to you for expansion and investment. And these benefits of making a calculated choice about incorporation jurisdiction are not limited to just large corporations—entrepreneurs, small business owners, and startups can also benefit from strategic planning. Here’s what to know about choosing the best state to incorporate in.
What’s in this article?
- Which state to incorporate in: Factors to consider
- How to choose which state to incorporate in
- What are popular states to incorporate in?
Which state to incorporate in: Factors to consider
Incorporating a business involves deciding which legal jurisdiction the business will operate in. This decision can significantly impact many aspects of the company. Before choosing which state to incorporate a business in, consider these factors:
States have different corporate income tax rates and structures. Some states—such as Nevada, South Dakota, and Wyoming—don’t levy any corporate income tax, while others, such as California, do.
Filing and annual fees
States have varying costs for filing the incorporation paperwork, and they also charge annual fees to maintain the corporate status.
Different states have different regulations pertaining to businesses. The level of regulation can impact how easy or hard it is to conduct business.
Legal system and precedents
Some states, such as Delaware, have a robust body of corporate law that can provide predictability for businesses. Delaware’s Court of Chancery is well-known for its developed case law on business issues.
The level of information that needs to be disclosed publicly varies by state. Some states require more information about business owners and operators to be made public, while others offer more privacy.
Some states impose franchise taxes on businesses incorporated within their jurisdiction for the privilege of incorporating there. They are typically either a flat fee or based on the net worth of the corporation.
Flexibility of corporate laws
Some states offer more flexibility in terms of corporate governance. For example, this could include custom governance structures or flexibility around board meetings.
Investors often have perceptions about the credibility and stability of businesses incorporated in different states. For example, many large companies choose to incorporate in Delaware due to its strong legal framework and court system, and since investors often view Delaware incorporation positively.
The economic condition and stability of a state can also be a significant factor. Businesses might want to incorporate in states with strong, stable economies.
Business presence and operations
If your business is going to operate primarily in one state, it might make sense to incorporate in that state. Incorporating in a different state from where you’re operating can often lead to paying fees and taxes in both states and dealing with additional regulatory complexity.
How heavily you weigh each of these factors is a subjective decision that should reflect your specific business concerns and priorities. Take your time and fully explore all of these considerations.
How to choose which state to incorporate in
Choosing the right state to incorporate your business in is an important decision that can affect operational effectiveness, financial health, and overall business success. This decision influences aspects such as taxes, privacy, legal liability, and stakeholder perception. By following a systematic decision-making process, you can make a strategic decision that supports your company’s objectives. Here is a step-by-step guide to choosing a state to incorporate in.
Identify your needs: Understand the specific needs of your business. This could include appearing credible to investors, a more flexible corporate governance structure, or owner privacy.
List potential states: Based on your needs, list potential states where you could incorporate your business. For many businesses, this list will include their home state, Delaware (due to its extensive body of corporate law and its reputation among investors), and states with favorable tax environments.
Research the corporate laws of each state: Understand the corporate laws of each state on your list, paying special attention to laws that impact your specific needs. For instance, if you want a flexible corporate governance structure, look at how each state’s laws support this need.
Understand the tax implications: Engage a tax advisor to help you understand the tax implications of incorporating in each state on your list. This could include corporate income tax, franchise tax, sales tax, or property tax.
Consider filing and annual fees: Look at the cost of filing the incorporation paperwork and the annual fees for maintaining corporate status in each state.
Evaluate the regulatory environment: Consider the regulatory environment of each state, such as the ease of doing business and the regulatory requirements for businesses.
Consider privacy laws: If privacy is a concern, research the level of information you would need to disclose publicly in each state.
Look at the legal system and precedents: Review the legal system of each state, particularly if your business operates in a highly regulated industry or one where there are many legal disputes.
Consider investor perception and business credibility: If you’re planning on seeking investment funds, consider the perception of investors toward businesses incorporated in each state.
Assess economic stability: Check the economic stability of each state. This can give you an idea of the state’s future ability to maintain its current corporate laws and tax rates.
Compare and decide: After considering all of these factors, compare your options and make a decision. You’ll need to decide which factors are most important for your business.
Deciding where to incorporate requires thoughtful evaluation of multiple factors, and the best choice for a business depends on its unique needs and circumstances. It’s a good idea to get advice from legal and financial experts as you navigate these steps, ensuring you establish a firm foundation for your business’s success.
After you have considered all these factors and made your decision, you can then proceed with incorporating in the chosen state.
What are popular states to incorporate in?
The “best” state in which to incorporate depends on the specific circumstances and needs of each business. Here are a few commonly preferred states and the reasons why they are preferred:
Delaware is often considered to be the gold standard for incorporation, particularly for larger corporations and those with ambitions to go public. This is primarily due to its well-developed and sophisticated body of corporate law. The Delaware Court of Chancery, which specializes in business law, is renowned for its comprehensive case law and swift decisions. This legal certainty provides a level of predictability for businesses.
Delaware also offers flexible statutes that allow companies to structure their governance and management as they see fit. However, Delaware isn’t necessarily the cheapest state for businesses, especially smaller ones. The state has an annual franchise tax that can be substantial for larger corporations, and its incorporation fees aren’t the lowest. Additionally, businesses that operate in another state will still have to pay to qualify to do business in that state, which can lead to additional costs and complexity.
Known for its business-friendly environment, Nevada has no state corporate income tax, no franchise tax, and no personal income tax. These tax advantages can be significant for businesses. Additionally, Nevada offers strong privacy protections and allows for the use of nominee officers and directors, which can help protect the identities of the business owners. The state also has strong protections against “piercing the corporate veil”—a legal decision in which courts drop the business owner’s limited liability protection provided by the company—which provides a high degree of protection for corporate owners.
However, companies considering Nevada should be aware that if they operate primarily in another state, they will still likely be subject to taxes in that state. Additionally, the lack of a well-developed body of corporate case law in Nevada can lead to less predictability in the legal system compared to a state such as Delaware.
Wyoming has many of the advantages that Nevada offers: there’s no state corporate income tax, franchise tax, or personal income tax, and the state provides strong privacy protections for businesses. Wyoming also has a reputation for having a business-friendly legal environment, including protections against piercing the corporate veil. In addition, Wyoming offers “perpetual existence” for corporations, meaning corporations can continue to exist even if an owner dies or leaves the business.
An important consideration for businesses looking at Wyoming is that, like Nevada, the state’s corporate law isn’t as well-developed or predictable as Delaware’s. Additionally, businesses operating in another state will still need to qualify to do business in that state, which can result in additional costs and regulatory requirements.
For many small- and medium-sized businesses, the benefits of incorporating in states such as Delaware, Nevada, or Wyoming might not outweigh the costs and complexities of doing business as a foreign corporation in the state where they operate. If a business operates primarily in one state, it often makes sense to incorporate in that state. Incorporating in the home state also ensures that the company’s operations are governed by the laws of the state where it does business, which can provide a degree of legal certainty.
Whether you are a small business owner, an entrepreneur just starting out, or a larger corporation planning to expand, make your incorporation decision with careful consideration. In addition, engage with legal and financial advisors who can guide you through the nuances of different jurisdictions. Ultimately, the best state for incorporation is the one that aligns most closely with your business’s unique needs and long-term goals.