Incorporating a business is a strategic decision that can shape a company's future trajectory. In the US, part of incorporating is choosing a jurisdiction – or the state where the corporation is formed. This decision can affect the amount of taxes owed, owner privacy and how the firm is perceived by potential investors.
State-specific tax provisions, legal protections and the 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 just for large corporations – entrepreneurs, small business owners and startups can also benefit from strategic planning. Here's everything you should know about choosing the best US state to incorporate in.
What's in this article?
- Which US state to incorporate in: Factors to consider
- How to choose which US state to incorporate in
- Which states are popular to incorporate in?
Which US state to incorporate in: Factors to consider
Incorporating a business in the US involves deciding which legal jurisdiction the business will operate in. This decision can have a significant effect on many aspects of the company. Before choosing which state to incorporate a business in, the following factors should be considered:
Taxation
US states have different corporate income tax rates and structures. Some of them – such as Nevada, South Dakota and Wyoming – don't levy any corporate income tax, while others, such as California, do.Filing and annual fees
Costs for filing the incorporation paperwork vary across different US states, and they also charge annual fees to maintain the corporate status.Regulatory environment
Different states have different regulations pertaining to businesses. The level of regulation can affect how easy or hard it is to conduct business.Legal system and precedents
Some US states, such as Delaware, have a robust body of corporate law that can provide businesses with predictability. Delaware's Court of Chancery is well-known for its developed case law on business issues.Privacy laws
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.Franchise taxes
Some US states impose franchise taxes on businesses incorporated within their jurisdiction for the privilege of incorporating there. Typically, these are either a flat fee or are based on the net worth of the corporation.Flexibility of corporate laws
Some US states offer more flexibility in terms of corporate governance. For example, this could include customised governance structures or flexibility surrounding board meetings.Investor perception
Investors often have pre-conceptions about the credibility and stability of businesses incorporated in different US states. For example, many large companies choose to incorporate in Delaware due to its strong legal framework and court system. As a result, investors often view incorporating in Delaware in a positive light.Economic stability
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 a business is going to operate primarily in one state, it may make sense to incorporate in that state. Incorporating in a different state from where the business is operating can often lead to paying fees and taxes in both states and dealing with additional regulatory complexity.
How much weight each of these factors carries for a business is a subjective decision that should reflect specific business concerns and priorities. Businesses should thus take their time and explore all of these considerations fully.
How to choose which US state to incorporate in
Choosing the right state to incorporate a business in is an important decision that can affect operational effectiveness, financial health and overall success. This decision influences aspects such as taxes, privacy, legal liability and stakeholder perception. By following a systematic decision-making process, businesses can make a strategic decision that supports their company's objectives. Here is a step-by-step guide for businesses in the US to choose a state to incorporate in.
Identify needs: businesses should have an understanding of their specific needs. This could include appearing credible to investors, a more flexible corporate governance structure or owner privacy.
List potential states: based on these needs, businesses should list potential states where the business could be incorporated. 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 favourable tax environments.
Research the corporate laws of each state: businesses should understand the corporate laws of each state on the list, paying special attention to laws that affect specific business needs. For instance, if having a flexible corporate governance structure is desired, look at how each state's laws support this need.
Understand the tax implications: businesses should engage a tax advisor to help them understand the tax implications of incorporating in each state on the list. This could include corporate income tax, franchise tax, sales tax or property tax.
Consider filing and annual fees: businesses should look at the cost of filing the incorporation paperwork and the annual fees for maintaining corporate status in each state.
Evaluate the regulatory environment: businesses should consider the regulatory environment of each US state, such as how easy it is to do business and the regulatory requirements.
Consider privacy laws: if privacy is a concern, businesses should research the level of information that would need to be disclosed publicly in each state.
Look at the legal system and precedents: businesses should review the legal system of each US state, particularly if their business operates in a highly regulated industry or one where there are many legal disputes.
Consider investor perception and business credibility: if the business is planning on seeking investment funds, they should consider the perception of investors towards businesses incorporated in each state.
Assess economic stability: businesses should check the economic stability of each state. This can provide an idea of the state's future ability to maintain its currently applicable corporate laws and tax rates.
Compare and decide: after considering all of these factors, businesses should compare their options and make a decision. They'll need to decide which factors are most important for them.
Deciding where to incorporate requires a thoughtful evaluation of multiple factors, and the best choice for a business depends on its unique needs and circumstances. It's a good idea for businesses to get advice from legal and financial experts as they navigate these steps, to ensure that they establish a firm foundation for their success.
After they have considered all these factors and made a decision, they can then proceed with incorporating in the chosen state.
What are popular states to incorporate in?
The "best" state to incorporate in depends on the specific circumstances and needs of each business. Here are a few commonly preferred states and the reasons why:
Delaware
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 specialises 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 either. 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.
Nevada
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 to protect the identities of the business owners. The state also has strong protections in place 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, it is likely that they will still 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, when compared with a state such as Delaware.
Wyoming
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 has strong privacy protections in place 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 that corporations can continue to exist even if an owner dies or leaves the business.
An important consideration for businesses looking at Wyoming is that, as with 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.
Home state
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 in which they operate. If a business operates primarily in one particular 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 who is just starting out or a larger corporation planning to expand, consider your incorporation decision carefully. 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.