The decision on where to incorporate a business is important for every owner. Among the factors that entrepreneurs should consider are the tax benefits of registering in one state over another and which state's laws would be more beneficial to your company in the event of litigation. Here, we will discuss some of the pros and cons to incorporating in your home state and when it makes sense to register in multiple states. We will also take a look at some states that have become popular for particular business registration purposes.
1. Is the grass really greener over there?
Let's say your business has one brick-and-mortar location from which it operates in the state where you reside. The simplicity of registering your company there may seem straightforward enough, but what if you happened to live in a state where the corporate income tax rate was higher than the rate one state over? Also, what if you found out that another state didn't even impose a corporate income tax?
"Tell me more about this mystical land of unicorns," you say? Read on.
According to 2019 state corporate income tax data, two states can make the claim that they do not levy corporate income taxes: Wyoming and South Dakota. While that may be incentive enough to register in one those states, you must keep in mind that you must register your company in every state in which you intend to do business, as well. So, if you would like to take advantage of Wyoming's nonexistent corporate income tax benefits but your company is based in Illinois where it transacts its business, you are fully within your rights to register in both states. However, you will now be responsible for paying the incorporation fee for both states, as well as the annual reporting fees for each. Every business is different, of course, when it comes to what it can afford paying on a yearly basis. For some, Wyoming's corporate privacy laws may be worth the extra incorporation, alone. Ultimately, such a decision depends on the business owner's objectives.
When you incorporate in multiple states, you must designate one state as your home, or "domestic," jurisdiction, and then any subsequent states would be considered “foreign.” Another consideration here is that many states levy franchise taxes instead of, or in addition to, annual filing fees and state income taxes for the privilege of conducting business in them. Franchise taxes vary from state to state, as well as how they are calculated.
2. Delaware: America's Playground... for Fortune 500 Companies
There's a reason why a majority of Fortunate 500 companies have incorporated in the lovely state of Delaware, and it's not for the abundance of peach blossoms (Delaware's state flower) found there. It is because of one main reason: its court system. It even sounds fancy – the Court of Chancery. Juries are not seated in disputes involved with Delaware corporations because the court is set up for cases to be heard by judges only - judges who specialize in corporate law. Cases are generally heard much more quickly in Delaware because corporate disputes have their own forum, away from non-business matters that may clog up the court systems of other jurisdictions. But, again, in order for corporations to enjoy the benefits of this specialized court system, they must play by Delaware incorporation rules and pay Delaware franchise taxes.
3. Nevada: America's Playground... for Everyone Else
Another state that has emerged as a popular destination for incorporating entities is Nevada. Like Wyoming, Nevada provides appealing privacy laws to businesses. Among some of these benefits are minimal reporting requirements and the fact that shareholders and certain investors are not required to be disclosed publicly. While Nevada does not have corporate income taxes, it does levy gross receipts taxes on businesses, which some believe to be less economically sound for various reasons. Also, companies that fall under Nevada's unemployment compensation laws and report gross wages to the Nevada Employment Security Division fall under Nevada's quarterly modified business tax.
4. Questions to consider
The above examples demonstrate that a lot more goes into the decision of where to incorporate than just whether you can pay a lower yearly filing fee. Here are some questions you should consider when determining where to register your business:
- Where do you intend to do business?
- Do you conduct business in more than just one state?
- Do you have a particular need for corporate privacy?
- How important are corporate tax considerations?
As always, it is advised to reach out to a legal and/or tax professional to discuss your business options to help make the best decision for you and your company.