If you’re starting a business or trying to grow an existing one, you may be considering incorporating your business. Find out the best states to incorporate your business with the following options.
Background
Incorporation is the process of creating a legal entity and separating it from the entity’s owners. For a business, the result of incorporation is a legal entity separating its income and assets from its owners and investors. Some of the reasons you may want to incorporate include:
Protection of personal assets
Establish credibility
Easier access to capital
Perpetual existence
Tax planning flexibility
How to incorporate your business
Here are the steps to take when you’ve decided that it’s time to incorporate your business.
Step 1 – Choose a state. You must first choose a state in which to incorporate your business. We’ll elaborate on this point throughout the rest of this article. Once you’ve chosen a state, you may start researching the different cities within that state.
Step 2 – Name the registered agent. This is the person appointed to represent your corporation if someone needs to contact your business. While you could act as the registered agent, naming a third party to represent your business would allow you to protect your privacy as the owner.
Step 3 – File articles of incorporation. This is the official application you’ll submit to the state of your choice with the appropriate fee.
Step 4 – Declare tax structure.* All businesses that incorporate are taxed by default as a C corporation. After a discussion with your tax advisor, you may wish to be taxed as an S corporation.
Step 5 – Draft company bylaws. These are the rules that govern how your business will be run. Not all states require a set of bylaws, but it’s always good business practice to have them and adhere to them if your business is incorporated.
*NOTE: You’ll often hear or read the terms “corporation” and “C corporation” used interchangeably. As a business owner, you should understand that terms are distinct from one another. “Corporation” is strictly a legal term, while the phrase “C corporation” is strictly a tax term used only by the IRS.
What to consider when choosing a state to incorporate
Here are some factors to consider when looking at the best states for incorporation.
Corporate Income Taxes. This is one of the top reasons a business may incorporate in a different state. In 2023, 44 states levied a corporate income tax. Rates range from 2.5% in North Carolina to 11.5% in New Jersey.
NOTE: Remember, though, that while you may incorporate your business in a state that doesn’t levy a corporate tax you’ll still be subject to another state’s tax laws if you operate your business there.
Individual Income Taxes. Instead of paying corporate taxes, your business’s tax liability may be calculated using individual income rates if your business is an S corporation. In 2023, 43 states and the District of Columbia will have an individual income tax, with each jurisdiction having its own set of tax rules.
Fees. Some states have high formation and annual filing fees. California is infamous for its $800 annual fee for all corporations and limited liability companies, regardless of size, gross revenue, or net profit.
Privacy laws. Certain states have strong privacy laws that can shield a business owner’s information from the general public.
Top 7 States to Incorporate Your Business
Here’s a look at the top 7 states considered the best states for incorporation
But just because a particular state doesn’t appear on this list doesn’t mean it may not be a good choice for your business.
You’ll likely have to do a little digging to uncover which state(s) may be advantageous to incorporate for your business. A particular state may have a law you want to take advantage of, while another may have a provision you’ll want to avoid.
Delaware
Advantages
Corporate laws are viewed as the most flexible in the U.S.
The Court of Chancery features judges who are experts in business law
A franchise tax is levied, but not a corporate income tax
No personal income tax for non-residents
Business owners can remain anonymous
Disadvantages
Larger corporations may find more benefits than smaller corporations
Nevada
Advantages
No corporate income tax, franchise tax, or personal income tax
Business owners can remain anonymous
Disadvantages
High incorporation fees
Perception by some that a business incorporated in Nevada is either not legitimate or is “shady”
Wyoming
Advantages
No corporate income tax, franchise tax, or personal income tax
Flexible management structure
Sales tax rate of 4% is one of the lowest in the U.S.
Disadvantages
Business owners who live in Wyoming may find more benefits than non-resident business owners
South Dakota
Advantages
No corporate income tax, franchise tax, or personal income tax
Strong protection from creditors
Accessibility to investment
Disadvantages
The sales tax rate is trending upward but still in the bottom half of states
Alaska
Advantages
No personal income tax
Top 5 lowest sales tax
Disadvantages
Corporate income tax and property tax are average
Florida
Advantages
No individual income tax and a modest corporate income tax
Disadvantages
Initial fees for setting up a corporation can run to several thousand dollars.
North Carolina
Advantages
Top 5 lowest corporate income tax rate
Top 20 lowest personal income tax
Low rate of unemployment insurance
Disadvantages
Property and sales tax are average
Incorporation Beyond State Borders
Regardless of your business’s state of incorporation, you’ll need to officially register in every state in which your company conducts business. This registration, formally called a foreign qualification, is extremely important for several reasons:
Protects your company and employees. Qualifying as a foreign entity is the first step towards ensuring that your company will satisfy all required compliance obligations, including filing income taxes, sales and use taxes, employment taxes, workman’s compensation, etc. Meeting your compliance obligations will help legally protect both you as the business owner, and your employees.
Fines and penalties. You may be subject to fines and penalties for each day you conduct business as an unregistered entity.
Court representation. A business without foreign qualifications may have limited or no rights when settling legal disputes in some states’ courts.
So what’s the definition of “conducting business in a state?” Here are some of the most common reasons why your business would need to qualify as a foreign entity before doing business in a new state:
Establishing a physical presence such as an office building, retail store, or warehouse
Have one or more employees
Earning a substantial portion of your revenue
Conducting in-person meetings with clients
Purchasing property
Simple incorporation in all 50 states with 1-800 Accountant
Choosing the right state to incorporate your business is an important step during the process of incorporating your business.
In this article, you’ve learned about the benefits of incorporating your business, the steps you need to take to achieve this, and why choosing the right state to incorporate your business is so important.
This is a reminder that even though a particular state wasn’t included on our list of top states to incorporate, there may be better choices for your business.
With so many factors to consider when selecting a state to incorporate your business, a 1-800Accountant incorporation expert is just a few References away. Please contact us with any questions you have about incorporating your business.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.
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