How to Choose the Best State to Incorporate

Choosing the Best State to Incorporate

Choosing where to incorporate can be as important as choosing what type of business entity to form. While there's no legal requirement as to where your small business must incorporate, choosing the right jurisdiction is definitely a strategic issue that can provide benefits in the long run. For most small businesses incorporating in your home state makes the most sense, especially if you don't engage in interstate commerce. If your small business, however, does engage in business across state lines, you should take certain factors into considerations such as how corporate taxes and laws vary between jurisdictions.

Home State

If you own a local small business and do not have plans to expand outside of your home state, incorporating at home usually makes the most sense. Generally, for every other state that you do business in, you will have to register and pay substantial fees as a foreign corporation. That means that if you incorporated in a different state, but only do business in your home state, you will likely be paying registration fees in the incorporating state as well as foreign corporation fees in your home state. In addition, you will likely have to hire a registered agent for service of process in every state that you do business.

Tax-Friendly State

Choosing a tax-friendly state can lead to huge potential savings for your small business. Nevada often tops the list as places to incorporate for tax considerations given that it has no taxes on corporate income, corporate shares, franchises, or personal income. Be aware though that most states require you to pay taxes on any income generated within that state. That means that if your small business was incorporated in Nevada, but you do business in both Nevada and New York, you will still have to pay New York taxes and fees. Here is a breakdown of corporate income taxes by state for 2016 by the Tax Foundation.

Corporate-Friendly State

You've probably heard the term "a Delaware corporation before. Why do so many companies choose Delaware as a place to incorporate? It is because Delaware is widely known as the jurisdiction with the best business laws in the country. In addition to Delaware laws being very corporate-friendly, the court system, known as the Court of Chancery, is very sophisticated in business issues and is very effective in resolving issues. That means less legal costs for litigation that might take years longer elsewhere. Interestingly enough, many investors won't even invest in a company that isn't incorporated in Delaware or will require the company to reincorporate in Delaware. For a great summary of the benefits, take a look at this publication by the Delaware Department of State.

Regardless of where you ultimately decide to incorporate, check out your local economic development corporation or chambers of commerce for information on certain benefits your small business might be eligible for when you do business in that state. For example, small businesses in New York City can apply for tax benefits if they meet certain criteria. Finally, check out these other considerations when choosing a location by the Small Business Administration.