1. Most Tax-Friendly States
2. Benefits of Creating a Corporation
3. How to Avoid Excessive Taxation

Knowing the best states for corporations can help you decide where to structure your business. In 2010, the State Business Tax Climate Index, a study that ranks the best and worst states for business taxes, was released from the Tax Foundation, which is a non-partisan tax research group in Washington, D.C.

Most Tax-Friendly States

The Tax Foundation lists the following states as the most tax-friendly:

  • South Dakota.
  • Wyoming.
  • Alaska.
  • Nevada.
  • Florida.
  • Montana.
  • New Hampshire.
  • Delaware.
  • Washington.
  • Utah.

South Dakota, Wyoming, Nevada, and Washington do not impose a corporate or individual income tax. Alaska and Florida do not impose an individual income tax, but Alaska does have jurisdictions that impose a sales tax. Montana, New Hampshire, and Delaware do not have a sales tax, and while Delaware does have a very favorable law environment, the state has the second worse corporate income tax in the nation. Utah does have both a favorable unemployment insurance tax system and low property taxes but does impose all major taxes.

In determining the top 10 states, the Tax Foundation took into consideration the states that were absent of a major state tax. Just short of making the top ten list, landing at number 11 is Texas. The state does not have an individual income tax and does not recognize LLCs or S corporations. In addition, Texas does impose taxes on intangible property, such as stocks and bonds.

The study reported Iowa, Ohio, California, New York, and New Jersey as being the least tax-friendly states for business. Iowa fails to tie tax increases to inflation and the state imposes both a corporate and individual alternative minimum tax, AMT, causing Iowa to fall among the bottom states on the list.

Also at the bottom of the list is Ohio. The state received low scores for their gross receipts tax, which offer no deduction for employee compensation or for the cost of goods sold. Plus the state has an intangible property tax and overall higher property taxes.

With a high corporate income tax rate of 8.84 percent and an alternative minimum tax, AMT, California isn't considered to be tax-friendly for business owners. Add the 8.25 percent statewide sales tax rate, and California could only end up at the bottom of the list. The state's increase in its sales tax makes it the highest state-level rate in the entire nation. In addition, each personal income tax bracket saw an increase of 0.25 percent.

For those living in the state of New York, they can blame their drop in ranking on an enactment of two personal income tax brackets this year. The state saw an increase of 30 percent over the previous year with a new rate of 8.97 percent. Not only do New Yorkers get to feel the effects of a 30 percent increase in their personal income bracket, the state tacks on a 3.648 personal income tax. This means New York City has the highest state and local combined income tax rate in the nation.

The only state that tops New York's penalizing tax system is New York's neighbor, New Jersey. It earns the top spot for being the worst state to do business across the nation. Poor ratings in personal income tax, sales tax, corporate income tax, and consistently high rates in almost every tax area easily placed this state at the very bottom.

Benefits of Creating a Corporation

By creating a separate business entity or a corporation, you gain both privacy and the protection of your assets. Unfortunately, there are a few states where incorporated businesses must carry the tax burden for schools and other public initiatives.

How to Avoid Excessive Taxation

To avoid excessive taxation, business owners should look for states offering a safe haven and business-friendly tax rules, such as Delaware and Nevada. The two states are ideal for those wanting to incorporate or operate a business.

Many states require that business owners identify the names of all members, managers, partners, and shareholders. Once again, Delaware and Nevada cater to corporations, with Delaware even allowing an anonymous person to set up a corporation.

In addition, you do not have to reside in the state to incorporate and receive all the tax benefits while operating your business. This is especially attractive to business owners who do not want to relocate their residence but want to incorporate where tax laws are business friendly.

Your home state is your first option, but if startup costs are too heavy, along with heavy tax laws, consider other sensible places to establish your corporation.

If you need help with knowing the best states for corporations, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.