So you’ve gone through the pros and cons, and you’ve decided you want to incorporate your business. There’s a lot to think about — and it’s important to understand how the the state in which you incorporate impacts your bottom line. Here are some of the considerations to keep in mind.
In order to form a new LLC or corporation, you will pay a one-time filing fee to your state (usually to the Secretary of State’s office). These formation fees vary. At $50, Arkansas, Colorado, Hawaii, Iowa, Oklahoma and Mississippi have the lowest formation fees, while at $455, Connecticut has the highest. However, since this is just a one-time fee, this cost should not be of much significance for your business, says CorpNet.com CEO Nellie Akalp.
Annual Fees and Filings
In order to maintain operation of your LLC or corporation, most states mandate an annual fee. States also usually require you file an annual report that keeps them up-to-date about basic company information such as management and mailing address. Only Ohio and Alabama don’t require these reports.
However, if you’re thinking about incorporating a business in a state with lower annual fees or no reporting requirements, make sure you’re also operating your business out of that state, says Akalp. Otherwise you might end up paying two sets of fees — or even some penalties — if your company conducts business in a different state than where it’s incorporated. It’s possible to foreign qualify your business and obtain authority to conduct business in another state, but you will still have to pay extra annual fees for that privilege.
Except for Nevada and Wyoming, states levy an annual franchise tax when incorporating a business. This means you will have to pay a tax every year for the privilege of incorporation and conducting business in your state.
The amount of this tax varies state by state. For example, California bases its annual tax on income but charges at least $800 regardless if your company is making or losing money. Delaware, on the other hand, calculates its franchise tax based on the number of company shares and par value.
Akalp warns that when incorporating a business, investors really like it when a company is registered in Delaware. Delaware’s corporate law and business judicial system allows for business disputes to be cleared up much more quickly. Thus, if you want venture capital financing, incorporating in Delaware might be the best decision for your business. It’s not a coincidence that more than 50 percent of all publicly-traded companies and 64 percent of the Fortune 500 are Delaware entities.
State corporate income tax
You might consider incorporating in one of the six states with no corporate income tax: Nevada, Ohio, South Dakota, Texas, Washington or Wyoming (although Ohio, Texas and Washington have a tax on total gross company revenues). Even better, Nevada, South Dakota and Wyoming don’t have a personal income tax.
However, if you need to conduct business in another state, you will end up paying that state’s corporate income taxes anyway. Akalp advises that if your business has fewer than five shareholders, you will probably save time and money by simply incorporating a business in your home state.
For more information on the fees, filings and taxes of each state, here’s a handy guide.