Where To Incorporate a Business: Everything You Need to Know
Where to incorporate a business is essential, as the state you file in will determine how you figure your taxes and fees that you may be responsible for.3 min read
Where to incorporate a business is essential, as the state you file in will determine how you figure your taxes and fees that you may be responsible for. The costs to incorporate, as well as the tax structure, will be determined by the state you form your corporation in. When deciding where to file your incorporation, you will need to consider:
- Choosing your home state or another state. Many owners will incorporate their business in their home state where their physical company is located. It is vital to consider the ongoing fees, as well as startup fees, to determine if your home state will provide you with the best option. No matter where you are filing your incorporation, you will have to incorporate in every state where you plan on performing business.
- Weighing the advantages and disadvantages. You will want to look at all of the state statutes and taxation requirements for the corporation type you are filing. Also, do your research to see if you will be responsible for any minimum tax or franchise fees.
- Calculate the costs. Determine all of the ongoing costs of running a corporation and the ongoing tax requirements for the state you are considering for incorporation.
Variables to Consider When Choosing In Which State to Incorporate
There are many ongoing filing requirements and tax issues depending on the state you are incorporating your company. Many businesses will need to maximize costs to be able to get their business up and running, so it is important to consider all the possible expenses that will vary from state to state. Some of the fees you will want to consider include:
- Formation Fees. When you form your corporation or LLC, you will be required to pay a filing fee with the state's Secretary of State's Office or Corporations Division. Some of the lowest formation fees are in the states of Arkansas, Colorado, Hawaii, Iowa, Oklahoma, and Mississippi, and run around $50. Texas and Connecticut have two of the highest with $310 and $445 respectively.
- Annual filings and fees. In many states, you will be required to pay an annual filing fee, as well as provide a one-page report each year that will serve as your annual report. There are only two states that do not have annual filing requirements, and they are Ohio and Alabama. Annual filing fees can range from less than $100, such as in New York, California, South Dakota, and Wyoming. Some states have annual filing fees that run a couple of hundred dollars or more, such as Nevada and Delaware.
- Franchise Taxes. Some states require a franchise fee in lieu of or in conjunction with the annual filing fee. A franchise fee is in effect, paying for the privilege to be able to do business in the state. The calculations of franchise fees vary from state to state. An example is California who calculates their annual franchise fee on the income with a minimum fee of $800. In Delaware, the fee is calculated on the number of shares and their par value, which makes a better deal for those businesses that may be small and have fewer assets. States such as Wyoming and Nevada offer no franchise fees at all.
- Legal and Court System Considerations. You will also want to assess the court systems and legal dealings that occur in each state. For example, there are more businesses incorporated in Delaware due to the fact that the state requires a different court system to settle business issues and allows judges to decide cases instead of juries. This allows court cases to be resolved more quickly, which can be preferential to business owners, both for the expediency and the ability to have matters determined by a judge who will be much more versed in legal matters than a jury.
- Investors. You may want to give considerations to which state could draw in the most investors for your company. There are many investors who prefer companies incorporated in Delaware due to the fact that they feel their money would be more secure due to the court system.
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