Variables To Consider When Determining Where To Incorporate
Becoming a new business owner is a fascinating process. However, many don’t realize the amount of effort that goes into establishing a corporate structure. A perfect example is evidenced by the fact that before doing anything else, such as choosing a name for the company or finding a registered agent, entrepreneurs must first decide where to incorporate their new business. Typically, figuring out where to incorporate boils down to either Nevada, Delaware, Wyoming, or the entrepreneur’s home state. However, entrepreneurs would be wise to consider a host of factors.
To register a new business, owners must pay filing fees to the state in which they’re filing. Unfortunately, filing fees can range drastically. For example, in states such as Arkansas and Colorado, the filing fees are as low as $50. On the other hand, filing fees can skyrocket as high as $455 in Connecticut. If a business is strapped for cash, they may want to factor the filing fees into consideration when determining where to incorporate. If nothing is tying a company to a state with high filing fees like Connecticut, there is typically no reason for the entrepreneur to incorporate there.
However, it’s also worth noting that the filing fee is a one-time fee. If an entrepreneur determines that a particular state is worth incorporating in because of other benefits that they offer, it may be easier to justify paying a high filing fee. Entrepreneurs could consider the filing fee to be like an investment in their business. It may be worth “investing” in a state that will pay higher dividends to the company in the long run.
Similarly, entrepreneurs should also be aware of the filing fees associated with annual reports. Most states require LLCs and corporations to file an annual or biennual report with their Secretary of State’s office. There is often a filing fee associated with doing so. New business owners may want to look into the cost of these fees when determining where to incorporate their company.
Another issue to consider when deciding where to incorporate is the legal system in the state which the company will register. For example, nearly 65% of Fortune 500 companies incorporate in Delaware, primarily due to the state’s legal system. Delaware has a separate court dedicated solely to resolving business disputes.
Judges are in charge of resolving the disputes as opposed to juries, which often means that the cases are solved more quickly here than they are in other states. If a company does not believe they’ll have to contend with complex business litigation, this point could be moot. But, it may be worth considering when determining where to incorporate a new business.
Similarly, Nevada is an attractive state when determining where to incorporate because its laws tend to protect corporations. In fact, Nevada has some of the most favorable corporate laws in the United States. The state also has some of the highest degrees of privacy as it does not share information with the Internal Revenue Service.
Corporate Income Tax
The state corporate income tax rate could play a huge role in determining where to incorporate. Six states do not levy a corporate income tax:
- South Dakota
However, Ohio, Texas, and Washington choose to tax gross company revenues. Nevada taxes gross receipts, but only if the company’s revenues are greater than $4 million. In addition, Nevada, Wyoming, and South Dakota not only refuse to collect corporate income tax, but they also do not collect state personal income tax.
Factoring corporate income taxes into the decision of where to incorporate is only relevant for those companies who conduct business in one state. For example, if a company incorporates in Wyoming but is located and operated in California, the company must file as a foreign entity in California. This means that the business will be subject to California state income taxes. So, if a company is located and conducts business in a state other than the one in which they’re founded, they will end up paying filing fees and taxes either way.
Another factor to consider when determining where to incorporate are privacy issues. States can vary considerably in their reporting and disclosure requirements. For example, states like Nevada only require officers, directors, and registered agents to be disclosed. Other states could require the corporation or LLC to disclose all shareholders or members. It could prove to be troublesome for some corporations if a state requires them to disclose stockholders as a matter of public record.
New business owners may also want to pay attention to the organization requirements of the state in which they’re electing to incorporate. For example, Nevada, Wyoming, and Delaware are all attractive options for corporations because they allow single-person corporations. Some others define how many members must serve on the board of directors. For smaller businesses, this could be troublesome, as they would then be forced into finding directors to serve in this capacity. Allowing single-person corporations can not only protect owners for liabilities and debts, but it can also enable owners to issue stock.
Businesses, especially those who are in search of capital, may want to consider what investors are looking for when determining where to incorporate. Many investors tend to be familiar with corporate law in Delaware. Some investors will not only request, but require companies to conduct business in Delaware before providing capital. Those businesses in search of venture capital financing may find it in their best interest to talk with their investors beforehand to see if they have a preference about where to incorporate.
Registered Agent Services
If an entrepreneur would like to register their corporation in a state in which they are not present, they must consider whether they will be able to find a trustworthy registered agent. The registered agent must be an individual or company authorized to conduct business in the state. Of course, entrepreneurs could hire third-party registered agent companies, such as our team at DoMyLLC, to serve as a registered agent in a state in which the entrepreneur is unfamiliar.