How to Incorporate a Business: Choosing a State for Incorporation

prosWant to know how to incorporate a business? It all begins with choosing a state for incorporation. While you’re weighing your options and deciding if you should form an LLC or corporation, be aware that the state in which you incorporate has many consequences in terms of taxation, cost and laws.

Should You Choose Your State or Another State?

If you decide to incorporate in the state where your business operates and is located, this is known as home state incorporation. Whether you choose to form an LLC, limited liability partnership (LLP), limited partnership (LP) or a nonprofit, you will pay filing fees to the state when you file your incorporation documents and that state will have ongoing requirements and annual fees.

Many small business owners think they can save money by simply incorporating in the state with low fees, even if they do not operate in that state. If you incorporate in Delaware, for example, but you do business in Utah and Idaho, you must register to transact business in those two states.

Understand State Taxation and Statutes

To decide your state of incorporation, it pays to do your research about each state’s LLC and corporation statutes to decide which is best for you. Think about how an LLC or corporation is taxed by the state and their tax requirements if you are foreign-qualified, and if you need to foreign-qualify in the state. Some states impose income tax on LLCs and corporations, whereas Delaware and Nevada have no income tax imposed on corporations or LLCs. That means you may save money when you form a Delaware LLC versus forming an LLC in your home state.

You’ll also need to consider any minimum tax or franchise taxes imposed. Think about the additional costs of ongoing requirements the state imposes, as well as requirements by states of foreign qualification.

Why Choose Delaware or Nevada?

As you research how to incorporate a business, you’ll probably come across a lot of information about the benefits of incorporating or forming an LLC in Delaware or Nevada. That’s because these two states are considered business-friendly with a number of unique advantages.

If you choose to incorporate in Delaware, you’ll enjoy Delaware’s flexible business laws and the Court of Chancery, which has merit-based judges who focus only on business law. Corporations do not face any state corporate income tax, only a franchise tax, and the state’s taxation requirements favor large companies. You won’t pay personal income tax if you don’t live in the state and members or managers of LLCs are not required to be residents of the state.

If you choose Nevada, the state has no fees on corporate shares or state corporate income tax. You won’t pay personal income tax or a franchise tax for an LLC or corporation, but you will face initial and annual statement fees. Your members and managers do not need to be residents of the state.

Choosing your state of incorporation is a very important decision that shouldn’t be taken lightly. There are major ramifications of your decision and incorporating in Delaware or Nevada may not be in your best interest. In many cases, the best option is to incorporate or form an LLC in your home state to avoid foreign qualification and paying fees in two states. Consult with your attorney and a corporate services company like USA Corporate Services before you start this process.

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