As you decide whether to form a corporation or LLC, also consider options for the state in which you will incorporate. The cost, taxation and corporate laws vary from state to state, making some states advantageous for certain small business owners.
Choosing your home or another state
Incorporating your business in the state where your company is physically located is called home state incorporation. No matter if your business is a C corporation, S corporation, limited liability company (LLC), limited liability partnership (LLP), limited partnership (LP) or nonprofit corporation, you must pay filing fees to the state when incorporation documents are filed, and will be subject to ongoing requirements and fees imposed by that state. Some business owners mistakenly think they will save money by incorporating in a state with low fees, even if their company is neither located nor conducts business in that state. Keep in mind that companies incorporated in one state but doing business in another state(s) must register to transact business (foreign qualify) in those state(s).
Weighing advantages: state statutes & taxation requirements
When deciding your company's state of incorporation, research those states' corporate or LLC statutes to determine if any may be best for you.
- Consider how corporations and LLCs are taxed by each state and the taxation requirements imposed on foreign-qualified businesses, if foreign qualification is necessary for you. Does a state impose an income tax on corporations and LLCs? Does it have a minimum tax or a franchise tax?
- The added costs of fulfilling the ongoing and taxation requirements imposed by the state of incorporation and state(s) foreign qualification often outweigh the perceived benefits of incorporating outside the home state.
- Try calculating your company's projected revenue for its first few years of existence and then evaluate states in terms of the true amount of taxes required, to see if there may be an advantage.
The appeal of Delaware & Nevada
Delaware and Nevada are two states in which some small business owners opt to incorporate a business. They offer unique advantages for certain types of businesses.
- Delaware’s business law is one of the most flexible in the country.
- The Court of Chancery focuses solely on business law and uses judges instead of juries.
- For corporations, there is no state corporate income tax for companies that are formed in Delaware but do not transact business there (but there is a franchise tax).
- Taxation requirements are often favorable to companies with complex capitalization structures and/or a large number of authorized shares of stock.
- There is no personal income tax for non-residents.
- Shareholders, directors and officers of a corporation or members or managers of an LLC don’t need to be residents of Delaware.
- Stock shares owned by persons outside Delaware are not subject to Delaware taxes.
Some potential advantages to forming a corporation or LLC in Nevada include:
- Nevada has no state corporate income tax and imposes no fees on corporate shares.
- There is no personal income tax or any franchise tax for corporations or LLCs (but initial and annual statement fees and business license fees apply).
- Shareholders, directors and officers of a corporation or members or managers of an LLC don’t need to be residents of Nevada.
Remember, if you form in Delaware or Nevada but you transact business in another state, it is likely that you will have to foreign qualify your business in that state. For questions about the best state of incorporation for your business, or to determine if you need to foreign qualify in another state, consider talking to an attorney.