By creating a separate entity, incorporating a business can reduce your personal liability. There are three different types of incorporation: S-corporation, C-corporation, or LLC. Each of these options comes with its own benefits and disadvantages. After you have decided which structure is best for your organization, the next step is to choose where to incorporate.
If you’re considering incorporating within your state, or if you’re looking into other options, there are several factors that will determine whether or not you have an easy or bumpy journey. The formation fees, tax rates, and legal structure are all factors that determine the best state for incorporation. We will go over each of these categories, paying particular attention to the states that rank highest in each.
The Key Takeaways
- When deciding where to incorporate, you should consider costs such as formation and annual filing fee, corporate tax rates and the legal environment.
- Most states charge between $40 and $50 for the best formation fees.
- The states that charge the lowest annual filing fees are those who do not require filing yearly or don’t charge any fee.
- We chose states with low corporate taxes that charge low gross revenue taxes, don’t tax corporations or have corporate tax rates below 3%.
The best states for formation fees
- The best states to form a company: Arkansas, Colorado, Iowa Kentucky, Michigan Mississippi Missouri New Mexico and Tennesse
- The worst states in terms of formation fees are Connecticut, Texas and Massachusetts
Let’s begin with the first cost associated with incorporation: the formation fee. The state charges you a one-time fee when you register your business. You can check the latest filing fees on each state’s website. Remember that this is in addition to the fees that your lawyer or facilitator might charge for preparing and filing your paperwork.
The formation fee will have a significant impact on your decision. The formation fee can be very important if you are counting every penny at startup. It’s a one-time charge, so its impact on your bottom-line is minimal. In most cases, filing fees are more important than formation fees.
For corporations and LLCs, fees can vary from $40 to $455. States with LLC or corporate fees as low as $40 or $50 are the states that have been chosen to be the ones with the lowest fees. Connecticut charges $250 for corporations. Texas charges $300 for both corporations and LLCs. Massachusetts charges $275 for corporations.
The Best States to File Annual Filing Fees
- Alabama, Ohio, South Carolina and Texas are the best states to file annual filing fees.
- States with the highest annual filing fees are: Nevada, District of Columbia and Maryland
The fees for incorporation are only the beginning. You will be required to submit a one-page annual report, along with a filing charge that will vary by state. In some states it is required every two-years and therefore called a Biennial Report. This report will keep the state updated on any changes to your business. It includes the main address, the authorized signatories and the number stock issued by the company.
At the moment, only South Carolina, Alabama, Ohio and Texas do not require filings or fees on a regular basis. You can save money and time by not having to file this annually. The District of Columbia, Maryland, and Nevada charge the highest fees, $300 each for LLCs and corporations.
Best States for corporate taxes
- The best states for corporate tax are Nevada, North Carolina and Texas
- The worst states for corporate tax are Alaska, Illinois Iowa Minnesota Pennsylvania and New Jersey
The tax burden is a major factor when deciding where to incorporate. Taxes are a major factor in determining the best state to incorporate in. You should consider three different types of taxes: state income taxes, corporate taxes, and franchisor taxes. S-corporations are affected by state income taxes because owners of the S-corporation pay personal income tax based on their share of ownership. Corporation taxes may affect LLCs. Franchise taxes are levied for the privilege to operate and exist in a state which recognizes this type of tax.
Nevada, Wyoming and South Dakota are all ranked high in the best tax laws category because they have no state income tax or corporate tax. This only applies to businesses operating within these states. If you incorporate in one state, but operate your business elsewhere, you are still subject to the tax laws of that state. The District of Columbia, on the other hand has some of highest corporate and personal income taxes in the nation. New Jersey, California and Minnesota aren’t far behind.
The primary difference between Franchise tax, and Income tax, is that the franchise tax does not depend on how much money is earned by a business. It may be based on gross receipts or net worth depending on the state. In general, there is a minimum tax due regardless of what factors are used by your state. You could lose money in your business, but still be liable for a large franchise tax. There are still fifteen states with franchise tax laws, including New York and Georgia.
States with the best legal system
- Best legal systems:Delaware Maine and Connecticut
- Worst Legal System:Illinois Louisiana and California
Legal environment can have an impact on both business owners and individuals. Delaware, for instance, is known as having some of the best business law in the nation. Delaware is the only state that has a Court of Chancery to hear corporate cases instead of a jury of ordinary citizens. You won’t have to wait for your case on a general docket. Instead, you will deal with a court that only handles business matters. You will be able to speak with judges who have a thorough understanding of business law.
Delaware is one of the best states in which to incorporate. It has been dubbed the “most corporate-friendly” state in the nation. Delaware Division of Corporations is home to more than 66 percent of Fortune 500 companies in the United States. 6
According to a report by the Chamber of Commerce Institute for Legal Reform, Delaware, Maine and Connecticut have the best legal climates, while Illinois Louisiana and California have the worst.
Incorporation Basics
State-level legislation governs incorporation laws. This means that every state has its own set of laws governing the fees, requirements and tax obligations for businesses that are incorporated in that state. The state in which you decide to incorporate will affect your experience.
You do not have to incorporate a business where you live or work. The state in which you choose to incorporate is entirely up to you. It is best to register your business in the state where it does most of its business. For example, if you have a brick and mortar store that only conducts face-to-face transactions, or an landscaping company that only has a limited service area in a single state. In some cases it may be worthwhile to register your business in another state. This is especially true for businesses that operate online or in multiple states.
By incorporating your business, you create a separate entity from yourself or your partners. Although there may be costs involved with incorporating out of state, your business might benefit from it if other factors are in your favor.
What State Should I Incorporate in?
All of these factors can have a long-term impact on your business, so it’s important to consider them at the very least when deciding where to incorporate. The best state for incorporation depends on your priorities. The legal structure will be the most important factor if you’re courting investors or evaluating your legal options. If you are forming an S corporation, personal income tax will be a major factor in your annual expenses. Do you worry about the costs of yearly filing obligations in a particular state? Your priority will be the annual reports and fees.
Do your research on the state that you’re considering for your business, no matter your point of view. You can check the website of your state’s Secretary of State to see what rights and responsibilities you have under current laws. Find answers to frequently-asked questions, as well as contact information for more detailed answers. As always, you should consult a lawyer who can provide you with professional advice and help you make the best decisions for your company.
FAQs (Frequently Asked Questions)
What is the least expensive state to incorporate in?
Kentucky has the lowest fees for forming an LLC: $40. The following states charge the least fees for corporations: Arkansas, Colorado Iowa, Kentucky Michigan, Mississippi Missouri New Mexico and Tennesse. 1
What is the best state for incorporation?
Ohio has some of the lowest fees and taxes. For $99. LLC’s and corporations as well as nonprofit corporations are able to file their formation papers. The state does not require annual reports, and its tax rate on corporations is only 0.26%. The state’s legal climate is, however, in the bottom half. Delaware offers the best business environment.
