As a business owner, you don't have to incorporate your LLC or company in your resident state. In fact, many entrepreneurs research the best states to start a business in advance of a company launch to ensure they've picked the right location.
Selecting which state to incorporate in is a critical decision when launching; while it is possible to re-incorporate in the future or get a business license in a second state, it's far easier to make the right call at the outset. Many different factors go into determining what's the right fit for your company, including taxes, fees, liability, funding and more. Before launching, sit down with other founders to find the answer to "which state is the best to start a business?" for you. Here are nine things to consider.
The very first step of incorporating once you have chosen your structure is to register with the state and pay filing fees. Your formation fee is a one-time charge paid to the Secretary of State.
For an LLC, check out the filing fees by state to get an idea of what this will cost upfront. This fee runs between $50–$500. Arkansas and Colorado are among the lowest fees at $50.
Some states levy no corporate income tax at all, including Nevada, Ohio, Texas, Washington, Wyoming and South Dakota. On the other end of the spectrum, several states have very high corporate tax rates, so be aware of this before incorporating in Illinois, Alaska, Iowa, Minnesota, New Jersey and Pennsylvania.
An initial review of filing fees might reveal that it's "cheap" to incorporate in one state, but don't forget the long view. If you are incorporated in one state but are physically located and doing business in a separate one, you'll still need to register in your home state to pay any taxes or filing fees as well.
State Income Taxes
While taxes at the corporation level are key for the company as a whole, personal earnings are also important. Depending on the state income tax rate, income you receive from your company as a solopreneur or employee could be significantly impacted. California, Hawaii and New Jersey have the highest personal income tax rates.
Litigation Environment, Court System and Investment Landscape
No business owner wants to end up in court, but plenty of them choose to incorporate in a state that's perceived to have a business-friendly court system. In fact, over 66 percent of Fortune 500 companies have been incorporated in Delaware, where business cases are determined by judges and not juries.
The length of a typical business litigation case is much shorter in Delaware, too. Many business owners prefer their case’s fate be determined by a judge who is experienced in business matters, rather than a jury. Likewise, investors prefer certain states where they feel their interests are protected well. If your business is exposed to a lot of risk or possible lawsuits, the filing and annual report fees in Delaware can be worth the investment.
Business Growth Rates
The efforts a state puts into supporting new business owners and the rate of new companies setting up shop there are good indicators of future potential. Montana is a popular location because of consumer spending rates and the number of new entrepreneurs thriving there.
The majority of states require a simple report or annual fee to maintain your corporation or LLC. While Wyoming costs $52, filing in Nevada costs $325 per year. Some states, like Missouri and New Mexico, require neither an annual report nor a filing fee.
Even the method for charging franchise tax looks different from one state to another. California charges a flat $800 to a business registered to transact in the state or be incorporated there. That is due even if the company isn't making any money or reports a loss. Other states, however, charge based on number of shares and par value.
Brick and Mortar vs. Hybrid or Entirely Online
If you own a brick-and-mortar-only business, the extra costs of registering and filing an annual report in multiple states may not be worth it. If you're operating online, however, or have a few locations in different states, you might incorporate in one and get licensed to operate in the others, meaning you'll be responsible for any annual reports or fees.
Physical Proximity to Support Systems
Whether you need access to a particular business hub, an industry of people that work primarily in one region or easy shipping locations, look for states with existing structures and companies that can help you grow.
Ready to decide where to start your company? Check out our state guides for state-specific information.
Laura Briggs is an author, TEDx speaker and freelance writer. Her first book won the "Best in Business" prize at the 2019 Author Elite Awards.