What is the Best State to Incorporate your Entity?
Choosing the best state to incorporate your business in is one of the most important decisions you’ll make when you are preparing to enter the US market.
The United States is made up of 50 states and each has its own rules and regulations around how business is conducted within their state. This can range from the level of corporate income tax you will pay to how legal matters are dealt with in a court of law.
Within this blog, we’ll discuss the key considerations for choosing the best state to incorporate your entity, and offer suggestions to what states may meet the criteria for you.
Key considerations when choosing the best state to incorporate your entity
As you’re not required to incorporate your business in the same state that you operate in, there is a great degree of flexibility to where you can register. However, this means that you can be overwhelmed by information when deciding the best state to set up.
You may be inclined to incorporate in a different state due to better business incentives, so it is important you consider the following variables when deciding the best state to incorporate your entity in.
Continue reading to learn more about :
Formation fees
Whether your business forms a Corporation or LLC, you must pay a one-time filing fee to your chosen state’s secretary of state office. As this is a one-time fee it should not sway your decision too much, but it is still worth noting when deciding the best state to incorporate your entity in.
For the most up to date formation fees and requirements visit your chosen state's Secretary of State website.
States with low formation fees for a Limited Liability Company (LLC) ($50 or under)
Arkansas, Arizona, Colorado, Hawaii, Iowa, Kentucky, Michigan, Mississippi, Missouri, Montana and New Mexico
States with high formation fees for an LLC (Ranging from $300-$500)
Massachusetts, Tennessee, and Texas.
Annual filing fees
Depending on the state you incorporate your entity in, you must file a report and fee yearly or biennially.
The annual filing fees and the report informs your chosen state of any changes that happen within your business, including the main address and stocks.
If the thought of submitting this yearly report and fees deters you, Arizona, Missouri, New Mexico, Ohio, or South Carolina may be for you as they do not require regular filings which will save your business money and time.
Some states yearly filing fees can be expensive, so it is important to take these yearly fees into consideration when choosing which state to incorporate your business in. For example, the District of Columbia's annual filing fee is $300. Find out a full breakdown of the initial and annual fees for LLCs across the 50 states.
Tax rates
When choosing which state to incorporate your business in, it is likely that taxes will play a huge role in your decision-making process. You should consider a state's income taxes, corporation taxes, and franchise taxes.
Best states to incorporate for tax purposes
Wyoming and South Dakota are popular for incorporating as neither of these states charge a corporate income tax. Nevada, Ohio, Texas, and Washington also do not have a corporate income tax but do have a gross receipts tax.
Lowering corporation tax is one of the ways departments are trying to attract more businesses to incorporate in their state. For example, North Carolina has a low corporate tax rate of 2.5%, with this set to drop to 0% in 2023.
We previously discussed why Tennessee’s moderately low corporate tax rate of 6.5% was a major decision as to why companies are choosing to relocate to the Volunteer State. Similarly, a favourable tax climate was one of the reasons many businesses decided to make the move to Austin, Texas.
States with high corporate taxes
In contrast, you may choose to avoid certain states for incorporation due to their higher corporate tax rates.
The US states with the highest levels of corporate income tax include:
New Jersey (11.5%)
Minnesota (9.8%)
Illinois (9.5%)
Alaska (9.4%)
Pennsylvania (8.99%)
California (8.84%)
Corporate laws
When you choose to incorporate in a state it means that the state's law will govern the internal affairs of your company, for example, if an owner versus manager dispute was to arise. Therefore, it is important to research the state’s reputation for business law.
For example, Delaware has a reputation for having some of the best business laws for businesses. It is the most common state for a foreign business to incorporate in, with over 66% of the Fortune 500 companies choosing Delaware as their legal home.
Delaware has a history of corporation-friendly laws, including tax laws that allow corporations to be taxed at a low rate in Delaware and avoid higher taxes in their home states. A Delaware corporation is often preferred by investors due to the predictable interpretation of laws and favourable tax laws.
Want more information to decide whether Delaware is the best state to incorporate your business? Check out our breakdown of the pros and cons of incorporating in Delaware.
Privacy laws
Privacy laws are one critical aspect that can significantly impact the decision-making process when choosing the best state to incorporate your business. Privacy laws govern the protection and disclosure of information related to businesses, shareholders, and directors.
Certain states in the United States have advantageous privacy laws that offer greater protection and confidentiality for corporations. States that are often considered favourable for incorporation due to their privacy laws include:
Delaware
Incorporating in Delaware allows corporations to keep shareholder names off public filings and does not require directors' names to be listed in the formation documents. Delaware offers the Court of Chancery, a specialized business court known for its expertise in corporate matters, ensuring a fair and efficient dispute resolution process.
Wyoming
Wyoming allows companies to appoint nominee officers and directors, preserving the privacy of real owners. Wyoming also does not require the disclosure of shareholder information, which grants an extra layer of privacy protection.
Nevada
Nevada enables corporations to issue bearer shares, which do not require the names of the shareholders to be publicly disclosed. The state also maintains strict confidentiality laws regarding corporate records and shareholder information.
New Mexico
New Mexico offers the option of using nominee officers and directors, allowing business owners to maintain anonymity. New Mexico does not require the public disclosure of shareholder information, which helps protect corporate privacy.
Alaska
Alaska allows corporations to appoint nominees or professional officers and directors. Shareholder information does not need to be disclosed publicly, ensuring greater privacy for business owners.
It is crucial to consult with legal and tax professionals to fully understand the privacy laws and other considerations associated with incorporating a business in any jurisdiction.
The Best State to Incorporate in Depends on your Business Objectives
Overall, the decision on where to incorporate your corporation largely depends on your business objectives. While one attribute such as favourable privacy laws can offer significant advantages, it is important to evaluate all aspects, such as tax obligations, regulatory requirements, and access to resources, to make an informed decision. We advise checking out different states’ Secretary of State websites to figure out which requirements are best for you.
If you are currently operating from the UK, we recommend following these key steps to setting up your business in the US.
Choosing the best state to incorporate in is an important step, but by no means the only one. If you are looking to employ staff in the United State, you cansimplify this process and use a specialised Employer of Record USA service, like PGC, to facilitate the processing of payroll and provision of insurance and benefits to your US employees.
Disclaimer: The information provided here does not, and is not intended to, constitute legal or accountancy advice. Instead, the information and content available are for general informational purposes only