| In the process of forming your small business, you will | | | | franchise tax? |
| make both simple and complex decisions. But one | | | | It is often beneficial to calculate your company's |
| important decision is often made by default because | | | | projected revenue for its first years of existence and |
| the business owner doesn't realize there is a choice to | | | | then evaluate the states in terms of the amount of |
| be made. | | | | taxes your company would be required to pay. |
| The decision is where to incorporate your | | | | State of Incorporation Factor #3: How Friendly is the |
| business-what state will form the regulatory hearth | | | | State to New Business Owners |
| and home for your new entity. | | | | Some states have a well-deserved reputation for |
| Believe it or not, you are free to form your corporation | | | | being friendly to new businesses, while others have |
| in any of the 50 states or the District of Columbia. And | | | | reputations-equally well-deserved-for being difficult. |
| since each of these 51 locations has its own tax | | | | Delaware and Wyoming top the list of friendlies, while |
| structure, start-up costs and regulations, defaulting to | | | | New York and California bring up the rear. Let's |
| your own home state might not be in the best interest | | | | compare them so you can see how different states |
| of your business or your bottom line. | | | | react to new businesses. |
| For small businesses, three major factors should | | | | Delaware and Wyoming |
| impact your choice for the state of your business | | | | The cost to form a corporation or LLC in Delaware is |
| incorporation formation. | | | | among the lowest in the country. Its corporate law is |
| 1. The cost of formation, especially if your company will | | | | among the most flexible, and there is no state |
| need to qualify to transact business in the home state. | | | | corporate income tax for corporations and LLCs |
| 2. Each state's taxation and corporate law | | | | formed in-state (though there is a franchise tax). But |
| environment. | | | | before you start learning all the words to "Our |
| 3. Does the state of your choice openly welcome new | | | | Delaware," know that many of these advantages are |
| business | | | | irrelevant to smaller businesses. There are also several |
| State of Incorporation Factor #1: Formation costs and | | | | indications that Delaware's days as a haven for |
| foreign qualification | | | | business may be numbered, including a recent |
| Forming a corporation or LLC in the state where the | | | | Kauffman Foundation study placing the state dead last |
| business is physically located is called home state | | | | in entrepreneurial activity. |
| formation. Corporations and LLCs must pay filing fees | | | | Wyoming is quickly becoming the go-to state for |
| to the state at the time of incorporation and are then | | | | businesses of all sizes and types, with regulations that |
| subject to ongoing state requirements and fees. | | | | are extremely pro-privacy and taxation that is |
| If your company is formed in another state but | | | | extremely low. That's why an increasing number of |
| transacts business primarily in the home state, it may | | | | analysts are now handing Wyoming the crown for |
| need to "foreign qualify" in the home state. To foreign | | | | most hassle-free and low-expense corporation state in |
| qualify, the proper paperwork-called a certificate of | | | | the U.S. |
| authority- must be completed and additional state filing | | | | New York and California |
| fees paid. | | | | Both the processes and costs of incorporating and |
| To learn whether your company may need to foreign | | | | running a business in New York are famously awful. |
| qualify to transact business in another state, consult an | | | | The state's tax system is burdensome and complex, |
| attorney. | | | | including a maintenance fee, a franchise tax, a license |
| State of Incorporation Factor #2: How Corporations | | | | fee, an organization tax, and an income tax. In addition |
| and LLC's Are Taxed | | | | to taxes, the ongoing requirements for filings and |
| Business owners should also understand how | | | | reporting are legendary. |
| corporations and LLCs are taxed by each state under | | | | California's anti-business reputation is based largely on |
| consideration, as well as the taxation requirements | | | | a brutal system of taxation, including an $800 minimum |
| imposed by the home state on foreign-qualified | | | | income tax for both C corporations and S |
| corporations and LLCs. | | | | corporations-the highest in the nation. |
| For example, find out... | | | | When it comes to friendliness to new incorporations, |
| 1. If your chosen state impose an income tax on | | | | the state-by-state landscape is ever-changing. |
| corporations and LLCs? | | | | To decide what is best for your new company, seek |
| 2. Does the state impose a minimum tax or a | | | | the advice of an attorney or accountant. |