A Concise Guide to the 8 Best States for Incorporatingby Allison Canty Published in Entrepreneurship, Startup on
Entrepreneurs often struggle to determine the best state to incorporate their business in. Each state differs in their incentives and penalties for doing business, which makes the decision of where to set up home base an especially weighty one with consequences that apply over the lifetime of the business.
Thankfully, this decision need not be arduous to make when one considers the tax and legal climate of several of the most business-friendly states. In order to help you choose where to incorporate your business, we have explored the tax laws and various perks of 8 corporation-loving states in the U.S.
States Without Income Tax
South Dakota is ranked by taxation think tank Tax Foundation as the top state for incorporation in the country, and it isn’t hard to see why. Incorporation authorityMaxFilings.com reports that in South Dakota, incorporation provides the owners with legal protection such that personal income and assets cannot be sought to satisfy corporate debts or liabilities.
The state is also known to have to low ongoing filing burdens. This is a big help to early companies who are still firming up their business, as frequent filing requirement can distract focus early on and put a drain on inexperienced executives.
South Dakota hits a real home run when it comes to corporate income tax. In fact, the state enforces no income tax of any kind, corporate or personal. This is an obvious plus to those seeking to avoid draconian state taxes on high-earning businesses. Furthermore, investment guideTheREIBRain.com reports that South Dakota does not enforce any capital gains tax, making it the ideal environment for incorporating.
Similar to South Dakota, Wyoming’s government website reports that the state has no corporate or personal income taxes of any kind. Owners of Wyoming corporations are responsible only for federal income taxes, the rest is theirs to keep and distribute at will. Wyoming also offers tax exemptions to business purchasing raw materials for production. Business-to-consumer transactions on gasoline and groceries are exempt from state taxes as well, which is a big benefit to entrepreneurs in these areas of business.
Wyoming is another state thatTheREIBrain.com reports does not enforce capitals gains tax. Entrepreneurs in real estate investing and debt collection can thrive on deals performed in-state without worrying about the often high capital gains tax that many states require.
Nevada is often discussed as one the most popular places in the country to start a business because of their extremely low taxation and commitment to privacy. Nevada is one of the three states in America to enforce no corporate or individual income tax, nor any tax on corporate shares. The Nevada Secretary of State points out that their business court system is one if the best in the country, minimizing time and cost to those summoned.
Nevada’s legislation for issuing shares is one of the nations most permissive, allowing businesses to offer them for capital, services, personal property, or real estate — allowing a high level of creativity. State law grants directors control over the value of these stocks, and as the Secretary of State himself says, “their decision is final.”
Florida ranks high in a study performed by theTax Foundation, primarily due to the fact that it lacks lacks the state individual income tax. To help some companies avoid additional corporate income tax, Florida exempts “S” corporations from state taxation. GimmeLaw.com, an online resource of various state laws, reports that Florida’s online business infastructure is the best in the country, offering a search-able database of documents and online filings in seconds.
Software businesses especially benefit from incorporating in Florida. According to Tax Foundation research, Florida is one of several states that provides exemption from taxes for business-to-business software sales. This act allows both software users and retailers of businesses to save big on bulk purchases of expensive software licenses.
States Without Sales Tax
If you can stand the climate, Alaska offers a blend of business hospitality that is specifically set up to attract new companies to the area. First and foremost, GovSpot.com reports that the state enforces no individual income taxes, so when the business begins to pay you, all you need to concern yourself with is the corporate and federal income tax.
Perhaps just as important is the fact that the state does not have any sales tax, which allows businesses to decrease costs by buying materials and supplies in-state.
Alaskan LLCs are reported to offer some of the best protection to their owners in the country. As reported byAlaskaUSATrust.com, the revised legislation makes it impossible for a court to order the dissolution of an LLC unless it can prove that the company cannot continue to carry on its purpose in business.
The website of the government of New Hampshire reports that the state does not enforce an individual income tax on earned money. The only state income tax that business owners in the state must pay is on income from interests and dividends, assessed at a flat rate of 5%.
This unique structure is largely why New Hampshire was listed among the best states in the country in terms of individual income taxation. The lack of a sales tax helps to keep costs even lower for businesses in New Hampshire. Companies buying supplies from other companies pay substantially less without the additional sales tax added on.
New Hampshire does tax business profits at a rate of 8.5%. This rate isn’t especially low, considering several states already discussed have no such tax at all. However New Hampshire redeems itself in this aspect by enforcing no capital gains tax.
Tax Foundation lists Montana as having the sixth best business tax climate in the country. The state offers business owners an escape from sales tax, which is an excellent way for Montana to spur its own economy by encouraging business to do their materials shopping in-state. While having no state sales tax is certainly a perk, it is not the only reason why businesses should consider incorporating in Montana. The state is home to the 10th best property tax and 16th best corporate income taxes in the nation.
Businesses in Montana are eligible for a high number of tax deductions not seen in other states. These credits and deductions include job credits, research and development deductions and credits, investment credits, and deductibles for the cost of goods sold by the business. Additionally, Montana lacks a gross receipts tax (tax on the total revenues of a company), which can further decrease a company’s amount of taxable income.
The tiny State of Delaware is the legal home to more than 850,000 businesses, 50% of all publicly-traded companies in the U.S., and 63% of all Fortune 500 companies. What is it that makes Delaware so attractive to corporations? Besides not charging any sales tax, the state offers a comprehensive package of incorporation services including thorough and easily accessible legal guidance from their well-developed legal courts.
Delaware’s relaxed laws, which includes a high cap on the amount of interest lenders can charge borrowers, makes it an extremely popular state especially for banks. But there’s something good for any type of business that is considering planting its roots in Delaware – as long as it’s legal.