Don't miss this key business formation criteria when starting or expanding your company.
Don’t miss this key business formation criteria when starting or expanding your company.

When you started or expanding your business, what criteria did you use for selecting a location? Did you opt for a “business friendly” state? Because each state offers different taxes, fees, credits and incentives, it can be hard to know how to choose the best fit for your company.

One important idea to keep in mind is that selecting a state of incorporation for your company doesn’t only come down to taxes, fees, credits and incentives. It’s also important to think about where your business will operate and have nexus. Although “business friendly” states certainly sound appealing, they aren’t always the best choice for entrepreneurs – especially small business owners.

A good principle to keep in mind is that if your business has five or fewer shareholders it may be best to form a corporation or LLC in your home state – where you live and will be conducting business.

With that in mind, here are 6 key business formation criteria to keep in mind:

1. Initial fees. Some states require one-time formation fees for new corporations or LLCs. In some states, like Arkansas, Colorado, Oklahoma and Mississippi, this fee is as low as $50. For others, like Texas and Connecticut, it’s as high as $310-$455. Fortunately, this initial fee shouldn’t have a long-term impact on your company.

2. Annual fees and reports. Most states have both LLCs and corporations file a one-page report along with an annual fee each year. This cost can vary as well, from hundreds of dollars in Nevada, California and Delaware, to as little as $9 in New York. Ohio and Alabama have the distinction of not requiring these regular reports and fees.

3. Additional franchise taxes. As Entrepreneur explains, “A franchise tax is basically levied by the state on corporations and other business entities for the privilege of being incorporated or registered to transact business in the state.” The way these taxes are determined changes between each state. Some levy an annual minimum (such as California’s $800 minimum) or base it on the number of shares and par value (e.g. Delaware). Nevada and Wyoming don’t have this tax at all, which makes them more appealing to larger companies in this regard.

4. Litigation. Would you guess that more than half (64%) of Fortune 500 companies are incorporated in the state of Delaware? A big reason for this is that the state has a court with the sole purpose of settling business cases with judges as opposed to juries. There are a few benefits to this: faster resolution and the disagreement being solved by a judge that has experience in business disputes rather than a jury of peers. Although this is a benefit for large companies, a lot of small businesses may never need to worry about litigation, so this is a benefit not all companies need to consider.

5. Investors. Some investors have preferences when it comes to the location of the business. In fact, it’s not uncommon for them to ask a company to select Delaware because of the state’s corporate laws.

6. Corporate income taxes. Some states have much higher income taxes than others, and six don’t require any corporate income tax at all! Be aware that, while Ohio, Texas and Washington don’t have corporate income tax, they do tax gross company revenues, whereas the other three corporate income tax-free states (Nevada, Wyoming and South Dakota) don’t have state personal income taxes at all. While this is a fantastic benefit for companies located in these states, it doesn’t carry through to businesses with nexus in another state. So, for example, if your business is incorporated in Nevada but still operates in California, you would still need to pay California state income taxes.

At Miles Consulting Group, we know that it can be difficult to figure out the best state for your business’ formation; there are a lot of fees and taxes to weigh against varying criteria. The good news is we’re happy to help! Whether you want to know more about initial and annual fees, state taxes, or available credits and incentives, or if you have other questions about multi-state tax law and business formation, be sure to contact us for advice specific to your company’s situation.

Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects, including the new California Competes Tax Credit and the California Manufacturers’ Partial Sales Tax Exemption. To learn more, contact us today at www.MilesConsultingGroup.com.

Photo Credit: Sue Clark