What Is the Best State to Form a Corporation?

Michael David April 15, 2010 0


We have all seen the advertisements touting incorporation services in a particular state. These advertisements appear in media ranging from airline magazines to internet ads. Indeed, in the past thirty years, states have risen to challenge Delaware’s prominence as America’s most popular corporate haven. Specifically, Nevada and Wyoming have been most aggressive in enticing entrepreneurs and businesspersons to incorporate under their state flag. As we will see, Nevada and Wyoming have succeeded. (For our 50-state incorporation report card, read Best State for Incorporation).

Are you ready to form your Corporation or LLC today?

First, Is Out-of-State Incorporation Right for You? (the Foreign Qualification Dilemma)

The first question a business person should ask is, “should I incorporate in a state other than where my business is headquartered?” As a general rule, if your business is small and operates and sells only in one state and you have no need for the special benefits afforded to say, Nevada or Wyoming corporations, you should incorporate in your state of operation. Here’s why: all 50 states generally require out of state (foreign) corporations to register and pay fees in the corporation’s state of operation. Registration in a foreign state is often called qualification.

For example, a Nevada corporation that transacts business in California must register in California as a foreign corporation and pay a filing fee and annual minimum franchise tax. Thus, the benefits of incorporating out of state are limited by such foreign registration rules because you will probably need to register in your home state anyway. If, however, your business operates in several states or if you expect to expand nationally, then you should consider incorporation in the state that is most favorable for you.

Our Top Pick As the Best State for Incorporation: Wyoming

Our first place pick for the best state for incorporation is Wyoming. Generally (of course, your specific needs may require a specific solution) Wyoming offers the greatest mix of benefits to the businessperson: privacy, convenience, low cost, ease of use, customer service, and low taxes. Wyoming excels in all these areas.

With respect to privacy advantages, Wyoming has no information sharing agreement with the IRS, and imposes minimal reporting and disclosure obligations upon owners and managers. Wyoming’s corporate taxation is among the most favorable in the nation. In fact, the non-profit group The Tax Foundation voted Wyoming to have “the most business-friendly tax system of any state.” Finally, fees, expenses, and periodic reporting burdens are very low. For these reasons, Wyoming is the most advantageous state (again, speaking generally) for incorporation, and edges out Nevada due to lower initial and periodic fees.

For a more detailed article on Wyoming incorporation read Wyoming Incorporation Advantages – Wyoming Corporation Advantages – Personal Privacy and Asset Protection.

Our Second Pick As the Best State for Incorporation: Nevada

A close second to Wyoming as the most advantageous state for incorporation is Nevada. Nevada remains a popular choice among entrepreneurs, and its advantages are well-known. Like Wyoming, Nevada has no information sharing agreement with the IRS, and imposes minimal reporting and disclosure obligations upon owners and managers. Nevada imposes no corporation income tax–so there are no tax forms and no tax agency. As such, there is no information available to share with the IRS.

Nevada also offers ease of use, good internet and online services like searching and filing, and excellent customer service.

However, Nevada has nudged its fees upward in recent years (perhaps to profit from its obvious popularity as a corporate destination). So, Nevada incorporation carries a slightly higher ongoing cost than Wyoming. Another disadvantage, which may not matter to some, is that Nevada corporations may sometimes carry a faint stigma; one may blame advertisers for this blemish, they routinely tout Nevada as an asset protection haven.

The Runner Ups: Delaware, Montana, Florida, and New Mexico

Delaware deserves mention. Historically, Delaware was Corporate King. It remains home to the largest number of Fortune 500 companies of any state. It offers privacy, great customer service, and a pro-management and pro-ease corporation statute. What knocked Delaware off the throne, however, was greed. It’s annual franchise tax, based on an incomprehensible mathematical jumble of authorized shares, outstanding shares, and assets (with zero credit for liabilities), tops out at a wallet-busting $165,000 a year. Granted, such franchise taxes are only imposed upon larger companies, but a small business can still easily find itself with a $3,000 to $5,000 annual tax bill.

Montana, Florida, and New Mexico all offer a very attractive blend of low initial cost, low filing burdens, low annual cost, and reasonable privacy protection. These states warrant consideration.

For our 50-state incorporation report card, read Best State for Incorporation.

Are you ready to form your Corporation or LLC today?



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