Launching a new business presents an exciting opportunity that includes making important decisions with far-reaching consequences. Not the least of these is deciding where to incorporate your business. Some states are widely considered more business friendly than others, and some companies prefer to go the traditional route of incorporating in their home state. There’s a lot to consider.
Business Basics
There are some fundamental financial considerations that every new company planning on incorporating should be aware of:
- Formation fees are a one-time filing fee paid to the state you incorporate in. This is a relatively low one-time expense that should have little financial effect on your business over time.
- Most states impose annual fees and report filings, which amount to a yearly set fee accompanied by a one-page report. These fees range from a few dollars to several hundred dollars, and – again – shouldn’t present a significant financial burden when amortized over your corporate fiscal-year.
- In place of or in addition to annual fees, many states levy franchise taxes, a tax imposed for the privilege of incorporating or conducting business in that state. The franchise tax calculation method varies considerably from state to state – some states, like California, charge a minimum fee even if your business is in the red and others, like Delaware, charge fees based on shares and par value, which can help minimize this expense for small corporations.
- Because Delaware has a separate business court – adjudicated by a judge with business experience instead of a jury – that is dedicated to business dispute resolution, many Fortune 500 companies choose to incorporate there. This is rarely advantageous for small businesses, however.
- Delaware also offers large corporations the advantage of improved investment opportunities. Many business investors are especially amenable to financing venture capital in Delaware, and they often make incorporation in Delaware a requirement for investing.
- State corporate income taxes will undoubtedly affect your company’s bottom line and should be taken into careful consideration. These taxes, however, are levied by the state that houses your business. There are a few states that offer the significant advantage of having neither corporate nor personal income tax: Nevada, Wyoming, and South Dakota. Unless you are considering moving your business to one of these states, however, you won’t be able to reap this financial benefit.
The Best Choice for Your Business
Choosing which state to incorporate in is not a one-size-fits-all proposition. Those states with the fewest expenses are not always the best choice. Some states have uniquely advantageous tax platforms, but these only apply to businesses that operate within those states. If your business is small with few shareholders, it is generally advisable to streamline by incorporating at home. For larger corporations, it’s worth investigating further when it comes to deciding where to incorporate.
Contact an Experienced Small Business Attorney in California Today
If you are ready to incorporate, we are here to help. Claire Kalia is a skilled business attorney with expertise in helping small businesses set themselves up for success. At Kalia Law, P.C., we’ve helped many Californian businesses get off to the right start, so please call us at 650-701-7617 or contact our office for more information today.
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