Where Is the Best State to Incorporate Your Business?
What is the best state in which to incorporate your business?
Many questions invariably arise throughout the process of incorporating or forming an LLC for your business. By far, one of the most common questions is…where? And more often than not, the question is framed as, “Should I incorporate in Delaware or Nevada?”
These two states are hot choices for incorporation, and for good reason. Many larger corporations choose Delaware because it offers some of the most developed, flexible and pro-business statutes in the country. And Nevada is increasingly becoming a popular choice for businesses due to its low filing fees, as well as the lack of state corporate income, franchise and personal income taxes.
However, as a general rule of thumb, if your corporation or LLC will have fewer than five shareholders or members (a condition which applies to the bulk of small businesses), it’s best to incorporate or form an LLC in the state where your business has a physical presence. This means the state where your business is physically located, where any property owned is located, where your employees reside and where the shareholders reside.
In other words, unless your business has a physical office in Delaware or Nevada, it’s much easier and less expensive in the long run to incorporate or form an LLC in your home state.
Here’s one example that highlights the situation. Suppose Susan owns a soap-making business in Maryland and is considering incorporating in Delaware. However, what Susan doesn’t realize is that Maryland has rather strong rules pertaining to bank accounts. As an “out of state” business, she would need to get permission in order to open a business bank account in Maryland (even though she lives right down the road from the bank). And opening a bank account in Delaware won’t be so easy, either, without any kind of physical address in the state.
That’s just one particular (albeit very common) logistical challenge. There are countless other potential hurdles, not to mention added fees.
For example, when a business incorporates “Out of State” (for instance, in Delaware), there may be additional filings and fees in both the state of incorporation as well as the state where the entrepreneur lives and runs the business. These can include:
For the state where a business incorporates:
- Appointing a Registered Agent in that state
- Paying filing fees in that state
- Filing annual reports in that state
And then, for the state of residence (where the business is physically located):
- Appointing a Registered Agent in this state
- Paying filing fees in this state
- Filing annual reports in this state
- Qualifying as a Foreign Corporation in this state
- Paying taxes in this state
I can’t overemphasize that last point, as it is a common misconception among many small business owners that I talk to. When you’re just starting out, the tax burden can seem overwhelming. It’s only natural to be concerned about your taxes, and certainly those tax laws in Nevada are incredibly appealing.
However, just because you incorporate your business in Nevada does not mean those are the only state tax laws that apply to your business. While Nevada may not charge state income taxes for your corporation, the state where your business is physically located will come after you for those taxes sooner or later. Adding insult to injury, your tax liability may actually increase because you’re viewed as a foreign entity operating in the state.
Pretty soon, any benefits from incorporating in Delaware or Nevada are diluted when you add in all the extra fees and paperwork of operating out of state. Don’t fall prey to the hype over these business-friendly states. The benefits are really limited to larger businesses (ones with more than five shareholders).
As a small business owner, you’re already contending with enough paperwork and fees as it is. Don’t add more to your workload by trying to operate out of state. In this case, the simplest route of incorporating in your home state turns out to be best.
About the Author
Nellie Akalp is CEO of CorpNet, her second incorporation filing service based on her strong passion to assist small business owners and entrepreneurs in starting their business. Free guides, advice and videos on small business legal topics are available at her Small Biz Corner. 
Founder of Small Biz Survival
Blue Fountain Media
It was definitely easiest for me to incorporate in Utah. They let you do most everything online and until I get bigger this will be just fine.
Nellie
Great article as Delaware and Nevada (for which I currently live) tout the advantages of filing here however they never seem to mention the disadvantages, especially for a small business. On the surface it seems like a great idea as filing fees are low, the tax structure is incredibly inviting until you delve into this and realize all that is involved with the paperwork for Nevada, the taxes as well as the local paperwork for the state in which you live.
It may cost more in the beginning to file in your own state but in the long run, adding in the time and the taxes, it is much more economical and just plain smart to file where you live.
@Robert – Congrats and I am happy to hear the process was easy for you and you did not run into any glitches; please feel free to reach out with any questions or if I can be of any assistance to you in any way and Good luck with your new company!
@Suzanne – Thank you so much for reading my post and you are on the money!!!! Reach with any questions at any time and let me know if I can assist in any way!
I organized my LLC in my home state of Indiana, and it was a snap. I could do it all online, and the costs were minimal. And just like Nellie said, I would advise that everyone check out what their state has to offer for small businesses before automatically going out of state.
Thank you for the article. We are an informal partnership right now, but we are starting to see sales and investments increase. So I am sure we could use some advice pretty soon ! Thanks again, b/c I had not thought about the hidden difficulties in incorporating in a different state.
Nellie,
Thanks for explaining the popularity of companies wanting to incorporate in Nevada, and Delaware.
I figured it was about the tax benefits, but you went even further into the reasons that some companies do it.
Of course, you can help those companies do just that, right?
The Franchise King®
@Henry – Thank you for reading my post and congrats on your new Indiana entity. Feel free to reach out with any questions or if I can help you out with your new business in any way!
@Todd – It’s my pleasure. Let me know if I can help out in any way when you’re ready to take the next step in legalizing your partnership; generally partnerships consider placing their partnership into an LLC when ready to take the next step; I would love to assist you in forming the LLC for you when and if you decided to go that route.
@Joel – HI Joel! How are you my friend?…You are absolutely correct, I can absolutely help
xo
Nellie
[...] the two best states to form an LLC are Nevada or Delaware because of their pro corporation laws [5]. This, however, is generally more expensive and time consuming than simply registering in the state [...]
[...] Where Is the Best State to Incorporate Your Business? [...]
Nellie Akalp: I see from your Twitter profile that @CorpNetNellie is located in Westlake Village, CA. How is it to incorporate a business in California?
@Martin: That is correct! Its super easy to incorporate a business in CA. Where are you located? And how can I help?
I see you’ve covered the paperwork and taxes component, but why did you ignore the asset protection aspect? This makes your argument for filing in your home state incomplete, yes?
[...] Where is the best place to start your business? You may have heard that, for lots reasons including taxes, there are places more friendly to businesses and that the best place to start or at least incorporate your business might be there instead of where you live. But incorporation expert Nellie Akalp warns against decisions based on just a few factors that can ignore the bigger picture. When deciding where to start your next venture, Nellie suggests that be it ever so humble, there’s no place like home. Small Business Trends [...]
@Pete – thanks for reading and commenting on my post! I have covered asset protection in a few other posts for Small Biz trends, so wanted to add some fresh content. You are very right though that asset protection is very important aspect of filing a Corporation or LLC. Thanks again for your comment and if I can ever assist in any way, do touch base! – Nellie
[...] *Original content written by Nellie Akalp for Small Business Trends [...]
But what about privacy? I do not like the idea of someone looking up my name in a State’s Division of Corporations and finding out my business. If I run a business from my home, then everyone in the world will know this. Delaware and Nevada, I believe, are private. Are there any others?
@Sher – I understand your concern however, if you file in a state other than the state where the business is located; you will be forced to foreign qualify your business in the state where you are transacting business and hence now subject to two states laws and regs…Here’s a quick video about the topic: http://www.youtube.com/corpnet#p/u/3/0SSZQV9Buog
Hi Nelly,
I am a non US resident from Sri Lanka. Recently I have come up with a requirement to set up a company in a foreign soil, due to the fact that my buyers in sri lanka want to invoice them directly in USD. So I thought of forming a LLC in Delaware after some research. But however there are still some questions unanswered.
01 Can I use the registered agent address as business address to open the bank accounts ?
02 Can I provide communication address as my local address in Sri Lanka for the bank account / my cousin’s address in Maryland (where he is a US resident) ?
03 Can I use my cousin’s address in Maryland for my company letterheads and invoices after forming the company ?
Please note that my company will not do business inside US , and 100% international business.
Hi Padmanath –
Here are answers to your questions above:
01 Can I use the registered agent address as business address to open the bank accounts ? No, the bank will not allow you to use the RA address as the biz address for the corp/LLC
02 Can I provide communication address as my local address in Sri Lanka for the bank account / my cousin’s address in Maryland (where he is a US resident) ? I do not see this as a problemJ
03 Can I use my cousin’s address in Maryland for my company letterheads and invoices after forming the company ? As long as it is ok with your cousin
- Nellie
Dear Nelly,
01 What would be your suggestion for the business address ? to use an additional address in Delaware state provided by the registered agent?/ To use my cousin’s Maryland Address ?/ my home address in Sri Lanka ?
02 Since I will be a non US resident, will I have to file the annual report for the Delaware LLC/ just pay the flat annual tax due by June ?
03 I have a partnership in Sri Lanka for my business, but going to open a single member LLC in US for the same operation. Do i have to reveal the local partnership details to form the Delaware LLC / can I directly open the fresh LLC and still qualify for the flat annual tax rate due by June ?
Thanks a lot for your previous answers
Hi Padmanath – Unfortunately I cannot give you legal advice so cannot answer your questions in detail. However, I can tell you that generally all all DE LLC’s are required to file annual reports in an annual basis for their LLC.
Hope that helps!
-Nellie
Wonderful Article Nellie. Is it better to incorporate in Wyoming than Nevada or Delaware? Thanks!
Thanks Jason for your kinds works and for reading my article Incorporating in Delaware. Forming a Nevada LLC, or Incorporating in Wyoming may make sense for large corporations or some small business owners concerned about “hiding assets.” For most small business owners, however, incorporating in your Home State usually makes the most sense…Please look at this link for more info and view my video: http://www.corpnet.com/incorporate/where-to-incorporate/ and then reach out to me if you are still unclear. – Nellie
Nellie,
Good article and some valuable information. My question is similar however, circumstances are different. I am transitioning from Georgia where I have my primary residence. Unfortunately, the economy is not favorable for a sell of our home so we are leasing it out. I am in New Mexico working on Govt Contract but want to become my own LLC, possibly to California. Where should I incorporate in this scenario if I need to get started (while still employed). Thanks… keep up the good work?
Hi Jeff – Where will you be residing and where will your principal place of business be located? Please provide me with the answers to my questions and I can provide you with some general guidelines as to what the state recommends… Thanks! – Nellie
Hi Nellie,
Currently, I live in Illinois and will be starting an Internet Marketing Company. I will be working from a virtual office in Chicago.
Right now, I am trying to figure if I should incorporate in Delaware on Nevada (offer the best protection?). As you know Illinois is not a pro busines state. Also, I will be moving within five years. These are some of the reasons why I am incorporating in Delaware and Nevada
Given the information above, do you have any suggestions or guidelines that I should follow.
Thanks,
Chuck
Hi Chuck –
Thank you for reading my article! As you may be aware, I cannot provide you with legal advice and providing you with a rec on which state to set up your company within would be considered legal advice.
That being said, I can offer some guidelines and options for you to consider in coming up with your decision. Both DE and NV are considered favorites in setting up a company; DE will have the greatest anonymity and few filing requirement and reneweal requirements. Also, please note, that if you do ultimately choose to proceed with DE, you may have to foreign qualify the company ion the state of IL if you decide to set up the bank account in IL…let me know if I can assist any further and possible help you in setting up the company or you.
Thanks!
Nellie
I already have a couple of corporations in my home state (NC). However, the business that I want to start can’t be done in my state. Peer -to-Peer lending is not legal in NC. I want to purchase loans from one of the companies that do peer-to-peer lending. I think that the only way to get involved is to open a corporation in one of the states where it is legal. Delaware is such a state. Every operational transaction can be done online. I’m still thinking about how to do the banking. Tell me some of the pitfalls that you see in my thinking. Maybe I missed something.