Should I Incorporate In A State With No Income Tax?

This is easily one of the most commonly asked questions we get. Each state has different rules and regulations when it comes to income tax. Most have both, some don’t collect personal income tax, and a few don’t college corporate income tax. And to a new business owner forming a corporation, forming in a state without a corporate income tax might sound awesome! After all, who likes paying taxes?

Unfortunately, things aren’t that cut and dry, and there are good reasons why so many business owners opt to stay in the state that they do business.

You can form a corporation in another state

First, you are allowed to form your corporation in another state. When you form that corporation, you are creating a separate, legal entity for your business. And that legal entity can “live” wherever it wants to – even in a different state than the one you do business in. That means the corporation is subject to that state’s laws, and its income tax. So if you form in, say, Nevada, the corporation will be subject to its laws and tax rate. But, like we said, there is a reason why people choose not to incorporate solely in tax-free states.

Out-of-state formation is costly and complicated
You first have to file your standard articles of incorporation with the secretary of state or department of corporations in whichever state you’d like to form in. You’ll also need a registered agent in that state to receive important paperwork and services of process. After the corporation is formed, you then have to register to do business in the state you actually want to do business in. That means getting a certificate of good standing from the formation state, and then filing it along with a foreign qualification application. All of these filings cost money, and you have to stay on top of all of the annual registration requirements for both states, rather than just one.

Your home state may still want its cut
Finally, and perhaps worse of all, doing all of that may not get you off the hook for paying in your home state. California, for example, has laws that enforce its taxes and regulations if the majority of a business’s transactions take place within the state. This isn’t the case for every state, but at the very least most states collect a franchise tax from every entity operation in its borders. For Multi-State businesses, this isn’t that big of a deal – it’s just the cost of inter-state commerce. But if your a small business just looking to avoid paying corporate income tax, a state like Delaware or Nevada may not be the haven you’re hoping for.

Brick-and-mortar stores, and other locally based businesses, are then normally better off staying in their own state, despite the corporate income tax rate. There are already other local fees and regulations they’ll have to deal with, and it’s usually just easier, and in some cases even cheaper, to form in the state you primarily do business in. However, it is a good idea to review your options with an accountant or other professional, and then base your decision on their recommendations.

Ready to form a corporation? Have questions on getting started? Give us a call at 1 (877) 692-6772!