People who are in the process of setting up a new small business entity have several key choices to make, including the state in which the business will be registered. While new businesses are often registered in the owner’s state of residence, business owners also have the option to incorporate their businesses in another state. The right choice will depend on numerous factors, but some business owners may benefit financially and operationally from choosing a different state as their base. If you are seeking guidance on which state to register your business or on another small business matter, consider contacting an experienced business lawyer at Polymath Legal PC, by calling (833) 931-6418 to learn more about forming a small business entity.
When Should You Register a Business in Your Home State?
Whether organizing a limited liability company (LLC), limited partnership, or corporation, new business owners should weigh the pros and cons of registering their business in their home state. This choice often makes the most sense for small businesses with few or no investors. Incorporating in your home state is also often more favorable for businesses that will conduct most of their operations within the owner’s state of residence.
The definitions vary between states, but most states will consider a business as “conducting business” in their state if the entity has a physical presence—a store or office—and employees in that state. Businesses that conduct all business-related activities within their home state must meet the regulatory requirements of that state. Businesses with operations in other states will have to file a foreign qualification—sometimes called an authorization to transact business—in each state where they have a presence.
Tax Implications of Incorporating in Different States
Corporate tax environments vary drastically from state to state. Some states do not assess state corporate income taxes on businesses that do not conduct business within the state’s borders. When considering which state to choose for a small business entity, business owners should carefully research the different tax rules in the states they are considering. The knowledgeable business lawyers at Polymath Legal PC can help owners understand the tax implications of incorporating a small business entity in various states.
States that are commonly chosen as bases for small business entities due to tax benefits include:
- Delaware—The First State is a common choice because it does not require payment of state corporate income taxes from businesses registered there unless the business conducts operations within the state. Delaware’s corporate tax system is an attractive option for companies with significant authorized stock or complex capitalization structures. However, Delaware does assess a franchise tax based on the number of company shares and their value
- Nevada—Many small business entities are based in Nevada because the state does not charge any corporate or state-level personal income tax. Unlike Delaware, there is also no franchise tax in Nevada. However, Nevada businesses with employees are required to pay quarterly payroll taxes calculated as a percentage of taxable wages.
Costs of Forming a Small Business Entity in Another State
Corporate income taxes are not the only financial factor to consider when choosing a state for a small business entity. Business owners who are currently exploring their options should also consider the following possible financial implications:
- Startup costs—Registering a business in another state involves statewide fees, which vary between states. Business owners should understand these registration costs before choosing their state of formation.
- Annual fees—Most states require registered businesses to pay annual fees to renew and maintain their registrations in the state.
- Sales taxes—Some businesses may benefit from registering in a state with no sales tax on the goods or services they provide or with a lower sales tax than that of their home state.
- Statewide financial incentives—Certain states are more business-friendly than others and offer financial incentives, such as tax breaks, for certain types of businesses. For example, environmentally friendly businesses should consider registering in a state that offers financial incentives for green small business entities.
The Process of Incorporating a Small Business Entity in Another State
Business owners who choose to incorporate in another state will need to register to conduct business within that state. A business that is registered in its state of origin is known as a “domestic” business, while those that are incorporated in other states are classified as “foreign” businesses.
Small business entities must register as foreign entities if they want to legally conduct business operations in another state. For example, an LLC formed in California that wishes to operate in Nevada will be considered a foreign business in Nevada and will require additional registration. Businesses must also register as foreign entities if they want to expand their business into other states. If you are interested in considering incorporation of your small business in another state, contact the experienced business attorneys at Polymath Legal PC to explore all your legal options.
Requirements for Foreign Entity Registration
Each state considers unique factors when determining whether a business qualifies for registration as a foreign entity. In most cases, the business must establish that it is “doing business” in the state. Some common examples of criteria that meet this requirement include:
- Having one or more employees within the state
- Having a physical presence in the state
- Taking orders in the state
- Having or planning to open a bank account in the state
- Owning or planning to purchase property or real estate in the state
- Having revenue generated within the state
- Filing taxes in the state
Learn More from a Dedicated Business Attorney Today
If you are in the process of establishing a small business like an LLC or partnership, you are likely dealing with a wide range of legal and financial matters. Shrewd financial planning in the early stages can have a major impact on the long-term success of a business. Choosing the right state for your business is a key decision during these planning stages and should not be taken lightly. The team of dedicated business attorneys at Polymath Legal PC are uniquely equipped to help you lay a foundation for success for your small business entity, so consider calling (833) 931-6418 for more information on registering a new business in another state.