The challenges and rewards of going on a risky but exciting start-up journey are many. And for the past three years, the United States has seen the formation of millions of new businesses across the country. One of the biggest challenges facing new startups is choosing which state to register their business in; this is because picking the state of incorporation is often misunderstood and frequently creates confusion.
A potential startup business owner actually has a choice of either registering in the state the business will operate in, or in a completely different state altogether. This makes shopping around for more attractive options like states that offer lower corporate income tax rates much easier – if new ventures can cut the tax liabilities, then they’re off to a good start.
But one should be cautious of incorporating in a ‘less tax’ state; while states like Delaware and Wyoming offer the lowest corporate tax rates in the country and many new businesses have been formed there, in comparison to a mid-range tax state like Texas, where starting an LLC may not be the cheapest, but certainly offers the most favorable conditions for business startups.
Wyoming
Administrative costs in Wyoming are relatively lower than in Delaware and Texas. The licensing and filing fees that some states require to be paid to complete the incorporation process, are not necessary in Wyoming. The state only charges an annual filing fee to ensure that the corporation is legitimate for another year. This fee is currently only $60.
There are also a number of personal asset protection laws in place in Wyoming, there to protect business owners and the officers of the company from losing any assets – from houses and cars to being held personally liable for any legal action taken against the company.
Data protection laws are also taken very seriously; by law, only registered agents maintain all private business data, so it stays out of any public databases. Wyoming even allows non-US citizens to start an LLC there, with some country exceptions.
Wyoming ranks third in the US for fiscal health and has a budget surplus, which is why Wyoming is able to give tax relief to startups looking to incorporate there.
Delaware
Delaware has a high number of registered corporations, including most Fortune 500 companies, taking advantage of the state’s business-friendly laws and profit-making tax codes. The state boasts a premium justice system; Delaware has a separate Court of Chancery dealing swiftly with business disputes because the appointed judges have business backgrounds.
Delaware’s Asset Protection Trust protects assets from creditors in case of litigation. The state has no income tax, nor does it charge corporate tax even for incorporations registered in the state, but not actually doing business in Delaware.
There is however, an annual franchise tax, starting at $75, but can reach up to as much $180,000 depending on the par value of common stock. The state has a high annual fee for corporations ($225) and LLCs ($300) and also requires the submission of an annual report, as well as needing a registered agent in Delaware to represent the company by receiving legal documents on its behalf.
Texas
Startups choose Texas as their incorporation state because state law allows company owners and members relative freedom from liability for any debt incurred by the business, including legal debt. Texas also does not require any annual registration fees, nor an annual report to be filed at the end of every year.
In Texas, an LLC has a choice of tax: If there is only one owner of an LLC, then the process of ‘pass-through’ is invoked, and allows the owner of the business to just pay the federal self-employment tax. Otherwise, a corporate tax rate is paid based on profits and income paid out to shareholders. There are also no limits to the number of members you can have in an LLC in Texas.
The main reason people choose to incorporate in Texas is not so much based on the numbers, even though the no state income tax is great. The fact that real estate is affordable, electricity prices are low and the business environment is favorable, are all factors that startups consider a plus when choosing where to do business.
Startups Should Choose the State with the Most Suitability
Startups choose different states to incorporate for different reasons. Finding the best combination that suits each unique business is a good startup strategy; chasing the most lenient tax laws may not always be ideal.
