Where you operate your business and where you incorporate do not have to be the same. Just because you live in one state does not mean you have to form your company in that state. There are several reasons residents of one state may actually benefit from incorporating in another state, including costs, privacy and corporate environments.
So, how do you know which state is right for you? While the decision should be based on your particular priorities, here are some top picks.
Wyoming tops the list because of its low cost and the privacy it gives owners.
Every state charges filing fees to form your LLC or your corporation, ranging from $50 to more than $500. In addition to the initial filing fee, most states charge an annual report fee. These fees can reach as high as $650. When your company is just starting off or you are forming a holding company, these additional fees add up. In Wyoming, the initial filing fee is only $100, and the cost of the annual report is only $50.
Equally important for some business owners is that Wyoming does not require the disclosure of the owners' or the management's names in the initial filing or the annual reports that can become public. While certain ownership information will always be required with non-public tax filings, it is not easy to find out the names of the owners or officers of Wyoming entities.
The mysterious holding company up to no good, acting as a shell company for some nefarious villainous corporation, in a Hollywood conspiracy flick may be the first image that comes to mind when you think about private corporate formations. But there are many legitimate reasons people do not want the names of the owners easily accessible with a few clicks on the internet.
Privacy still matters. Some people just prefer to be private. Many people put properties or other single assets into entities, and you may not want the world to know you own various properties or companies just because you are a generally private person.
Some customers can take it too far. It only takes one. In today's world, customers have a lot of power to give feedback online, but it goes beyond that. Angry customers can unleash havoc by doxing owners of companies, when in the past it would be a simple bad review.
You may not want your competitors or customers to know you own a number of related or somewhat related businesses. While it is not ethical to lie about connections when asked, there may be competitive reasons you do not want the connections generally known.
Note: Private corporate filings do not allow you to avoid taxes, lawsuits or governmental actions.
If you actually operate your business in Wyoming, you can also take advantage of its low tax structure. Not only is Wyoming one of the most business-friendly states for tax purposes, but it also has a low cost of living and an educated workforce to hire from. A potential downside is the sparse and spread-out population, which may make it difficult to hire the high-skilled workers you need.
While Wyoming may be a surprise to some, according to Swyft Filings' State of Swyft report, Wyoming has seen an uptick in new business formations. Specifically, the wholesale, retail and real estate sectors saw large year-over-year growth. Retail, consulting and real estate lead the pack for volume of new businesses formed in Wyoming.
Here's a summary of why Wyoming is one of the best states for starting a business:
Low startup costs
Owner and management privacy
Low tax structure
Promising industry growth
Colorado enjoys a low barrier to forming your entity, with the state filing fee starting at $50 and only a $10 annual fee. The state of Colorado also has an attractive tax rate that is almost half that of California.
Colorado has a highly educated workforce and is known to have a high quality of life. It has attracted a young and highly skilled workforce that enjoys the outdoor activities Colorado has to offer.
According to Swyft Filings, Colorado has seen tremendous growth in insurance, entertainment and social assistance. By volume, construction was the largest type of new business in 2018, likely to accommodate the quickly growing population.
Here's a summary of why Colorado is one of the best states for starting a business:
Low startup costs
Low tax rates
Highly educated workforce
Promising industry growth
3. South Carolina
The Palmetto State is also an attractive place to form your corporation or LLC. The initial fees for South Carolina are a little higher than the others ($235 for corporations and $110 for LLCs), but there is no fee related to the ongoing periodic filing. The tax rate is just slightly higher than Colorado's, but it's still competitive with other states. Finally, South Carolina provides owners privacy.
According to Swyft Filings' data, the city of Columbia is seeing entrepreneurial growth, the largest being in the technology sector. As the home of the University of South Carolina, the city is making use of its highly educated workforce that enjoys the college-town vibe.
Here's a summary of why South Carolina is one of the best states for starting a business:
No fees for ongoing periodic filing
Competitive tax rates
Privacy for owners
Growing tech industry
Highly educated workforce
4. New Mexico
New Mexico rounds out our list, especially when it comes to LLCs. The filing fee is only $50 for an LLC, and the ongoing periodic filings do not require a fee. Owners of New Mexico LLCs are not listed on easily searchable public records, so owners can protect their privacy.
New Mexico might have been higher on the list, but if you decide to file a corporation instead of an LLC, the fees are higher ($100) and you have to list the owners on the original incorporation paperwork, landing New Mexico at No. 4 on our list.
According to the State of Swyft, New Mexico is seeing a surge in construction, retail and accommodations as it pushes to increase tourism. New Mexico also has labor and employment laws that give employers more flexibility than other states.
Here's a summary of why New Mexico is one of the best states for starting a business:
Inexpensive LLC filing
Privacy of owners
A surge in tourism-related industries
Employer flexibility due to labor and employment laws
But what about Delaware for starting a business?
Someone has probably told you that you have to form a Delaware C-corp. The First State is a popular choice for good reasons. Most people recommend that you form a Delaware C-corp because that is the type of entity that banks and venture capital firms prefer. Investors are comfortable investing in Delaware C-corps because they know the rules.
Most of America's larger publicly traded companies are Delaware C-corps. The state has a well-established history of corporate law that is friendly to companies, and its judicial system is built around efficiently resolving corporate governance disputes.
You can't go wrong choosing Delaware as your state of incorporation – especially if you plan to seek capital in the first few years. It's also a good place if you want to keep ownership information off easily available databases. The initial filing fees are reasonable as well ($89 for a corporation and $90 for an LLC with annual filings at $300).
The reason it did not make the top four is that it does cost more than it does in other states to file the annual reports every year. If your business is profitable, the $300 annual filing fee is probably not a big deal. However, when you are forming an entity to hold a house you are flipping or some other strategy that does not involve recurring profits, every dollar counts. There are other jurisdictions that provide the same protections with a slightly lower cost.
You don't have to fall for the pressure that if you want to be the next $1 billion tech unicorn, you better form a Delaware C-corp. If your business is strong enough, it will attract the necessary capital. Investors would not have turned down Facebook if it were a Wyoming LLC instead of a Delaware C-corp. The investors may make you convert to Delaware C-corp as part of the deal, but don't feel like you need to take on the extra cost, lost tax advantages, or additional administrative burden just in case you attract investors who are more familiar with Delaware C-corps.
Nevada is a surprise exclusion
Nevada is also a common choice, but its popularity is waning. The state tried to attract business formations, saying it offered the same protections as Delaware, and adopted the same law to give companies and investors more comfort. However, Nevada recently raised its annual statement fees to some of the highest in the nation to drive revenue after the last economic downturn. Nevada's statement fees are now at a level that is more than twice that of Delaware. Moreover, the names of the owners are included in the original filing documents and easily accessible online. Nevada took advantage of its incorporation leadership role but may have gotten a short-term gain in revenues at a long-term loss, with fewer people filing in the state in the future.
The easiest thing to do, from a cost and administrative perspective, is to file your company in the state where you operate. But if you want to file in another state, make sure you choose the right one for your particular needs. Do you care about costs? Privacy? Legal stability?
Before picking a state other than your home, figure out what is important to you, and then find the state that matches those needs.