Isn’t it a good idea to know as much as possible about state formation before starting the process? Of course, it is. How can you just start with a process when you don’t know much about the loopholes of US states for business registration? Once you understand all the loopholes, make a clear consideration about these and choose the best state to form a corporation of your choice.
Once you decide whether to form a C-Corp, S-Corp, or LLC, the next step is to decide upon the basis of your formation state. The formation state refers to the state in which you file your documents and the state whose corporation will govern your business or start-up. A formation state tells you everything about your chosen state like its tax condition, filing requirements, and considerations.
Considerations For Choosing The Best State To Form A C-Corp
You can call these the considerations or the factors when choosing the best state to incorporate. The factors include state formation cost, post-formation fees, compliance provisions, governing statutes, and state taxation laws. The costs and taxation laws vary from state to state. Some of the states have become more advantageous for small-business owners. You need to put the same brain power for choosing the best state according to your business demand as you require for choosing the business structure.
Here are some factors to consider when deciding on which state to incorporate!
State Formation Fees For C-Corp
The first factor everyone might consider is the state formation fees. Everyone wants the best in the minimum budget so the fees are the most considerable factor. In some US states, the formation fees for C-Corps can go from $100 to several hundred dollars. During the formation of C-Corp, there are many other charges including business registration fees and additional costs. Again, these all vary from state to state. Therefore, you must consider the ongoing cost of operating a business before it becomes unannounced and expensive for you.
Business Tax Filing Fees For State Formation
The US tax filing system is a detailed plan for all your tax queries and is comprehensive too. We compose it deliberately for all C-Corps businessmen and entrepreneurs who are planning to take an initiative in the US. It’s almost impossible for you to make a wise decision without considering this factor when some states differ greatly from each other in this regard. Some states submit annual reports depending upon the business entities and confirm the company’s information through valid paperwork. This business fee doesn’t only include the fees of paperwork but also for tax registration renewals, licenses, and important documents. This fee can range from $50 to several hundred dollars depending upon the state selection.
The factor can be simply referred to as the business connection to the state. There is not a composed definition of it as the definition varies according to the state selection. Your state formation is highly linked to what kind of business you’re trying to do in that state. Does your business have a physical presence in the state? Does your business involve an economic activity through the state with or without the physical presence? These all are the connections of your business to the state so consider the nexus in general. For example, an economic nexus holds the sales transaction of a business that could go from $200 to $100,000 within the state annually. So, whatever you choose, choose it wisely.
As a business owner, this is your prime responsibility to research the regulations in any state about nexus as the rules change constantly. If you do not cope with the nexus rules according to the state’s demand, you may find penalties and other charges. You could jeopardize the whole business formation process simply.
State Corporate Taxes For C-Corps
The states work differently from each other when it comes to imposing corporate or income taxes on businesses. Some businesses have no personal income tax and some do not levy a corporate income tax on businesses. Some multi-state entities do not pay income tax in one state but do so if doing business in any other state.
Some states that do not impose corporate or personal income tax are Ohio, Alaska, Florida, Washington, Wyoming, Nevada, Texas, South Dakota, and Tennessee.
State Legal System For C-Corps
A business-friendly legal system will be your choice for starting a C-Corp. Some legal systems are more advantageous to businesses in some states than in others. It counts as a significant consideration as restrictive statutes and excess compliance requirements can create a lot of headaches for the owners of C-Corps. On the other hand, a friendly climate for businesses makes it easy for businessmen to attract investors for venture capitalists.
Some examples of business-friendly states are Delaware, Wyoming, and Nevada. These states bring flexible business setups for board structures or corporate offices. Moreover, there are highly favorable tax laws that do not only attract C-Corp foreigners but S-Corp and LLC owners too.
Read our article on the differences among these!
The court system is completely streamlined, fair, and partial in these states. Some of the states can also declare you and your investors to remain anonymous as the information is not required for the business documents.
Privacy For State Formation
Privacy is another variable that differentiates states based on the degree of public access to the business owners’s formation. Some states make your business documentation public based on their policy but some states don’t. This is purely your choice for which state you want to opt for your business. For example, Delaware makes business reports and documents online for the public. Nevada, on the other hand, is not bound to share any of your business information with the IRS.
Franchise Tax By States
A franchise tax is a fee imposed by states for business entities to be registered to conduct business in the jurisdiction. Some states allow business owners to file an annual franchise tax report and some income taxes. States calculate franchise taxes according to their ways and these vary from state to state. For example, Delaware calculates tax based on the number of shares and par value. California does it based on annual income. If it’s minimum, you can choose the state for the formation of your business along with all other considerable factors.
Home State Vs. Out of State
A company must pay taxes and comply with all the legal requirements if it’s conducting business in a state. You can establish a business in the state where you’re currently living and start paying taxes as this is the most advantageous for you. However, if you’re doing an online business while sitting outside of the premises of the US, you can make a calculated decision that is also well-researched. However, you can also qualify for foreign qualification if you’re sitting in one state but want to establish your business in another state. The states don’t care if you travel a lot to run a location-independent business. You always need to pick a state that you find as the matter of greatest connection for establishing the business first.
‘Doing Business’ In The State
There is a different definition of ‘doing business’ in every state. The term refers to where you are running and operating the business from. It doesn’t matter if you’re not present in any of the US states, but if you have customers here and the whole business operations, you’re doing business. This business such as C-Corp needs to be recognized by the state according to the legal compliances.
There are other criteria for ‘doing business’ such as:
- The company’s physical presence in the state
- The company’s meeting with customers or clients in the state
- The company’s employees working in the state
- The company’s sales threshold
The company doesn’t qualify for ‘doing business’ when:
- If it’s settling a lawsuit in the state
- If it has a bank account in the state
- The company’s sales through independent contractors in the state
- The company’s secure debts in the state
Concludingly, a company must be registered first if it meets the criteria of ‘doing business’ or having the nexus. It must comply with the state’s fee, reporting, filing, and tax requirements.
Penalties For Not Filing
If businesses are required to do so for foreign qualification and they fail to do so, they run the risk of incurring penalties. Their C-Corp will be illegal if they conduct business without any official state authorization. The possible penalty is in the form of fines and interest for the time the company was doing business without any authorization. It could also be declared as ineligible to sue other parties in the state. You need to consult an expert before making such a silly mistake.
Moving A C-Corp To Another State
If you’re already running a business and decide to relocate it to a new state, domestication is completely the answer. It is recommended when a business charter moves to a new state and ends its operations in the old state. Again it varies from state to state with their own rules and processes. The process of domestication entails:
- Applying in the new state
- Dissolve the company in the old state where it was initially registered
- Complete foreign qualification once the business is domesticated to the new state
- Complete the documentation required in the new state
- Complete the articles of domestication
- Complete the articles of dissolution
The state shifting is not much complex process just that of converting an LLC to a C-Corp as we have discussed earlier. The right attorney can streamline the process for you.
As you have read, there is much to consider whether you are an owner or a professional helping business clients. You always have to decide the best state for incorporating a business for the purpose.
Fast Corp USA always encourages you to use some professional help for navigating the complexities of incorporating a business into the state. We are always here to help you with the filing requirements in all 50 states. Contact email@example.com for more information and let us know how we can save you valuable time and give you peace of mind about the business formation according to the state compliances.