Where is the Best State to Incorporate?


The other day I posted about the changes in Nevada that kick in on July 1st. If you haven’t yet read that post, click here, and make sure you know what’s coming, especially if you have a Nevada-incorporated company. If you’re looking for the best incorporation state, read on.

The changes in Nevada bring up an obvious question: is Nevada still one of the top states in which to incorporate? Is there a better alternative? And just what IS the best state to incorporate in, anyhow?

Is Nevada Still a Top Incorporation Destination?

That’s a really good question. And I think the answer is going to be “maybe” – but it is very much going to depend on you, and your business circumstances.

For example, many tax clients use Nevada as a home for their Corporations, particularly when they want to park income out of a high-tax state. Remember, Corporations pay their own tax, at their own rate, and aren’t required to distribute profits. As the Corporation’s owner, you pay tax only on income you receive from that Corporation, either by way of salary or dividends. Depending on what you need for your lifestyle, there could be plenty of income left over that can sit. With Nevada not having a state income tax, it has been an attractive state to use for this type of structure.

But with the changes in Nevada law, this may not be the best strategy. Corporation renewals have just doubled. On July 1st you’ll pay $325 more to renew your Nevada corporation than you did on June 30th. Plus, the new Commerce Tax means you’ll have to report your income to the state once a year. If that income is more than $4 million, you’ll have a tax to pay on the excess. You can offset that increase in fees by using an LLC that makes a Corporation election, but you will have to deal with the new Commerce Tax return (first filings will be due in August 2016).

LLCs, on the other hand, are still a good bet in Nevada. LLC fees went up by just $25. Nevada law is very strong when it comes to the corporate veil and keeping it intact. Plus, Nevada is one of the Series LLC states, and depending on the type of business (and location) where you’re operating, it can be an excellent choice of entity. You, too, will have to deal with the Commerce Tax return, but the only income that counts for taxes is that sourced in Nevada. If you have a Nevada LLC, for example, that you use to hold real estate in Miami, Atlanta and Memphis, you won’t have a Nevada tax liability, even if your LLC was making over $4m a year.

What are the Alternatives?

The “Big 3 (or 4)” for incorporating have traditionally been Nevada, Wyoming, Delaware and lately South Dakota. Each of these states has positives and negatives as far as incorporating. Wyoming is cheap, has no state income tax, good strong laws, and privacy, but they are also slow, don’t have expedited filing options, and require original ink on their paperwork. That’s tough in a fast-paced business world, where you might need something filed yesterday.

Nevada is fast. Almost every filing can be done online with results in minutes. That’s very attractive when you’re in a hurry. Nevada has very strong asset protection law, creditor protection and liability protection for its owners, but it has these pesky new fees and taxes that make it less attractive in some circumstances than before.

Delaware has perhaps the strongest corporate veil protection laws, and a level of prestige that’s still hard to beat. But it doesn’t have an online filing option, meaning extra costs to get your paperwork processed and returned via courier. A $90 filing fee is great if you have 2-3 weeks to wait, but if you want that filing done overnight, prepare to shell out another $100, plus return courier fees, which can easily top another $75. Plus, the state’s fees for making changes to existing companies are high, and their maintenance fees have increased as well.

South Dakota has no income tax (personal or corporate), and relatively low incorporation and maintenance fees. The state is becoming a popular incorporation destination for these reasons. In fact, the Tax Foundation ranks South Dakota as #2 on its State Business Tax Climate, behind only Wyoming.

Is there a “Best” Incorporation State?

Personally, I don’t think so. There is no one-size-fits-all answer that will work for everyone. Often, when I talk to clients, we look at taxes, costs, maintenance fees, reporting obligations, and come to the conclusion that the very best state for them is their home state.

Can We Help?

If you’ve got questions about what you’ve read, or anything else relating to incorporations, we can help! We’ve been in business for more than 10 years, and can provide resident agent service in all 50 states. If you are looking for a quality, full-service and affordable resident agent or mailing service, why not contact us for a free quote? You can reach us at info@smartbusinessincorporation.com.

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