Are you looking to incorporate a business and make it a legal entity but you do not know how to incorporate a business, what are the best states to incorporate a business, fee and taxes in various states then this post is for you.
In this post we have mentioned everything in detail that you need to know about incorporating a business in USA as a foreigner, non US citizen or US citizen. Incorporating a company in USA gives your business a lot of credibility and access to the US market which in itself is the world’s most amazing market.
As a foreigner or a non US citizen looking to incorporate a business in the USA, you may find it hard to figure out where to start and that’s why we have created this complete guide to incorporate a business in the USA and which are the best states to incorporate a business in USA that would show you exactly what you need to do.
Well, incorporating a business has its own advantages as it helps you to mitigate liability and risks by forming a separate business. In the USA there are three types of business incorporations: You can form an LLC, a type S-Corp and a type C corporation with each one having its own advantages and disadvantages.
If you are from outside the US then go for a Corporation or LLC – If any of the owners of the business are not US Citizens, then you can either choose to form a type C corporation or an LLC (limited liability company).
A type S corporation is not for you as that requires all shareholders to be US citizens.
There is no restriction on the number of members for a US Corporation or LLC, which country the owners are from or whether they are individuals or other companies.
After you have decided on the structure that would benefit you the most, then it’s time to find out in which state to incorporate a business.
We will help you figure out the best states to incorporate a business.
Incorporation laws are different in each state with each state having its own fee structure and taxes which make it tricky for the beginners to find the best states for incorporating a business.
One thing that each one of us has in mind is the low cost and low taxes since we are just beginning and incorporation is the first step.
But remember your experience of owning and running a business will vary from state to state.
It is not necessary to incorporate your business in the state you live in; the state you incorporate in is completely up to you.
If you would do business only in the state where you live e.g. a local business such as restaurant, café, clothing store or a landscaping service then you may want to register in that state and it is the best option for you if you know that you are going to live in the same state in future as well.
In some cases if the economic status, social welfare status and the market looks favorable to you for doing business in another state then it is always a good idea to incorporate in a different state.
Sometimes it might be worth to register your business in another state, especially for online businesses or those that do business in more than one state.
Whether you are considering incorporating in your own state where you live or looking at other options, there are a number of factors that you must consider before deciding on to incorporate a business in any state.
The best states to incorporate a business are determined by the state formation fees, annual filing fees, taxes, and legal structure.
Best states to incorporate a business based on the above mentioned factors:
The first factor is the Formation Fees – The Best States that have the lowest Formation Fees are Arkansas, Colorado, Hawaii, Iowa, and Mississippi while the worst States that have that have the highest fees are Connecticut $455, Texas $310, and Massachusetts $295.
This fee is a onetime state filing fee that goes towards the formation of a corporation or LLC to the state’s secretary of state office.
Filing fees are different for each state and you can find the current filing fee on the website of sectary of state.
Remember that this is just a filing fee that goes to the secretary of state and there could be additional fees that you agent or attorney may charge for their efforts and time.
The formation fees factor may not be a crucial factor to you in deciding the state to incorporate your business if you are not on a very tight budget as far as your start-up costs are concerned.
A $50 to $100 filing fee will not hit your bottom line as much especially considering the long-term benefits of incorporating a business in a state of your choice.
Another factor that could be a deciding factor is the Annual Filing Fees – Almost every state charges an annual fee to keep your LLC or Corporation active.
You are required to submit the annual filing fee each year to the secretary of state.
The Best States for Annual Filing Fees are Alabama and Ohio while the worst states for Annual Filing Fees are Nevada $325, District of Columbia $300, and Maryland has a minimum of $300 as well.
Along with the annual filing fees each year you will also be required to file a one-page report which will vary depending on the state.
This report is required to keep the state informed about any changes in your business such as any changes in the business address, authorized signatories, and the number of stocks issued by the business.
Tip: At present, Alabama and Ohio are the only states that don’t require annual filings that can help you save a lot in terms of money and time from not having this yearly obligation.
After the formation fee and the annual filing fee then next and the most important deciding factor for the best states to incorporate a business is the Taxes.
Let’s have a look at the Corporate Taxes – The Best States for Corporate Taxes are Nevada, Wyoming, and South Dakota while the Worst for Corporate Taxes are District of Columbia, New Jersey, California, Minnesota, and Rhode Island.
Nevada, Ohio, South Dakota, Texas, Washington and Wyoming do not levy any corporate income tax.
However, Ohio, Texas and Washington levy taxes on the gross revenues of the company.
Tip: Nevada, Wyoming and South Dakota have no state personal income tax which is a huge benefit to the entrepreneurs.
Lower taxes can definitely help you save a lot and invest back in your new business while higher taxes can have a significant impact on your bottom line and therefore you must choose a state to incorporate wisely.
There are three types of taxes that are levied according to the structure of the organization such as the state income taxes that are levied on type S-corporation while Corporation taxes are levied on type C-corporation and LLCs might be affected by either type of taxes.
Franchise taxes are for the privilege of operating and existing within a state that recognizes these types of taxes.
As mentioned above Nevada, Wyoming, and South Dakota have best tax laws because they do not have state income tax or corporate taxes.
However, you must remember that this applied to the businesses that operate within those states. While you might incorporate there, if you operate your business in another state you will still be subject to that state’s tax laws.
The District of Columbia, New Jersey, California, Minnesota, and Rhode Island have some of the highest personal and corporate income taxes in the country that you must take into consideration before incorporating a business in these states.
Another form of Tax is the Franchise tax – It is different from income tax as franchise tax is not based on money earned by the business.
Depending on the state, it might be based on a business’ net worth, gross receipts, or even margins.
There is also a minimum tax owed regardless of the factors your state uses in calculations.
So you may lose money in your business but you would still owe a hefty franchise tax.
Legal System is another factor that you may want to consider before incorporating a business – The states with the best Legal System for Corporations are Delaware, Nevada, and Wyoming while the Worst states are Mississippi and New Mexico.
As we have mentioned above the state where you choose to incorporate a business can have the best or the worst overall experience of owning and running a business due its corporate laws structure and the legal system.
Each state has its own corporate laws and legal system.
Let’s take example of Delaware which is known for its best business laws in the USA.
The state has a dedicated court which hears corporate case laws instead of a jury of citizens and therefore corporate cases are handled more quickly and more efficiently which brings down the legal costs significantly as well as saves a lot of time.
Delware has set a great example for legal system for corporations and few other states such as Nevada and Wyoming are catching up with Delware when it comes to the states with the best legal system.
Once you have a clear idea in which state to incorporate a business in the USA then it’s time look at the requirements to form a company in the USA.
It’s completely up to you what type of entity you choose to form; it could be a type C corporation or an LLC.
Requirements to Form a Corporation or LLC in the USA
The requirements to incorporate a company in the USA are pretty straight forward and simple which includes:
Find a filing agent
There are hundreds of filings services and agents online that offer a complete business incorporation services in the USA.
They do the filing for you, submit all the papers to the secretary of state and return you the ‘articles of incorporation’ documents.
Some, filing agents specifically work in a particular state where you want to form an entity and some cover every state in USA.
Choose a Business Name
You have to choose a business name for your entity that you want to incorporate and the filing agent will file the application under the same name.
In case the your chosen name is not available for registration then your filing agent would inform you and as you choose a different name.
Provide a Registered Agent
A registered agent is needed for the business incorporation in USA as it is mandatory to have a registered agent.
A registered agent is a person or a company that has a physical address in the same state where you prefer to incorporate in order to sign the official and legal state documents, accept official documents on your behalf, send them to you via email or postal mail and in case there’s a lawsuit then your registered agent can forward it to you.
Typically, a registered agent fee is around $99 – $300 a year depending which filing agent you have chosen.
Most of the filing agents provide the registered agent service for a fee.
FEIN Number (optional)
Once you are done with the filing and incorporating a business then the next step would be to get a Federal Employer Identification Number (FEIN) also known as an EIN or simply Tax ID Number which is issued by the United States Internal Revenue Service (IRS).
You should also keep in mind your priorities before you decide to form a company in USA because ultimately you would be responsible for your business’s success or failure.
Forming a company in USA is pretty straightforward and everything is mentioned in detail on the websites of each secretary of state to guide you with the incorporation process.
You will also find answers to frequently asked questions and contact information for getting more in-depth answers.
Also, it is always a good idea to get professional advice from a CPA or a legal advisor before you decide to form a company in USA as they can guide you in the right direction and help you make the right decision.
The factors mentioned about such as filing fees, annual filing fees and taxes can have huge impact in the long-term success of your business and so it is important to consider them when choosing a state to incorporate a business.
If you have investors on board or considering your legal options, then incorporating a business in a state that has the best legal system in place can be the most important factor for you while deciding.
We hope you like this detailed post on how to incorporate a business in USA and what are the best states to incorporate a business.
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