How to Choose Where to Incorporate

Four Methods:Making Basic Considerations About Where to IncorporateConsidering State TaxesLooking at Filing FeesChecking for Business-Friendly Laws and Courts

Corporations have some advantages over other business structures, such as providing protection for shareholders’ personal assets and having the ability to raise capital by selling stock. However, there are also some disadvantages, such as the high tax costs that some corporations may incur.[1] When deciding where to incorporate, you might also want to consider the potential legal challenges of incorporating in a state and the impact that your business might have on a community. By thinking through your options carefully, you will have a better chance of making the best choice for your business.

Method 1
Making Basic Considerations About Where to Incorporate

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    Think about where you do most of your business. The most sensible thing to do is to register your corporation in the state where you conduct most of your business.[2] By doing this, you save yourself from having to set up a new physical location. You can continue to do business in your state and you will not have to worry about making major changes.
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    Consider the potential impact on your community. If you are thinking about setting up your business somewhere other than your home state, then you might want to consider how setting up in your home state might benefit it. Not only would you be stimulating the economy, you might also have an impact on the people in your community.
    • For example, corporations are often more attractive to employees because of their ability to offer competitive wages and health insurance.[3] Therefore, incorporating in your home state could provide jobs for many people in your community.
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    Weigh your projected revenue against the tax breaks. In some cases there may be a significant financial advantage to setting up shop in another state. To determine if this is the case for your business, calculate your projected revenue for the year and consider how much money you would save if you were to incorporate in another state versus your home state.[4]
    • For example, if you anticipate a revenue of $150,000, but your state will collect 11% of that, then you would end up paying $16,500 in taxes. Therefore, you might be tempted to incorporate in a state that would only charge 4% on your revenue because that would only cost you $6,000 in taxes.
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    Be aware that a physical presence is required. If you choose to incorporate in a different state, then you will have to establish a physical presence in that state. Otherwise, you will still be subject to the laws and taxes of your home state.[5]
    • For example, many businesses are attracted to Delaware because of the low cost of doing business there. However, unless your business has a physical location in Delaware, you cannot reap the benefits of its corporation laws and low filing fees.
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    Incorporate as a foreign corporation if necessary. You may decide at a later date that you want to incorporate somewhere else because you are doing more business there. If your business expands and you find that you are doing more business in a different state, then you can always register your business as a foreign corporation later on.
    • Keep in mind that there are fees associated with filing as a foreign corporation.[6] Make sure that you weigh the costs of these fees against the potential benefits.

Method 2
Considering State Taxes

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    Avoid states with gross receipt taxes. Also known as “turnover tax,” a gross receipt tax is sometimes implemented in place of a state income tax, so check into each state’s laws regarding these taxes before you decide to where to incorporate. While income tax considers a company's revenue and allows for deductions, a gross income tax levies fees against all business transactions. This includes business transactions such as purchases of materials and equipment.[7]
    • Currently, Nevada, Ohio, Texas, and Washington are the only states to impose a turnover tax.[8]
    • Many people find this method to be economically harmful because it adds an extra layer of taxation.
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    Look for states with low or no income tax. State income taxes are taxes that states levy on corporations based on the amount of income reported each year. Currently, forty-four states levy a corporate income tax, with the rates ranging from 4% (North Carolina) to 12% (Iowa).
    • South Dakota and Wyoming are the only states that do not levy a state income tax (nor a gross receipts tax).[9]
    • North Carolina, North Dakota, Colorado, Mississippi, South Carolina, and Utah are the states with the lowest income tax rates, falling at or below 5%.
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    Think about states with no sales taxes. Sales tax is a fee imposed on either the seller or the purchaser of an item or goods, so this is important to consider when you are thinking about where to incorporate your business. Business owners have to be concerned with obtaining registration for taxable sales, collecting appropriate taxes, and remitting and paying the appropriate taxes.[10] When states don’t have a sales tax, business owners can decrease the costs of materials and supplies.[11]
    • Alaska, Delaware, New Hampshire, Oregon, and Montana are states that do not assess a state sales tax against corporations.[12]
    • Keep in mind that if you sell your products online only, then you do not have to charge sales tax. However, if you sell online and you also have physical store, then you do have to charge sales tax.[13]
    • If you offer a service rather than a product, then you may also be able to omit sales tax from your customer transactions.[14] For example, educational services are not subject to sales tax in New York, so if you have a tutoring business, then you would not need to charge sales tax.[15] Make sure that you check your state’s rules regarding sales tax if your business offers a service.
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    Consider the cost of franchise taxes. Make sure that you look into each state’s franchise tax as well before you decide where to incorporate. A franchise tax is a tax levied on corporations and businesses by the state for the privilege of conducting business transactions within a state’s borders. Each state calculates their franchise taxes differently, possibly basing it on income, shareholders, or maybe forgoing a franchise tax altogether. Therefore, it is important to calculate how much you’ll be paying in franchise taxes to determine if incorporating in a particular state is cost-effective.[16]
    • Franchise taxes are based on where the business operates, not where it is incorporated. For example, if you run a business from your home in Texas, but incorporate in Nevada because they have no franchise tax, you won’t receive a tax break. Because you are operating in Texas, you will be subject to Texas franchise taxes.[17]
    • Many people consider moving business operations to Nevada because there are no franchise taxes in this state. If you have a brick and mortar business, then you might consider setting it up in Nevada.
    • You can compare state franchise taxes to determine how they are assessed (based on income or stock), as well as the percentage or dollar amount paid.[18]

Method 3
Looking at Filing Fees

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    Check the cost of your one-time formation fee. You may want to incorporate in a state that has a lower filing fee to help keep your costs down. Your incorporation fee is a one-time filing fee that you pay to your state’s secretary of state office. Prices range anywhere from $50 to $455. Because this fee is only assessed once, many people don’t consider it a significant factor when considering the longevity of their company.[19]
    • Arkansas, Colorado, Hawaii, Iowa, Oklahoma and Mississippi have the lowest incorporation fees at $50.
    • Connecticut has the highest formation fees at $455.
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    Consider annual filing reports. Most states require you to annually submit a one-page filing report to the secretary of state's office. Failure to submit this report in a timely manner can result in both monetary penalties (which differ by state), as well as dissolution of the corporation.[20]
    • Ohio and Alabama are the only two states that currently don’t require corporations to file any type of annual report.[21]
    • Check your state’s respective secretary of state office website for more information regarding filing procedures, due dates, penalties, and notices of pending dissolution.
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    Calculate annual filing fees. Along with annual filings, some states require corporations to pay an annual filing fee. Annual filing fees range in price from $9 (New York) to $325 (Nevada) or more. Visit each state’s secretary of state’s office website to compare filing fees.[22]
    • Filing fees for some of the more popular incorporation states are: Delaware $225 for corporations; Wyoming $52; South Dakota $50; and California $21.
    • More information regarding filing procedures, due dates, penalties, and notices of pending dissolution can be found on the website of each state’s respective secretary of state's office.

Method 4
Checking for Business-Friendly Laws and Courts

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    Identify the legal framework for business proceedings. When considering where to incorporate, look for a state that has laws that are flexible in both the creation and protection of businesses. Delaware’s General Corporation Law is known as one of the most business-friendly and advantageous laws in place today.[23]
    • For example, Delaware’s laws allow companies to reduce their tax bill by allowing taxable income earned elsewhere, to become tax-exempt income in Delaware.
    • Each state has different laws affecting corporations. To find more information about the laws that govern your state of interest, use your favorite search engine to look for your state’s particular corporation laws or business organization codes.
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    Look into the laws about equity sales and initial public offerings (IPO). Each state has different laws regarding the sale, ownership, and taxation of company stock. If you are looking for equity investors or wishing to sell parts of your business, look for an equity-friendly state that will save both you and investors in the long run.[24]
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    Consider states that have a judicial system for business proceedings. If you are conducting business in a state that is heavily regulated, or if you are in an industry which is prone to liability, you should look for states that are used to handling corporate law, such as Delaware. Delaware has a separate court that resolves business disputes by the use of judge, instead of jury, which many business owners prefer.[25]
    • Cases are often resolved more quickly in states like Delaware where judges are experienced in business matters.


  • If you incorporate in your state of residence, you will have what is known as a "home state incorporation." If you incorporate outside of your current home state, you will be labeled as a "foreign qualified" entity.
  • You won't avoid any taxes or fees when registering as a foreign corporation; the fees are the same as if you would register as an in-state company from the beginning. In essence, you'll be paying double the fees since you will have to register both in the state where the business is incorporated, and the state from where the business is operated.
  • Visit the Secretary of State’s website and look at all the incorporation requirements, including all of the necessary paperwork.
  • When in doubt, contact your company’s legal attorney for additional advice or to clarify any confusing information.


  • Be aware of a business scheme in Nevada which encourages corporations to register there and then use phone lines, a Nevada forwarding address, and bank accounts to convince the IRS that the business is being operated there. By using these techniques, the IRS and the corporation's home state may assume that the corporation is actually doing business in Nevada, when in actuality, the corporation is operating the business out of its home state.

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