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Many people incorporate in the state where they do most of their business. And sometimes this is the best choice – but not always.

Where your business is located does not have to dictate where the business is incorporated. In fact, you might be better off choosing to incorporate in a state thousands of miles from your home office. Choosing where to incorporate is not a matter of ease of distance but, rather, ease of business.

Corporations do not receive equal treatment across the country. Every state sets its own business laws and regulations. Some states are considered business-friendly. Others, like California, are almost anti-business. A decision as simple as where your business is incorporated can make a big difference to your bottom line and your peace of mind.

Nevada, Wyoming and Delaware are states which offer a favorable corporate law and low taxes. Nevada and Wyoming have no corporate or personal income tax. Delaware taxes entities doing business inside their state. But by setting up in those states you have the benefit of a favorable corporate law without the need to pay extra taxes.

Conversely, suppose you set up a California corporation to do business in Oregon. Not only would you have to pay Oregon taxes (because you are doing business there) but you would also have to pay California’s notorious $800 per year franchise fee because you incorporated there. You won’t set up in a high tax state to do business in another state.

What if you set up a Nevada corporation for your plumbing business in Ohio? Because you are doing business in Ohio you will submit the Nevada paperwork to the Ohio Secretary of State’s office and ‘qualify’ to do business in Ohio. You will pay Ohio state taxes on your business profits. But because Nevada has no corporate tax you won’t pay any extra money in taxes by setting up in Nevada. (You will, however, have to pay Nevada’s annual fee and a registered agent fee in Nevada.)

Choosing which state to incorporate in is an important decision and may turn on what type of business you have, what your financial goals are and what the laws of your home state are compared to those of a favorable state. Be sure to consult with your professional team so that you understand all the pros and cons before you commit. As well, there is more information on these issues in Start Your Own Corporation.

Now let’s review our third case...