Rose Report: Issue 22

The State of Affairs

issue22-pic-story3There’s a lot of decision-making involved in starting a new business: office space, a logo, employees, whether it will be a corporation or a limited liability company. But an important decision involves selecting a state in which to organize the company.

While incorporating in the state where your office is located may seem the most logical, there are a number of other factors to consider. “Most of it has to deal with logistics and operations,” says Rose Financial Services partner, Timothy Fargo. “What’s your business purpose? Most states will give you credits for locating in that state and making capital investments or hiring residents as employees.”

When choosing a state, the following should be considered:

  • Type of entity. Not all states have the same type of entities. Most will work with sole proprietorships, limited liability companies (LLC), limited liability partnerships (LLP), limited partnerships (LP) or nonprofit corporations. Some have a franchise tax. Each type of entity has different taxation requirements and fees depending on the state.
  • Tax credits. Different states offer different benefits for various industries. In Maryland and California, for example, a biotech company can earn a biotech credit. Pennsylvania offers a manufacturing credit. Texas and North Dakota give credits for those in the oil industry. Find out which states offer a credit within your industry.
  • Tax benefits. In addition to credits, you should consider whether a state requires annual or quarterly filings, unemployment rates, state income taxes, and other types of taxes that will affect your business.
  • Nexus within a state. If your business operates in different states, you’ll need to register in those states too, a term known as “foreign qualify.” Factors that require foreign qualification include having fixed assets, employees, a bank account, or orders accepted, in another state. It does not matter to the state whether you have income yet – the state still needs to collect its filing fees.
  • Your home state. Despite the advantages that other states may have, registering in your home state may be the easiest solution to avoid extra paperwork and legal representation. “If you are operating or doing business in your home state, you’ll still have to pay business taxes on revenue that originates in that home state,” writes the US Small Business Administration on its website.

You may have heard about companies registering in Delaware and Nevada. Many companies register in Delaware for its business-friendly laws and lack of income tax for non-residents, while others choose Nevada because it has no state corporate income tax, personal income tax or franchise tax. Fargo says Alaska is an interesting state worth examining, because it has a lot of tax and employee credits, but is more difficult for companies who might not open up any operations there.

It’s important to determine, however, whether some of these benefits are worth the extra work required when it comes to incorporating outside your home state, and to examine the positives and negatives that each state offers. Work with your lawyer and accountant to decide what is the best situation for your own company.