What is the Best State for Forming a Business?

Entrepreneurs often wonder which state is the best to form an LLC or incorporate. Each state has different taxation requirements, legal environments, and ongoing fees to stay in compliance. As a result, selecting the best home state, or “domicile,” for your new business entity is a significant consideration. Entrepreneurs should give as much thought to choosing their domicile as they would their company’s name or business entity structure.

The key is to choose a domicile that serves the eventual goal of the company. Are you forming a local business, such as a home repair company or a boutique shop? Are you starting a tech company and seeking outside investors to accelerate growth? Or, do you have specific tax or privacy concerns? Depending on your business plan, your answer will vary. The following are some high-level considerations to review when deciding on a home state.

Factor in Your Plans for Growth

From the outset, many companies have ambitious growth plans. Choosing the right domicile will either support or detract from your ability to attract investors and support your customer base.

For example, if you’re seeking investors, you may be expected to form a Delaware-based company. Investors often feel more comfortable with Delaware’s business-friendly legal system than those of other states.

Let’s suppose you aren’t dealing with outside investors, but will have an initial customer base in multiple states. In this case, you may decide to form the business entity in any one of those states for proximity to the customer, or for other tax or legal advantages.

If you have additional tax or privacy considerations, states like Wyoming and Nevada ask for relatively little information about businesses registering in their state. Many of them also have lower tax burdens that may better suit your personal tax situation or corporate income structure.

Keep in mind: By forming the LLC or incorporating it in another state, the business is generally required to foreign qualify in your state, anyway. This creates additional upfront and ongoing costs that may be necessary for quickly scaling companies but may not be right for a new small business.

Frequently, forming an LLC or incorporating away from where you live and operate may not be the right fit. As a result, you might:

Consider Forming Your Business Where You Live

Initially, many small businesses have operations in a single location and primarily serve customers in surrounding areas. Their models don't include investors or anticipate rapid out-of-state growth, though it may happen organically. If this describes your business, forming an LLC or incorporating in your own state may be the best choice.

By forming your business where you live, you can quickly get your business up and running. This also minimizes the overall amount of paperwork, taxes, and ongoing filing fees needed when forming a company out of state.

Most small businesses, including those in your community, are typically formed in the owner's home state. The reason for this is simple - owners don’t stand to benefit enough from the tax and legal protections offered by a state such as Wyoming or Delaware. They simply form a legal entity to limit their personal liability and start serving local customers right away.

Assess Ongoing Compliance Requirements

Every state where you form or register your business requires that you appoint a registered agent to receive service of process. This is a legal appointment, and to meet the requirement, your agent must have an address in that state.

If you form your LLC or incorporate in your home state, you can use your physical business address (though there are reasons you may not want to) or hire a company to serve as the agent for you. But, if you decide to form your business in Wyoming and you don’t reside there, you’re going to need a Wyoming registered agent before you can even create your company. You’ll also need a registered agent in any other states when you foreign qualify.

Additionally, nearly every state requires business entities to file an annual report to stay in good standing. While these reports are just “part of doing business,” they can create complexity and cost hundreds of dollars in additional fees each year. During planning, be sure to research the ongoing requirements in states in which you plan to register. You might not always be able to save costs, but you’ll be better prepared to avoid penalties for falling out of compliance.

Like the business structure and company name, choosing the right domicile directly impacts your ability to grow, attract investors, and serve customers. Regardless of the state you choose, you will face taxes and basic governance and compliance responsibilities. But, the paperwork is far from the only consideration. By speaking with a qualified tax or legal professional and making a well-researched decision, you can easily position your business for success.

Harbor Compliance does not provide tax, financial, or legal advice. Use of our services does not create an attorney-client relationship. Harbor Compliance is not acting as your attorney and does not review information you provide to us for legal accuracy or sufficiency.