Top 5 U.S. States: Where is the Best Place to Incorporate a Business?

There’s a lot to consider when it comes down to ranking the best states in which to incorporate your business—what are the tax advantages? Have you ever considered business court systems? Which state has the most privacy? Each state is different when it comes to the advantages they boast to entrepreneurs and businesses, but where are the overall best business climates, and what makes them so great?

The answers, of course, depend on your needs of your business, but there is legislation and certain incentives that make some states more hospitable for entrepreneurs. Here are five of the most business-friendly U.S. states, and the factors that make them so advantageous for conducting business:

5. Delaware

dover delaware
Dover, the capital of the U.S. state of Delaware – photo credit: Wikipedia

Sales tax: None
Incorporation fees: $89
Annual report fees: $50
Corporate tax rate: 8.7%

It’s not much of a secret that business owners flock to this state to incorporate their businesses— Delaware is simply a business-friendly state. What makes it so business friendly?

Delaware boasts the Court of Chancery—a forum of sorts, like a court of appeals specified to the laws of business. Say the shareholders of a corporation feel that a board of directors isn’t maximizing their profit and want to sue: they would go to the Court of Chancery. The court hears the appeal and rules on a decision made by a group of judges, much like the US Supreme Court does. This offers business more rights and advantages in that their issues can be resolved efficiently and by a court knowledgeable in the situations at hand. Many big businesses and Fortune 500 companies are drawn to Delaware because the laws are tried and true, and have been tested for a century.

Along with big businesses comes big investors—Delaware attracts these investors with its business-friendly statutes and the flexibility that comes with conducting business there. Also, start-up fees for businesses are inexpensive at $89 to incorporate and $90 to organize a limited liability company.

Entrepreneurs’ ability to do business in Delaware is not bogged down by state and federal bureaucracy. Although the corporate income tax is 8.7%, no sales tax, a well-developed business court and flexible business law have kept Delaware in the top for many years, and will continue to do so into the future.

4. Idaho

boise idaho
Boise, the capital of the U.S. state of Idaho – photo credit: Charles Knowles

Sales tax: 6%
Incorporation fees: $100
Annual report fees: $0
Corporate tax rate: 7.6%

Idaho has a positive economic climate which has been steadily growing—business filings rose 1.8% in 2012 alone and the economy has been increasing steadily since 2010, matching and exceeding national growth rates by the end of 2012. Its capital city, Boise, has a large amount of corporate headquarters and entrepreneurs considering its size, and in recent years has become a go-to place of incorporation for outdoor gear entrepreneurs (Core Concepts, for example) and technology companies (such as Micron, Hewlett-Packard, and Mobile Dataforce) because of state incentives and exemptions put in place for business ventures.

Idaho has no tax on corporate shares, nor is there a gift tax, and there are tax incentives being implemented, such as a 3% Investment Tax Credit, which applies towards businesses that need to buy new equipment in order to operate. With this credit, a business can have up to half of their state income tax liability offset.

It costs $100 to incorporate, but you will never pay an annual report fee. Having been recently named the friendliest state for small business, Idaho has the second-lowest energy costs in the nation, lowest crime rate in the west, and overall lowest business costs. The bottom line: it’s cheap and business-friendly.

3. Wyoming

cheyenne wyoming
Cheyenne, the capital of the U.S. state of Wyoming – photo credit: Wikipedia

Sales tax: 5.42% average
Incorporation fees: $100
Annual report fees: $50
Corporate tax rate: None

Overall, the cost to incorporate here is substantially lower than the average cost in the US, and the initial startup fees as well as the annual requirement fees are some of the lowest in the country.

Wyoming is a true tax haven, considering these facts: There is no corporate tax in Wyoming, the sales tax rate is 4%, there is no individual income tax, there’s no gross receipts tax, no capital gains tax, no inventory tax, no excise tax, and no franchise tax. Also, privacy and flexibility is a huge draw: Wyoming does not require that managers or members be listed publicly, and the reporting and disclosure requirements are minimal. A business owner’s name isn’t even required to be registered with the state, which is beneficial when it comes to the owner’s personal asset protection and the avoidance of costly legal situations that could arise.

The state is financially strong, and at the moment there is a large budget surplus. There is an eager workforce in this state, supplying a competitive workforce for employers. Business owners can operate independently from the state government, in that there are minimal fees, minimal taxes, privacy, and businesses are encouraged to flourish, free of bureaucracy.

2. Nevada

las vegas nevada
Las Vegas, the largest city in the U.S. state of Nevada – photo credit: Moyan Brenn

Sales tax: 7.59% average
Incorporation fees: $75
Annual report fees: This depends on the value of the authorized stock, the minimum being $75
Corporate tax rate: No corporate tax, but there is a $200 flat annual business license tax

Nevada, which has often been referred to as the “Delaware of the West,” is a business-friendly state touting overall low taxation and commitment to business privacy. There are no corporate or individual income taxes, no tax on corporate shares, no franchise tax, no gift tax, no stock transfer tax, and no taxes on corporate shares.

There is modified business tax abatement, which is an abatement of 50% (there is a business tax imposed on employers at 1.7% on wages over $85,000 per quarter, and this abatement would provide a 50% cut off of that tax). There is also the Train Employees Now (TEN) program in effect, which matches grants up to 75% for employee training programs.

Nevada also has a business court system in place, taking after Delaware’s positive example of a well-maintained, organized, and effective business court system. There are minimal reporting and disclosure requirements, and business owners are not required to reveal who the stock holders of their corporation are. No one has to know who owns your corporation (only officers, directors, and the resident agent are disclosed) and no information is shared by Nevada with the IRS, if privacy and asset protection is important to you as a business owner.

Nevada law protects the personal liability of directors and officers when it comes to acts committed by the actual corporation. Nevada has also implemented training programs, such as the Train Employees Now program, designed to create a talented and ample workforce to help employ the state’s growing tech and online industries.

1. South Dakota

sioux falls south dakota
Sioux Falls, the largest city in the U.S. state of South Dakota – photo credit: Wikipedia

Sales tax: 5.52% average
Incorporation fees: $150
Annual report fees: $50
Corporate tax rate: None

There was a lot of buzz this year about South Dakota being the top state for doing business in the US. Following a barrage of tax cuts in 2010, South Dakota has steadily risen since to become a tax haven and positive climate for those looking to start a business.

So what factors, exactly, make this such a positive business climate? There is no corporate or individual income tax, and South Dakota has one of the lowest flat sales tax rates in the country, coming in at 4% (after factoring in the average local tax rate as well, the average sales tax rate is about 5.5%).

The cost of doing business in this state is low; there is an initial incorporation or organization fee of $150, and a $50 annual report fee. The property taxes are low, utility rates are low, and the sales tax is low. The cost of living is low. All of this combined makes South Dakota a small business Shangri La.

About the Author: Drake Forester spent the early years of his life working at a locally-owned sawmill and enjoyed living in the woods. His life experiences have crafted a unique real world perspective concerning the law and real world industries. The logging industry was effectively shut down from the North American Free Trade Agreement (NAFTA); and the mill closed. NAFTA reinvented Drake’s career by paying for him to go to law school.

As the chief legal strategy officer, Drake’s role at Northwest Registered Agent guides the company and its clients through the vast bureaucracy we all deal with when running a business.