If you are starting an online business, you will need to decide on which is the best state to incorporate your online business.
Unless you have a compelling reason otherwise, it's generally best for online businesses to incorporate in the state in which it will principally be doing business.
There are some tax and organizational advantages to registering in certain states. Delaware, Nevada, and recently Wyoming are the most popular for out-of-state corporate registration. Consult with me, a business lawyer, if you would like to know which state is the best state to incorporate your online business.
If you would like to learn more about which state is possibly best for you, continue reading below...
What Does It Mean to Incorporate a Business?
Typically, "incorporating" means forming a Limited Liability Company (LLC) or Corporation.
Incorporating a business is the process by which a business entity becomes viewed as a separate legal entity within the eyes of the law.
That means the LLC or Corporation is afforded the same rights and allowed to function within those rights the same as an individual citizen.
There are many benefits of incorporating your business to become a separate entity. The corporation can initiate law suits the same as individuals, protects its shareholder's personal property from seizure in the event of a law suit, and acquire personal assets, and remain in existence beyond the dispersal of shareholders.
Factors for Considering Which State is the Best for Incorporating
When deciding to incorporate your business, choosing to incorporate in a particular state simply because of your physical location is typically enough.
Typically, you want to incorporate your online business in the state where you will be conducting your business.
It does not matter that you are operating an online business. So for example, if you are currently in California and operating a Shopify store, you want to incorporate your LLC or Corporation in California.
The term in "doing business" is defined in California as “entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce.”
However, if you are a non-US resident, you have many options on which state to incorporate.
Each State offers various incentives and penalties for incorporating, providing tax breaks or imposing hefty charges and fees. Therefore, several factors must be considered before deciding in which State to incorporate:
- Tax filing fees - these are the costs associated with filing the various corporate tax forms with the IRS.
- Laws and regulations for businesses.
- Income tax - this is in consideration income tax for the corporation, because the corporation is now considered a separate entity.
- Sales tax
- Franchise taxes and regulations - this is only relevant for a business establishing a branch of an already existing business.
- Whether you are willing to live there
Best State for Incorporating
Again, if you are an online business, you should incorporate your LLC or Corporation in the state where you will be doing business. So if you physically live and do business in California, then incorporate in California.
However, if you are a non-US resident, the best state for incorporation is 3 states: Delaware, Nevada, and Wyoming.
Why Delaware is the Best State for Incorporating Your Online Business
Delaware is considered to be the most business-friendly state for incorporating.
Delaware offers several tax breaks for LLCs, feature lower than market average tax filing fees, and have limited regulations in transacting business across state lines. Furthermore, Delaware is unique because of the Chancery Court. This is a Court established specifically to hear law suits for or against corporations.
In fact, Delaware is America’s most popular state to form an LLC or Corporation. More than half a million business entities have their legal home in Delaware including more than 50% of all U.S. publicly-traded companies and 60% of the Fortune 500.
Why Nevada is the Best State for Incorporating Your Online Business
Nevada offers the best incentives in terms of taxes. This is because Nevada lacks business income tax, franchise fees, capital gains tax, state corporation tax, or inheritance tax. If you are unsure, that means there are zero specific taxes geared towards business. Furthermore, Nevada does NOT have an IRS Information Sharing Agreement at all. This makes Nevada the ultimate tax haven.
Why Wyoming is the Best State for Incorporating Your Online Business
Wyoming offers the same exact benefits as Nevada, meaning zero business specific taxes. It also offers one other benefit nice for publicly traded corporations. Wyoming allows a "lifetime proxy". Essentially, one person can control the stock options while a proxy places a vote for them. This way stockholders may remain anonymous.
What Happens If You Incorporate in the Wrong State
Note that even if you incorporate in a foreign state like Delaware, your company may still be subject to registration as a “foreign entity” and compliance with the laws of states you transact business in.
A corporation or LLC conducting business in one state when incorporated in another is considered a foreign corporation and must qualify as a foreign LLC or corporation to legally do business in that state.
For example, a business incorporated in Nevada that wants to do business in California would be considered a foreign corporation in California, and as a result, the Nevada corporation must qualify (or register) as a foreign corporation to do business in California.
The biggest downside to incorporating in a different state is that your company will be required to file for authority to do business in the state where the business is located, and most likely will also have to purchase a Certificate of Good Standing or Certified Copy of the Articles of Incorporation (or Formation) from the Secretary of State where the company is incorporated.
These additional filing and documents fees make the use of an alternative state substantially more expensive than incorporating at “home.”
To conclude, unless you have a compelling reason otherwise, it's generally best for online businesses and entrepreneurs to incorporate in the state in which it will principally be doing business.
Otherwise, if you are a non-US resident, then I would suggest forming your LLC or Corporation in Delaware.
Delaware is very efficient and foreigner-friendly. Forming your company in Delaware is generally the easiest and most efficient.
If you are still in doubt about which state is the best state to incorporate your online business, contact me, Sam Mollaei, Esq., business lawyer, and I will assist you.
Mollaei Law is a law firm specializing in business law serving businesses and entrepreneurs. We provide legal expertise in all stages of business development by drafting and reviewing contracts and agreements, assisting transactions and negotiating, forming LLC's and Corporations, registering trademarks and copyrights, business planning, and answering any legal questions you may have about your business.