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IncorporateMany new business owners are surprised to find out that they are not legally required to form a corporation in their home state or where the business is physically located. The decision to incorporate your business is a big step in the future of your company, but choosing which state to incorporate in can be equally important. While most business owners choose to incorporate in the same state where they are located, there are some good reasons to consider incorporating in another state. The primary advantages of incorporation in a "corporation friendly" state fall into three categories- total cost of incorporation, taxation on the new business, privacy concerns. If you are considering incorporation, here are a few reasons that you may want to pick a different state.

Before we look at the benefits of incorporating out of state, business should look at the costs associated with the process. In many cases, business will want to work with an attorney in the state where they are incorporating due to the legal complexity of the process. This is a cost that you will likely incur regardless of the state you choose. You will also need to have a resident agent- that is, someone in the state where you incorporate that has a physical address in that state. The good news is that there are businesses that offer this service for around $150 annually, but this is a fee that you will need to pay if you are incorporating outside of your home state. The other thing to consider is that you will need to register as an out-of-state business in your home state before you can begin doing business. There are fees associated with this process which will vary from state to state. Overall, the initial cost of incorporating out of state will still likely be lower than it is in your home state due to the fees imposed on new corporations.

The basic characteristics of a corporation are roughly the same in every state, but the tax rate applied to corporations is very different. Some states charge as much as 10% tax, while others, like Nevada, do not charge a state income tax or a franchise tax. In most cases, income tax is not a consideration for a business that is forming an LLC or type S corporation. Keep in mind that you will still be required to pay business taxes in the state where you operate, however, avoiding the taxes charged for corporation maintenance can provide a significant tax savings.

For many businesses, privacy and reporting are important considerations. Many states have a so-called information sharing agreement with the IRS. Corporation friendly states such as Wyoming and Nevada do not have this agreement, which means that businesses can avoid many tricky financial situations. These states have very minimal reporting and disclosure rules that are applied to corporations, meaning that you can keep your business information as private as you wish.

The advantages to incorporating in another state are lower fees, expenses, and decreased reporting burdens as compared to your home state. Before you choose a state to incorporate in, research the costs, reporting requirements, and taxes required by your own state, and then decide if another state provides advantages over your own.

 

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Last modified on Sunday, 26 May 2013
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