Where Should Your Small Business Incorporate?

By Andrew Beattie | October 14, 2009 AAA
Where Should Your Small Business Incorporate?

Incorporating, making the leap from a personally-owned business to one with investors, is no small decision. Corporate laws and corporate tax laws vary between states (and countries for that matter). Let's look at some of the top places to incorporate in the United States.

Setting Priorities
Corporate tax rates, access to an educated labor force, cost of office space and many other factors contribute to what makes a place good or bad for incorporating. For some businesses it makes sense to search for the lowest tax rate and least rules. Many credit card companies and other large institutions shop between states for the best deal and Delaware, Nevada and other states tailor their laws to attract these businesses.

For smaller businesses, the cost of incorporating in another state - hiring corporate and tax lawyers to guard against legal challenges and so on - nullifies many of the advantages. Because of this problem, we'll rank states in a couple different ways. (Find out how becoming a corporation can protect and further your finances in Should You Incorporate Your Business?)

Lowest State Corporate Taxes
You can't get away from the federal tax, but the states set their own tax rates. There are three states that don't dip into corporate profits at all: Nevada, South Dakota and Wyoming. This is useful if your business is mobile and/or earning enough to make the legal work worthwhile.

Texas deserves an honorable mention as well. It doesn't overtly charge a corporate tax, but it has a franchise tax that these three states go without.

The Cheapest State To Do Business In
Corporate taxes are important, but they're not the only costs a business faces. If you plan on actually working where you incorporate, then the priorities shift. Forbes did a handy ranking of labor, energy and tax costs for businesses. The 2009 top five are:

  1. South Dakota
  2. Wyoming
  3. North Carolina
  4. West Virginia
  5. Delaware

Quality of the Workforce
If your business is specialized, you'll probably want an educated labor force to pull from. According to the Forbes list, the top states for an educated work force are:

  1. Colorado
  2. Washington
  3. Virginia
  4. Utah
  5. New Hampshire

The Economic Question
If you're looking for a state with a strong economy, Forbes ranks the top five as:

  1. Texas
  2. Nevada
  3. Washington
  4. Oklahoma
  5. Colorado

But if it's projected economic growth you're after, the picture changes quite a bit:

  1. Washington
  2. Colorado
  3. Texas
  4. North Dakota
  5. New Hampshire

The Holistic Approach
Forbes, among others, takes a holistic approach to ranking states. They do an overall ranking that incorporates all of the metrics above as well as things like quality of life. In their 2009 ranking, Virginia took the top spot despite only appearing once in our cutthroat ranking.

If you're looking to incorporate and shopping around for a place to do so, it's probably a good idea to take a page from Forbes' book and make a list of what is important to you and your business. Once you have that, you can look at the state that offers you the best fit for your needs - possibly one that isn't mentioned on the top five lists at all. (Don't overlook the details when starting up a business. It's the small expenses that have the potential to make or break a great idea. Check out Business Startup Costs: It's In The Details.)

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