Here are the Best States to Register an S-Corporation
Learn the top places in the U.S. to incorporate.
Are you thinking about registering your small business as an S-corporation?
Maybe you’re starting a new business or launching a startup and want to incorporate it.
Perhaps you want to convert your LLC into a corporation.
No matter your situation, an S-corporation can be a sensible business structure. It allows you to separate your business and personal finances, protecting your personal assets if you are ever unable to pay back a business loan or your company is sued. Sole proprietorships don’t have these protections.
One common issue small business owners face is whether it makes more sense to register as this type of business entity in your state or in a different state that could be more beneficial to do business in.
In some cases, such as Delaware, Nevada, and several other states, entrepreneurs can incorporate and receive significant tax benefits and other incentives without living or operating a business in the state. In other cases, it could make sense to move to another state to enjoy its incorporation benefits. (The state tax benefits will impact state taxes, not your federal tax return that you file with the IRS.)
This article will reveal the top states to incorporate your business if your top priorities are to optimize your tax situation, reduce your regulatory burden, and maintain privacy around how you operate your company.
Level set: S-corporations, according to the Internal Revenue Service, pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. By contrast, a C-corporation is a legal structure in which the owners, or shareholders, are taxed separately from the entity. In this article, tax implications related to S-corporations are weighted along with other factors in ranking states.
Also, be aware that this article addresses for-profit organizations only. Nonprofits realize different benefits when they incorporate.
Top 3 states for forming an S corporation
Many big Fortune 500 companies are incorporated in Delaware even though their headquarters are located in other states. What makes Delaware so attractive to them? The state offers unparalleled benefits to companies, including:
- Flexibility. Delaware offers businesses significant flexibility when it comes to corporate and board structure. This makes it easier to set up your organization. Officers and directors are not required to live in Delaware. You also have the option to operate your business solo in the state. Most other states require at least three people to act as officers and directors.
- Privacy. Delaware does not make you disclose key details about your officers and directors when you incorporate there. Many states require this information to be publicly documented.
- Courts. In corporate legal situations, Delaware uses judges through its court of chancery rather than juries. If your business is taken to court, your case will be evaluated by a judge with corporate legal expertise, not a jury made up of laypeople with no business knowledge or who could be biased against businesses. In Delaware, you are more likely to experience a fair, impartial, and streamlined legal process.
- Investors and financial companies. Many investors and banks prefer Delaware corporations to ones formed in other states. If you are seeking venture capital or are going public, incorporating in Delaware could benefit you.
- Taxes. Delaware’s tax laws are friendly to corporations. If you incorporate in Delaware but have your headquarters in another state, you may not have to pay state income tax. Check with your tax advisor to find out for sure.
There are some drawbacks to incorporating in Delaware.
- Business size. Smaller companies with low business income may not enjoy all the benefits of incorporating in Delaware that larger ones do. Check with a business attorney or expert to find out if your company is large enough to make it worthwhile to incorporate in the state.
- Expense. It can cost a lot to incorporate in Delaware. You must evaluate whether the benefits of incorporating there outweigh the costs of filing fees and other ongoing incorporation expenses.
Nevada is considered a business-friendly state. Here are some of the top reasons why:
- Foreign entity. You can form a corporation in Nevada even if you plan to operate your business in another state by registering as a foreign entity.
- Taxes. For most business owners, the most important benefit of incorporating in Nevada is the lack of state taxes, including corporate income tax, unitary tax, estate tax, gift tax, personal income tax, franchise tax, or admissions tax. However, if you form a corporation in Nevada and live elsewhere, you may have to pay taxes to that state. A tax expert can help you figure out if this could be an issue for you.
- Privacy. Nevada does not require you to list the names of directors to incorporate. You, your investors, and other stakeholders can remain anonymous. An attorney is named as the person of record for your business allowing everyone else to stay anonymous.
- Asset protection. When you incorporate in Nevada, any liability your business incurs is maintained in the corporation. Nevada has fewer legal loopholes than most states, adding a layer of certainty and protection to businesses.
Drawbacks of incorporating in Nevada include:
- Fees. The cost of incorporating in Nevada is high. You need to work with a business expert to figure out if it’s worth it for you.
- Stigma. Many illegitimate businesses incorporate in Nevada but are run elsewhere. This could cast a negative light on your organization.
Wyoming is also considered a leading state to incorporate in because it offers significant economic incentives and other benefits:
- Flexibility. Individuals are allowed to form corporations in Wyoming.
- Incentives. Wyoming provides economic benefits to businesses that incorporate there. There is no corporate state income tax or franchise tax for corporations. Wyoming does not collect personal income tax, and the state sales tax is a relatively low four percent. (Note that there are exceptions for manufacturing equipment and similar purchases.)
- Fees. Incorporation and other related fees are relatively low in Wyoming.
There is one major issue with incorporating in Wyoming:
- Benefit limits. If your business is located outside of Wyoming, you may not be able to enjoy all its tax benefits. Check with a business tax expert to find out for sure.
Other states to consider incorporating in
South Dakota is attractive to incorporate in because it has no corporate or individual income taxes. However, its sales and unemployment taxes are relatively high, making it less attractive to retailers and companies with many employees or those working in risky industries.
Many businesses find Alaska an appealing state to incorporate in because it has no income tax and relatively low sales tax. Very high unemployment taxes offset these tax benefits. If your business is a small one with few employees in a non-risky industry, Alaska could be a good place to incorporate.
Florida is a solid place to incorporate in because it has a long history of low taxes, including no state income taxes. Its corporate tax rates are among the lowest in the United States. It also has a long history of being pro-business. More good news: Florida keeps making minor improvements that make it more attractive to incorporate there year after year after year.
Be aware: Many small business owners think that Texas is a good state for S-corporations. The reality is that it’s better for Limited Liability Companies (LLCs). It makes more sense to register an LLC in Texas than a corporation.
Least favorable states for S-corporations
Here are some of the less favorable states for registering S-corporations in, as well as the corresponding reason why.
New Jersey is one of the leave favorable states to do business in because of its high tax burden. It ranks in the bottom ten for corporate, individual income, sales, and property taxes. The only relief companies get is a lower-middling unemployment insurance tax rate.
California’s individual income and sales taxes are as bad as New Jersey’s. However, its property and corporate taxes are more attractive. Still, this is offset by California’s notoriously high regulatory burden, especially concerning the environment. Business owners should think twice about settling in California and forming an S-corporation.
New York’s relatively favorable corporate tax rate makes it somewhat attractive to incorporate in. However, all other taxes in the state are among the highest in the nation. New York is known for being notoriously litigious, and many rulings are anti-business. Also, New York is known for being a state where it’s challenging to conduct business. It could be wise to avoid incorporating there unless you absolutely need to.
Some other states that are not business friendly include Minnesota, Arkansas, Iowa, and Connecticut. They tend to be high-tax and highly regulated.
Forming an S-corporation in your own state
While it might make sense to incorporate in a pro-business place like Nevada, Delaware, Wyoming or some other similar state, it could make sense to stay in your own state. Here are some reasons why:
- Convenience. It could be simpler for you to incorporate, operate your business, and live in a state you are familiar with. You probably know and understand your tax obligations and local court system. You’ve likely built critical connections with suppliers, marketing agencies, lawyers, accountants, and tax experts. Add to this the fact that any government agencies and courts you may have to deal with are located close to home and not in a place like Delaware or Nevada.
- Business name. If you’ve already registered your business name in your state, it could be simpler to incorporate there. Your name may not be available in another location, forcing you to change it and losing the equity you’ve built up in it.
- Fees and taxes. Business incorporation costs and annual fees vary from state to state. Incorporating in your home state could make financial sense if you own a relatively small business with a limited number of investors or live in a state with low fees. Each state has its own fee structure, taxes, and benefits. And except for the top and bottom states on our list, many states have comparable fees and benefits for incorporating. It’s worth working with a business consultant, lawyer, and tax expert to determine the best option for incorporating your business.
- Foreign entity registration issues. Depending on whether your business activities qualify as “doing business” in more than one state, you may need to register as a foreign entity should you choose to form your corporation in a state in which you do not live or operate your business. This is an extra step and expense that you need to be aware of and consider as you choose where to incorporate.
If you decide to incorporate your company in a business-friendly state, but you do not plan to move or operate your business there, you must take all the necessary steps and file all the required paperwork. A single misstep or error could end up costing you a lot.
Here are a few essential things to keep in mind if you incorporate in another state.
- You will need to file articles of incorporation in your chosen state.
- You must also apply for your federal EIN number (employer identification number) if you don’t currently have one.
- Because you will be conducting business outside your state of incorporation, you must register in your state and any other state where you do business as a foreign entity. Each state has its requirements and application process, so be sure to follow the instructions for each state you register in. You will likely need to get a business license and pay state fees to operate in each state.
- Take time to understand your tax obligations as a foreign entity in your home state, your incorporation state, and any place you do business. These will vary significantly from state to state.
How to incorporate your business
Transforming your small business into an S Corporation can seem complicated and overwhelming. It takes many steps — and a great deal of paperwork — to complete it, whether you do it in another state or your own.
You will likely have to address articles of organization, create an operating agreement, set up bylaws, identify a board of directors, and possibly publish an annual report. Start by visiting the state’s secretary of state’s website for more information on filing. What’s essential is that you submit the correct documentation in the proper order, or you could run into significant legal problems in the future. It’s usually a smart idea to work with a corporate law expert and tax professional to get it right.