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Many entrepreneurs are faced with a difficult decision: whether to incorporate in their home states or another state. This decision depends in large part on the type of business that the owner plans to run.
Incorporating in states like Wyoming, Delaware, or Nevada has become very popular. In fact, these states are often presented as the go-to states for people who have decided to form a new company. I’ll refer to them as “The Big 3” as they will be mentioned a lot in this article. All three states offer great low bureaucracy environments, low or no state taxes, and many more advantages.
These benefits are great but a lot of companies just can’t take full (if any) advantage of them.
A common misconception is that when you incorporate in Wyoming or Nevada, neither of which have state income taxes for corporations, you can do business in the entire United States and still pay no state taxes. This is not the case.
If you physically operate in another state (e.g., you have an office or employees in another state), you will have to pay taxes to that state no matter what state you have chosen to incorporate in. On the other hand, if you operate an e-shop or some other kind of online business, it really pays off to incorporate in Wyoming or Nevada because selling goods online isn’t considered to be doing business out of state.
It’s not that the Big 3 states are bad for incorporating — they’re great. But if you don’t have a real reason to incorporate in one of these three states, such as incorporating in Delaware if you’re an ambitious startup expecting venture capital or an e-shop, it may not be the best for you. Without a good reason to incorporate in one of the Big 3, you should probably incorporate your company in your home state.
Incorporating in your home state will save you from having to make a foreign qualification in your state, which is required if you’ll be doing business in your home state while having your company incorporated in another state. In the latter instance, you have to make foreign qualification in your home state. For example, you have to register your business there. A foreign qualification is not required when incorporating in your home state. This will not only save you some paperwork, it will save you money as well. Foreign qualification costs approximately the same as incorporation.
There is another way to save money. Since companies incorporated in the Big 3 states often have their actual physical location elsewhere, it’s common practice to have a virtual office there, which costs around $500 a year.