One of the most important decisions a new entrepreneur makes when starting their business is determining where to incorporate. Different states have different taxes, and as the co-founder of a tax company, I'm frequently asked which state is best for business formation.

The answer isn't overly complicated. While researching the tax laws of the various states, you'll find that some are more business-friendly than others.

Wyoming and Delaware consistently rank highly among business owners for being advantageous for startups. But, whether or not you can reap their benefits depends on the nature of your company.

Fees, Franchise Taxes, and State Corporate Tax

Wyoming offers low filing and annual fees, the annual operating requirements are minimal, and Wyoming levies no state corporate taxes. Wyoming has no personal income tax, either. These benefits are best for smaller LLCs and may not make much financial difference to larger businesses.

Franchise taxes are a vital consideration, as the process for computing these taxes varies by state. Wyoming has no franchise tax, while Delaware centers its franchise tax on the number of shares and par value. So, in Delaware, the franchise tax isn't substantial--if you operate a small company with limited assets and stockholders.

Delaware has no sales tax. And, investors often prefer the Delaware setup due to the advantages it provides to larger corporations, so if you're hoping to use venture capital to start, this may be the deciding factor for you.

Legal Protections

66 percent of Fortune 500 companies were formed in Delaware. Why? A judge with business expertise settles corporate disputes--this is called the Chancery Court--rather than a jury, and the cases are resolved quickly.

This adds up to a very business-friendly climate in Delaware. Note, however, that this primarily benefits larger companies that risk undergoing complicated legal battles.

Flexibility and Privacy

Flexibility and privacy continue to be top concerns for small business leaders. Delaware allows a lot of flexibility for corporate structure and does not require the founder to divulge information about officers and directors.

Wyoming is flexible in terms of how your business will run. Its privacy settings are different from Delaware's in that you can choose a lifetime proxy, which allows a layer of anonymity for founders. They can choose someone else to vote on their behalf and hold their company stock or shares. 

Your Home State

Don't forget to consider your home state. Why? One reason is you're only dealing with one group of policies and guidelines that you'll be accountable for. Not considering other factors, the general rule is that if your business has four or fewer shareholders, forming in your home state is the best option.

In many situations, you'll be required to register your business in whatever state you operate from. That means that you'll pay state taxes, pure and simple, plus the fee associated with incorporation itself. So, weigh the pros and cons to determine whether or not operating out-of-state is the right decision for your small business.

If your business is too small to take advantage of what's offered by forming in Delaware, incorporating there will only result in additional fees without benefits. Further, some tax benefits that Wyoming offers are only available to residents who work in that state.

Considering all the above factors before making a decision can save you--and your company--a giant headache.

Published on: Jul 24, 2019
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.