QUESTION: I’ve heard that many small-business owners choose to incorporate and form LLCs in Delaware and Nevada, even if they’re not physically located in those states. Why is that?
ANSWER: The short answer: taxes.
Delaware, also known as the incorporation state, has an especially business-friendly corporate law. Thanks to this law, any out-of-state business that files in Delaware pays no corporate income tax. If you’re physically based in Delaware (i.e. a storefront), you don’t have to collect sales tax on purchases, and income is subject to a flat tax rate of 8.7%.
Delaware also recently joined the list of states to enact Benefit Corporation legislation. The means if you’re a socially conscious business, you can file as a B Corp, which gives you legal protection to consider mission over profit.
Nevada also has some great business perks in the form of minimal business taxes. In fact, it’s often called a tax haven because it has no corporate or personal income tax. The Tax Foundation has ranked Nevada as having the third most business-friendly tax laws of 50 states, alongside Wyoming and South Dakota. (Neither Wyoming nor South Dakota charges corporate income tax or individual income tax.)
But while there can be advantages to filing in tax-friendly states, most people elect to file in the state in which they are physically located, to avoid extra paperwork. Filing requirements often vary depending on where you plan to do business, so it’s important to check in with a filing expert or attorney to see if it makes sense for you.
Got a question for Deborah? Ask it in the comment section.
Are you looking to open a small business? Here are a few more helpful articles from Deborah Sweeney to get you started:
10 Things to Know When Starting a Business in 2014
Should I Form a Manager-Managed LLC?
What is an EIN and Why Do I Need One?
Do I Need a Business License?
How to Form an LLC
Image credits: Tim Kiser and Wikimedia Commons