Is It Time to Incorporate in Another State?
Some businesses use the summer months to kick back and relax after all their hard work in Q1. Others spend these laidback months strategizing their initiatives for the remaining year. For some startups, their next move might be to literally move—with plans to expand their business and incorporate in another state.
Incorporating in another state is a big undertaking for any business. Expanding a business means doing more than packing up and shipping out. When a small business decides to open an out of state location, the move is meant to reach their customer base and capture the attention of a new audience that might be interested in the business’s offerings and services. There’s also a certain amount of paperwork that must be filed to successfully operate a physical business outside of the state you initially incorporated in, too.
If you’re still mulling over whether or not to make the big move, ask yourself these questions (and see how you handle the answers) before packing up and shipping out.
How does the state’s tax climate impact my business?
Certain states, like Delaware and Nevada, have a reputation for being “corporate darlings.” Startups and expanding businesses often choose to incorporate in these states because of their favorable tax treatment.
In recent years, however, we’ve watched the rest of the United States catch up with Delaware and Nevada to offer small businesses a better tax climate. In some cases, small businesses may even save money on their tax bills once they form a business in a state outside of the one they do business in. Consider the nexus point for the state you wish to expand your business in. What do the state’s corporate tax laws look like for small businesses that foreign qualify?
On the lookout for states with strong tax climates that aren’t Delaware or Nevada? Consider forming a business in these states.
- South Dakota: The Mount Rushmore State does not have corporate, personal income, or enforced capital gains tax. With few filing requirements, it’s also a fairly easy state to stay in annual compliance each year.
- Texas: Everything’s bigger in Texas, but not when it comes to taxes! There is no personal income tax for small businesses expanding to Texas.
- Wyoming: Like South Dakota, Wyoming has no corporate, personal income, or franchise taxes. Expanding corporations just need to make sure they file their federal income taxes.
Am I moving to a small business friendly state?
Small business friendliness may be lower on your list of moving priorities than say, finding a new space to house business operations. However, it’s just as important to consider whether or not the new state is small business friendly.
Curious as to how small business friendliness is measured across the country? Check out Thumbtack’s rankings. Each year Thumbtack surveys and grades the small business friendliness in each of the U.S. states. These surveys go beyond friendliness. They also rank the ease of starting a business, hiring, regulations, employment, tax code, licensing, and training programs.
Do I foreign qualify?
Earlier, I mentioned that small businesses need to foreign qualify for corporate tax laws in new states. What does that mean?
Before a small business may conduct business in a state outside of the one they incorporated in, they must file a foreign qualification. This allows small businesses to register their companies in a new state as a foreign entity and obtain authority to do business.
Companies that foreign qualify are generally those that want to conduct business in the new state. They have plans to establish a physical presence there, like opening up a brick and mortar storefront, and pay employees to work there.
Obtaining a foreign qualification isn’t too difficult once you know you’re ready to register. Businesses will apply for a certificate of good standing first from the state of incorporation. This document proves that your business is already in compliance (and knows how to meet its tax and filing obligations) in the state it does business in. Then, file your foreign qualification documents with the state you’re planning to incorporate in and conduct business. You may be asked to provide additional information on these documents about your home state and entity as well. After filing, your documents will be forwarded to the state you’re expanding your business in. Once you are fully approved, you will receive a certificate of authority for your records—and to begin conducting business.