The act of registering a corporation in the US is known as “incorporating” the business. Whereas in the UK Companies House serves as a central registry for companies, the US has no such central registry. Instead, corporations are established under the laws of individual states.
So, how do you decide in which state to incorporate? Before exploring this topic, let’s debunk two common myths.
Firstly, the state of incorporation generally does not affect the amount of taxes that your business will be required to pay. Many clients incorrectly believe that, by incorporating in a state with no corporate income tax (such as Nevada, Wyoming, or South Dakota), they can avoid tax. In certain very limited circumstances they can (see below). But, generally, a business’ profits are taxed by the states using state formulas that are designed to approximate the degree to which the corporate profits arise out of the corporation’s connection with that state. Thus, even a Nevada corporation will typically be required to pay corporate income tax to another state if it has sales sourced to that other state or it has personnel or property located in that other state.
Secondly, the state of incorporation does not determine which state’s laws apply to the corporation’s day-to-day commercial transactions. The law of the state of incorporation only affects the internal governance of the corporation, such as the rules governing shareholder claims against corporate officers or directors. The day-to-day commercial transactions of the corporation will be governed by the law of the state chosen by the parties to the transaction or by the law of the state with a certain relationship to the transaction, notwithstanding where the corporation was incorporated.
In deciding where to incorporate your business, consider the following:
- Where will your office or employees be located? Regardless of where you choose to incorporate, if you transact business in any other state you must separately register with that other state. Although each state defines for itself what constitutes the transaction of business within its borders, having an office or employees in the state will always trigger the registration requirement. Thus, if you have an office or employees in a state it usually makes sense to incorporate in that state. Otherwise, you trigger additional filing requirements and additional fees.
- Do your business activities fall within the scope of Public Law 86-272? As noted above, usually corporations must apportion their profits among the states and pay corporate income tax to the states where those profits arise. To facilitate interstate commerce, Congress has carved out a narrow exception to this rule. Under Public Law 86-272, if the corporation’s activity in a state is limited to the mere solicitation of orders for the sale of tangible personal property and those orders are to be approved and filled from outside the state, then the state has no authority to impose income tax on the profits of the transaction. Thus, for businesses with activities that fall within the scope of Public Law 86-272, incorporating in a state with no corporate income tax will insulate the corporation from paying state corporate income tax anywhere.
- What fees or filings will be required? For UK companies accustomed to the detailed filings required by Companies House, the filing requirements in all US states will be a pleasant surprise. Unlike Companies House, there is no requirement in any US state that you file annual accounts. US states do vary, however, in the information that you must publicly disclose about your company, either at the time of incorporation or thereafter. Some states, for example, do not even require that you publicly disclose the shareholders, officers, or directors of the corporation. Initial incorporation fees vary from $45 (Arkansas) to $400 (Connecticut). Required annual fees to maintain the corporation vary from $20 (Montana) to $825 (California).
What if you incorporate in a state that you later decide is not the best state for your company? Fortunately, changing your state of incorporation (known as “domesticating” your company elsewhere) is relatively easy and – if done properly – will result in no adverse tax consequences.