ROBS and SDIRA clients face the same initial decision, where to incorporate their corporation or LLC. I recommend that, absent a clear and convincing reason to pick a different State, choose your home State. Here are some factors clients want to look at before making a final decision.
1. Incorporation fees.
When you form a Corporation or LLC, you need to pay a one-time filing fee to the state’s secretary of state office. Fees range from $50 to $500 or more. This is a one-time fee that should not have a significant impact on your bottom line over the lifetime of your business.Do not choose your State based solely on formation fees.
2. Annual fees and filings.
Most states charge an annual fee to maintain an LLC or Corporation. You’ll typically be required to submit an annual one-page report to the secretary of state’s office, along with a filing fee. Ohio and Alabama are the only two states that do not require some kind of annual or biannual report from corporations. Theses fees are minimal, although required. Do not choose your State based solely on annual filing fees.
3. Franchise taxes.
Many states impose franchise taxes in place of, or on top of, the annual report filing fee and state income taxes. A franchise tax is basically levied by the state on corporations and other business entities for the privilege of being incorporated or registered to transact business in the state. The method for calculating franchise taxes varies by state. For example, California charges an annual franchise tax based on income with a minimum tax of $800 per year, even if your business is losing money. Delaware bases its franchise tax on the number of shares and par value, meaning the amount isn’t significant for a small company with few assets and stockholders. Nevada and Wyoming have no franchise tax at all. This can be a significant factor in your decision. Many CA residents try to avoid the franchise tax by using a different State, only to discover later than CA will levy this tax for CA residents for even the most minimal amount of connection to CA. Know your State of filing and home State rules before deciding.
4. Legal system.
There are reasons why 64 percent of Fortune 500 companies are incorporated in Delaware, not least being Delaware has a separate court to resolve business disputes that lets judges decide instead of juries. Cases are often resolved more quickly than in other states. Many business owners prefer their case’s fate be determined by a judge who is experienced in business matters, rather than a jury. However, this advantage typically doesn’t apply to small businesses that will never have to contend with complex business litigation.
This concept does not apply to SDIRA clients. For ROBS clients who want to attract other investors, choice of State can make a huge difference. Many third party investors prefer to incorporate in Delaware or Nevada for its shareholder protection laws. Unless you want to attract passive investors to your business, ignore this idea. As the primary in control of your corporation, you will find that Delaware and Nevada offer little practical protection, radio ads touting differently notwithstanding.
6. State corporate income tax.
Six states levy no corporate income tax at all: Nevada, Ohio, South Dakota, Texas, Washington and Wyoming. However, Ohio, Texas and Washington have gross receipts taxes, which is a tax on the gross company revenues. Nevada, Wyoming and South Dakota have no state personal income tax. The lack of state corporate and personal income tax is a huge advantage for those businesses that are based In Nevada, Wyoming and South Dakota. However, these advantages do not apply to a business located in another state. For example, if your business is located and operates in California, you can’t avoid paying California state income taxes by incorporating in Nevada. You will be subject to the tax laws of whatever state you operate in.