Incorporation is a critical legal matter that impacts more than your company’s tax responsibilities for doing business. From startups to public enterprises, your bottom line is affected by your state of incorporation’s corporate income tax, excise (sales and use) tax, sales tax, physical and economic nexus tax, franchise tax, and gross income tax. Historically, in the U.S., Delaware is considered The Place to establish your corporate entity. Three other states—Nevada, Oregon, and Wyoming—decided to make incorporation in their state more appealing.
That means more options for you. What state should you incorporate in?
Delaware has more corporate entities than people for a reason
When Delaware first established the Court of Chancery in 1792, it sought to provide a legal “remedy” for corporate entities not found in the common law for the rest of us. As a result, internal business disputes go to a special court. The Court of Chancery made Delaware home to more corporate entities than people, and it provided a roadmap for other states wishing to be known as business-friendly.
Delaware is incorporation friendly
The requirements to incorporate under the laws of the state of Delaware are minimal.
- Information needed to register includes a Name and Entity type.
- A registered agent to act as an intermediary between your company and the state.
- Pay a fee to reserve a business name ($75).
- The fees for filing in Delaware vary depending on your entity type. For example, the fee for filing a Certificate of Incorporation in Delaware is $500 for a Statutory Trust, $200 for a Foreign Limited Liability Company, and $89 for a Stock Corporation.
The Delaware Division of Corporations offers electronic (in-person is suspended during the COVID-19 emergency) submission of business entity documents between the hours of 7:45 a.m. and 11:59 p.m. (EST) Monday through Thursday and until 10:30 p.m. (EST) on Fridays.
Delaware does tax companies
To compete for business tax income with New Jersey and New York, Delaware made incorporating within its borders easier for absentee (aka out-of-state) companies and incentivized absentee companies to do so.
Sole proprietors, partnerships, and C corps like Amazon (the world’s largest online retailer) incorporated in the “Liberty and Independence” state do not pay:
- Corporate income tax (unless they do business in Delaware),
- Property tax, or
- Sales tax.
Needless to say, their strategy worked. Our nation’s First State reported that 89% of companies with an IPO in 2019 incorporated there.
In 2011, Delaware garnered $860 million in taxes and fees from out-of-state business entities incorporated under its laws. With so few taxes, how does Delaware rake it in? The first state to ratify The Constitution levies a franchise tax and a gross receipts tax on companies to generate tax revenue.
The Annual Report Fee in Delaware
Businesses incorporated in the state of Delaware must file an annual report and pay a franchise tax. Domestic non-exempt corporation’s annual report fee is $50 and $25 for exempt entities. There is a $200 penalty fee for not filing an annual report by March 1st. Partnership entities such as limited partnerships, limited liability corporations, and general partnerships are not required to file an annual report in Delaware, but they do pay a $300 tax annually.
The Delaware franchise tax
A franchise tax is a charge by states on corporations to conduct business in their state. Currently, Alabama, Arkansas, Delaware, Georgia, Illinois, Louisiana, Missouri, New York, North Carolina, and Oklahoma have a franchise tax. The amount of franchise tax and how each state calculates the tax varies.
Businesses incorporated and operating in Delaware must file an annual report and pay a franchise tax and a corporate income tax. Delaware’s franchise tax is no less than $175 and no more than $200,000 annually. Note the potential ways to calculate franchise tax:
- Flat tax:
- $175 for non-stock for-profit companies
- $300 for LP/LLC/GP entities
- Authorized shares method
- Assumed par value capital method
Does your company have to pay a gross receipts tax in Delaware?
If you have customers in Delaware, the answer is yes. Businesses pay a gross receipts tax for the privilege of selling goods (tangible and intangible) or services to Delawareans. Gross receipts tax is the opposite of a sales tax that customers pay. Instead, companies pay for total sales. Delaware rates range from .0945% to .7468%, depending on the business activity. Payment is due monthly or quarterly. Late payments are subject to penalty fees. Take note, gross receipts tax in Delaware cannot be reduced by deducting expenses related to the costs of the goods or services sold.
Your very own Delaware corporate tax calendar
Delaware incorporated entities that owe $5,000 or more in franchise taxes must make estimated quarterly payments in progressively smaller amounts.
|Delaware Requirement:||Due Date:|
|State of Delaware Corporate Income Tax Return: Form 1100 or Form 1100EZ
Deadline for incorporated businesses to file an annual report and pay their franchise tax to the Division of Corporations.
Final payment on the remaining balance of franchise tax over $5,000 owed.
|Delaware Informational Return: Form 1902(b)||April 15|
|The deadline limited partnerships, limited liability corporations, and general partnerships to pay a $300 tax to the Division of Corporations. No annual report is required.
40% first of four estimated payments on franchise tax over $5,000 owed.
|The deadline for Foreign businesses incorporated in Delaware to file an annual report and pay a fee of USD 125.00.||June 30|
|20% second of four estimated payments on franchise tax over $5,000 owed.||September 1|
|20% third of four estimated payments on franchise tax over $5,000 owed.
Incorporating in Nevada has certain advantages over Delaware
The goal may be the same for both Delaware and Nevada—to make their state a great place to incorporate a business—but, in the end, Delaware has been much more successful in attracting out-of-state foreign corporations than Nevada. However, Nevada does not have as many rules or requirements for maintaining your incorporation or taxes.
Factors for consideration when selecting between Nevada and Delaware as the domicile for your new business
When considering what state provides the most significant legal protection, you need to do your homework on the type of business you’ll be running, where your clients are, and where your operations will be. In other words, Delaware may have the highest number of companies incorporated there, but Nevada may be better suited for your business.
Here are the highlights of why incorporation in Delaware may be more attractive than in Nevada.
- The corporate laws of Delaware favor the stockholders, while Nevada’s laws advantage directors and officers. Delaware is preferred by shareholders (i.e., venture capital), and Nevada’s laws have attracted more family-owned corporations.
- Delaware has a substantially longer history of business litigation (i.e., Delaware’s Court of Chancery) than Nevada.
- A business license is required in Nevada, but in Delaware, the license is only needed if your company does business in the state.
Both Nevada and Delaware share the following requirements for LLC incorporation.
- You don’t need a bank account in Delaware or Nevada to incorporate in those states.
- You don’t need a physical office or mailing address as a stipulation of incorporation in those states.
- Do require a registered agent and the natural person to act as a contact.
- You don’t need to disclose a list of members or beneficial owners in Nevada or in Delaware to incorporate.
Nevada corporate taxes and fees
From a financial perspective, your state of incorporation hits the bottom line in the form of corporate taxes and fees. The Battle Ground State of Nevada has some similarities and differences with the “Delaware loophole.”
Nevada does not collect state income tax. Period.
Nevada does not have an income tax. Thus, the Silver State does not collect corporate income tax from Nevada corporations doing business in the state. Compare that with Delaware, which collects corporate income tax on Delaware businesses if they conduct business in the state. Nevada companies don’t have to pay a franchise tax, but they do in Delaware.
What business taxes are you required to pay in Nevada?
Employers should know that Nevada has a modified business tax for companies paying at least $50,000 in wages per quarter.
If the sum of all taxable wages, after health care deductions, paid by the employer does not exceed $50,000 for the calendar quarter, the amount of tax is $0. If the sum of all the wages paid by the employer exceeds $50,000 for the calendar quarter, the tax is 1.475% of the amount of the wages that exceed the $50,000.
Nevada corporations with a tax liability can apply for a non-refundable Commerce Tax Credit with the state’s Department of Taxation.
Reporting requirements and fees for Nevada corporations
Businesses incorporated in Nevada are required to file a list of Officers and Directors ($150 fee) and register for a business license ($500 fee) annually. Recall, Delaware requires that the names and addresses of directors be held with the registered agent who acts as the absentee corporation’s communication conduit. However, annual reports of Delaware corporations are publicly available and list directors by name.
Instead of a franchise tax and annual report that Delaware requires, Nevada wants 1) a current list of Officers and Directors and 2) an up-to-date business license each year. Both are due by the last day of a business’s anniversary month. For example, Silverado LLC established a limited liability corporation in Nevada on January 11, 1980. Every year after, the Nevada company has to file the Officer / Director list and renew its business license by January 31st.
Incorporating in The Beaver State
Forming a legal business entity in Oregon couldn’t be more straightforward. Just follow these three steps:
Step 1: Appoint a registered agent: an individual or business entity with a physical (no P.O. Boxes or mail forward) address in Oregon to accept legal service for your business.
Step 2: Find a name for your business. Protip: Oregon requires business names to include “corporation,” “company,” “incorporated,” “limited,” or the abbreviation in the title.
The steps are the same for out-of-country (foreign) and out-of-state businesses wishing to incorporate in Oregon. There are different fees, which we’ll get into in the next section.
Under the Oregon Limited Liability Corporation Act, members have the control to determine duties of members, responsibilities to the other parties, safeguards of member control, and the like. In Oregon, articles of incorporation give LLC members power and authority over how their company is governed and how internal issues are resolved.
Oregon’s corporate taxes
Oregon’s tax structure is appealing to many businesses because the Beaver State does not tax general sales, tangible property (i.e., inventory), intangible property, or capital stock/net worth. Here are the taxes levied on business by Oregon:
- Corporate activity tax (CAT) on commercial activity sourced to Oregon. The threshold for paying this tax is over $1 million in gross receipts.
- Excise Tax–Single Sales Factor is the basis of Oregon’s minimum business tax, and it does not use property or payroll to determine the basis.
- The personal Income Tax rate in Oregon is progressive. For example, the top tax rate of 9.9% is applied to either married filing jointly with dependents above $250,000 or single or married/RDP filing independently more than $125,000.
- Oregon Property Taxes are limited to 1.5% of the real market value of land, buildings, machinery, and equipment. Generally, the assessed property value in Oregon cannot be increased by more than 3% each year.
Consult a corporate tax advisor and a corporate attorney to determine if incorporating in Oregon is the best move for your business.
Perhaps Wyoming is the place to be? Let’s see what Wyoming has to offer your business.
Wyoming’s tax structure loves your business
Wyoming is ranked #1 on the Tax Foundation’s 2021 State Business Tax Climate Index, which isn’t news to Wyoming since it’s been number one since 2014.
What makes Wyoming a great place for your business to incorporate?
Business taxes you won’t have to pay in Wyoming
Businesses are attracted to Wyoming for its limited number of business taxes. It’s clearer to list the taxes that the Cowboy State bucks rather than the other way around.
⭑ Wyoming is one of two states (South Dakota is the other) in the U.S. that doesn’t have a corporate income tax (neither does Nevada).
⭑ Wyoming doesn’t have a gross receipts tax. Delaware and Oregon levy both a corporate income tax and a gross receipts tax.
⭑ Partnerships (S corporations), LLCs, and sole proprietors that would pay personal income tax elsewhere do not have to in Wyoming.
⭑ There is no tax on intangible (i.e., intellectual property, stocks, bonds, and bank accounts) assets in Wyoming.
Additionally, business owners and shareholders favor privacy incorporation in the Equality State because it doesn’t share business return information with the IRS.
What taxes do corporations and LLCs pay to Wyoming?
Among the four business-friendly states covered in this article, Wyoming has the fewest number of taxes for business owners to worry over. Still, there are a few taxes to consider, including the state’s annual license tax (aka annual report fee), industrial, commercial, residential property taxes, and the state’s excise (sales and use) tax.
Wyoming is not alone in requiring an annual license tax. Delaware, Nevada, and Oregon require a yearly fee either for filing a report or for a license. The license tax in Wyoming is based on your assets in the state. Wyoming corporations and LLCs should expect to pay either $50 or two-tenths of one mill per dollar of assets ($.0002), whichever is greater.
Businesses and personal property owners submit to their respective County Assessor by March 1 to determine the market value (or worth) of your property (as of January 1 of each year), which is the basis of your Wyoming property tax. Industrial tax value is assessed at 11.5% of market value, and the commercial property tax rate is 9.5% of market value. Note: Wyoming counties, school districts, cities and towns, and special districts for water and sewer or cemeteries have the power to levy taxes (mill levies).
Wyoming’s statewide sales tax is 4%, just a smidge under Nevada’s 4.6% general sales tax rate. Wyoming counties make levy sales and use tax at about 1%, and the heavy tourist areas of Teton Village and Targhee Village tack on 2% for resort district tax. Wyoming also asks its residents—businesses and individuals—to pay use tax on tangible property (i.e., vehicles, building materials, cigarettes, etc.) purchased outside of the state where no sales tax is required (closest being Montana and Oregon) at the same rate as your county’s total sales tax. In total, Wyoming’s sales + excise tax ranges from 5%–8%. Speak with your legal and tax advisor on how the Wyoming excise taxes could impact your business.
For changes at the county level to excise or lodging taxes, visit Wyoming’s Department of Revenue Taxing Issues for regular updates.
How to incorporate in Wyoming
Wyoming’s Secretary of State website lays out how to incorporate and maintain your good business standing in the state. Here are the basic steps to form a corporation, limited liability corporation, partnership, or sole proprietorship in Wyoming.
To register a new business entity in the Equality State, you’ll need:
- A registered agent with a physical address in Wyoming. A registered agent is an individual (at least 18-years old) or a business entity authorized to transact business in Wyoming. File A Consent to Appointment by Registered Agent form with the new entity filing.
- A business name using Wyoming’s naming convention filed with the correct form for your entity type (i.e., corporation or limited partnership) either online or by mail. The registration fee is $100.
Your Wyoming annual report is due on the first day of the month when the company initially filed. For example, XYZ L.P. filed on September 9, 2011, their annual report updating the name and address of all officers and directors is due each year on September 1 online or by mail to the Secretary of State. See above for information on Wyoming’s annual license tax.
Briefly, Wyoming’s nexus tax
In 2019, Wyoming enacted nexus legislation affecting remote sellers. At present, the bill cannot be enforced by the state department of revenue until the Second Judicial District Court of Wyoming has made a declaratory judgment.
Remote sellers are defined as out-of-state sellers with no physical presence within Wyoming’s borders. The state legislature followed in the footsteps of the U.S. Supreme Court ruling on South Dakota vs. Wayfair. The 2018 ruling made it possible for state governments to mandate a sales tax remittance (for either more than 200 transactions or $100,000 in gross receipts) of businesses without a physical presence within their borders. Scroll down to the end of this article for a little more on physical and economic nexus and how nexus taxes may impact your business.
For more information on statutes affecting business in Wyoming, visit the state legislature’s site.
Business privacy in Delaware, Nevada, Oregon, and Wyoming
Business is a very public activity, but some businesses prefer to keep information on ownership private. To get you started, I have summarized which of the business-friendly states covered in this post make information available to the public and have entered an information-sharing agreement with the IRS.
The U.S. IRS Information Sharing Agreements are between federal agencies (i.e., the IRS and the FBI), between the IRS and state governments, and local governments. At the state level, an IRS Information Sharing Agreement includes:
- Audit results,
- Federal individual and business return information, and
- Employment tax information.
States that receive information about a company from the IRS act on the data at their discretion. If privacy is essential to your business, speak with your legal advisor and research which states are proactively using this information to create tax legislation.
Table: Business Information made public and shared with the IRS in Delaware, Nevada, Oregon, and Wyoming
|State||Is ownership public information?||Participates in the U.S. IRS Information Sharing Agreement|
|Delaware||Yes. Annual reports are public information and list the names and addresses of a business entity’s officers and directors.||No.
Delaware has an MOU on information sharing with the U.S. Treasury.
|Nevada||Yes. A list of Officers’ and Directors’ names and addresses is filed annually.||No.
Nevada does not collect business income tax.
|Oregon||Yes. Annual reports are public.||Yes.|
Wyoming does not collect business income tax.
Finally, a topic of discussion for any new business deciding where to incorporate is nexus.
Which of our business-friendly states have economic nexus laws?
Delaware and Oregon do not have economic nexus laws on the books because they do not need to. The four states that don’t have sales tax are Delaware, Montana, New Hampshire, and Oregon. States without sales tax revenue do not need to be concerned with economic nexus.
What does economic nexus mean to your new business?
Likely, a business with an online retail presence, a remote workforce, or multiple sites will need to know the meaning of economic nexus.
The South Dakota vs. Wayfair case established a new way of looking at the sales tax nexus from a legal perspective (i.e., legal precedent) in all 50 states. Pre-Wayfair, a nexus hinged on a business’s physical (i.e., brick and mortar store, warehouse, trade show, traveling reps) presence in a state. Today, whether or not a business is required to remit sales tax in a state is based on economic nexus, including going above a certain number of total transactions in a state or exceeding a certain amount of revenue from transactions in the state. What triggers the economic nexus differs state-by-state.
It’s important to note that economic nexus does not replace the physical nexus concerning sales tax in a particular state. Delaware, Oregon, New Hampshire, and Montana do not have a sales tax, but nearly all other states have sales and use tax legislation for economic nexus.
Economic Nexus in Nevada and Wyoming are triggered by 200 or more transactions or $100,000 in gross sales. As we mentioned above, objections over Wyoming’s economic nexus law prevent the state from enforcing its economic nexus law. Businesses with economic nexus in Wyoming do not need to register or voluntarily collect sales tax yet.
Business-friendly states want your business, but there’s a lot more than low taxes and minimum filing requirements to consider. We can help set up an accounting system and prepare your taxes for any state where you do business. Schedule an appointment with an expert.
Quick Note: This article is provided for informational purposes only, and is not legal, financial, accounting, or tax advice. You should consult appropriate professionals for advice on your specific situation. inDinero assumes no liability for actions taken in reliance upon the information contained herein.