What is the best state to incorporate in for a foreign startup?
Answer by Wray Rives:
There are so many variables, all I can do is give you some general ideas about foreign nonresident owners of US entities and what states make “tax sense” for the non-resident owners. First I assume you that you want to set up a US based business entity that will be owned by non-US individuals. Following are some state specific things to consider.
-The state you probably read about online the most for incorporation. (when I say incorporation, I equally mean forming a C corporation or formation of an LLC) There is probably more mis-information available online about incorporation in DE than reliable information. seeThe pros are DE has favorable laws and court systems that appeal to outside third party investors. If you will have venture capital investors, they will probably appreciate your having a DE C Corp. If no outside investors, then DE is probably not your best choice. DE has relatively high annual franchise tax and the potential to owe state income and/or gross receipts tax.
-There is no state income tax and essentially no sales tax in Wyoming. Added benefit is WY has a flat scale for annual franchise tax. The maximum WY franchise tax will probably be about 1/2 of the minimum for DE. For most small businesses annual fee will only be around $50 per year. Downside is WY is not very populated. If you want to use services in the state like virtual mail addresses and such, it can be a challenge to find service providers.
-Another state with no state income tax and zero to fairly low annual franchise fees. Nevada does have a number of other business licensing regulations. Depending on the type of work, it may not be worth the headache.
-Extremely business friendly state. Low regulations and low annual cost to keep your entity in compliance. TX is also the second most populous state in the US, so unlike WY, you can find anything you want from TX based service providers. Franchise tax rate is actually -0- until you have more than $1.3M in annual revenue. TX does have a substantial sales tax and might not make sense if you are selling tangible items or taxable services.
New York or California
-I get a number of non-US clients who think it looks more prestigious to be a CA or NY company. If you have strong business reasons to want to do this, I understand. You need to understand prestige will cost you. NY and CA have some of the highest state level tax burdens in the US.
-FL comes up occasionally as a state for non-residents to form their LLC and the state is not necessarily a bad choice. While FL has no individual income tax, it does have corporate income tax, which can be a problem if at some future date you convert your LLC to a corporation. FL just does not give me a compelling reason to choose it. If your brother lives in FL, then go visit him for vacation, but set up your LLC or Corporation in WY or TX.
Final advice is have a conversation with a US tax professional. There are so many variables that can change what is “best” for you depending on ownership, potential tax treaties and the type of business you will operate. We have not even touched on potential US federal taxes for your business. You need to consider the pros and cons of your specific situation because there is no “one size fits all” plan for non-residents looking to set up a business in the US.