State for registration

Choosing the Best State to Register a Company

Despite the well-established myth, incorporation in Delaware does not automatic bestow tax breaks. The decision of where to register depends on the residence of the director in control of the company’s registration, the coordination of tax registration and the opening of a new bank account. It is probably best to register in the state in closest proximity to you. Comfortable states to register and operate companies include Virginia (East coast) and Washington (West coast).

The common misconception of Delaware’s athematic tax free status is untrue. The income tax rate for companies that do business in Delaware may be as high as 8.7%. This rate is higher than most other states. The zero percent income tax rate is reserved for Passive Investment Companies (PIC), which are de facto holding companies, or companies that own only intangible assets and licenses used outside of Delaware. All other companies operating in Delaware are subject to the 8.7% income tax rate. Therefore, unless you are registering a PIC, Delaware does not offer any tax advantages.

There are four states in the United States that do not have a corporate income tax (Nevada, South Dakota, Washington and Wyoming). Texas has an income tax of 1% on any income above one million dollars. A complete table of each state’s corporate income tax rate is available for download.

The state registration decision depends on the location of your operations, as well as the location of the director(s) and officer(s) of the company. In order to simplify the process of registering the company, obtaining a tax number, and opening a bank account, it is recommended that you initially establish the company as 100% owned by a U.S resident. Then, after obtaining the tax number and bank account, you can transfer 100% ownership to the non-resident. This will expedite all stages of the process, especially the opening of a bank account. When registering a U.S. company as a non-resident, it is often necessary to provide significant additional information about the non-resident.

When transferring (for example, nominal) shares of a U.S. corporation from a resident to a non-resident, it is necessary to notify the registration office, tax authorities, and the company’s bank about the change in ownership.

Registering the Address of the Company – The Registration Agent

When registering a company in any state in the U.S., it is necessary to have a mailing address within that state. This address is used for official correspondence with the registration office. Many companies and lawyers offer services for business registration, such as a “package” that provides a registered mailing address. It is important to remember that registration agents provide only a physical address and not an individual to serve as the director or officer of the company. Alternatively, an officer or director can serve as the registration agent. This requires that the director or officer of the company resides in the state in which the company is registered.

On average, the services provided by a registration agent cost around $100-$300 dollars a year.

Directors and Officers

In the U.S., there exists no institution for “nominee directors”, at least none similar to those used in certain offshore jurisdictions. The directors are responsible for the company and the shareholders (fiduciary duty). The responsibilities and authorities of the directors and officers are clearly defined within the company’s statutes. A common practice is to buy insurance to cover any possible liability on the part of the directors and officers in the company. This type of insurance is offered by all major insurance companies.

During the initial stages of registering the company, obtaining a tax number, and opening a bank account, it is desirable to have a resident director. Subsequently, it is recommended that you have at least one director/officer who is a U.S. resident. This requirement is not so much legal as procedural. For example, in order to open a bank account, it is necessary to have not only the necessary tax identification number of the company, but also the personal tax number of the individual responsible for the company. During the initial stages, the bank’s decision to open the company’s bank account or not depends partly on the personal information provided by the director/officer of the company.

Obtaining a Tax Identification Number (EIN)

The Employer Identification Number (EIN) is the primary identification number for legal entities in the United States. This number is provided free of cost after filing form SS-4, which can be done via the internet. Upon receiving this number, companies can use it for tax reporting, opening a bank account, building a credit history, etc.

Separate registration with the tax authorities of the particular state is not required except for registration for sales tax, excise tax, and social security tax. This registration is available online and can be completed in under an hour.

Filing a Federal Tax Return

Corporations (C-Corp) and Limited Liability Companies (LLC) which have received the status of C-Corp for tax purposes are required to provide their annual tax return for the year to the March 15 of the following year to the Internal Revenue Service. You will need to sign and file form 1120. It is strongly recommended that you use the services of a licensed accountant when filing your annual tax report. The annual tax return is signed by an officer of the company (can be signed by non-U.S. residents).

At the same time as filing the federal income tax declaration, it is necessary to file for state income taxes (if there is a state income tax). If the company has operated, acquired property, or hired workers in multiple states, they may have the obligation to pay additional state taxes.

State Income Tax and Business Licensing Fees at the Municipal Level

Along with federal income taxes, most states import their own income tax on local companies (i.e. those registered in the state) or companies doing business within that state. The tax rate and calculation method varies depending on the particular state.

Some counties also try to establish their own system of taxation. The most common method of taxation is to require a business license. Many counties and city entities require businesses to obtain this license. At a time when the budgets of most local governments (counties, cities, etc.) are being pushed toward deficit, local governments are becoming much more active in the determination of the fee for the business license. In some cases, the fee for the business license can be as much as one percent of revenue (for example, Arlignton County, Virginia). Often, local taxes are not taken into consideration when deciding in which state to register a company but the amount may be significant.