Setting up a company often depends on the purpose of the company. Will you be attracting outside investors, will you have customers in other states, are you looking for a way to mitigate state taxes, and what legal protections will you and your shareholders need? It doesn’t matter if you are starting a Texas corporation or a corporation in New York—analyzing every aspect of the legal process is critical for success.
As such, you will need to consider several variables when choosing where to set up your company. These include the cost, taxes, the legal system, where your sales will come from, and even the wishes of your investors – after all, he who has the gold writes the rules. With that in mind, here are some things to consider before incorporating.
- How Much Will It Cost?
States compete with each other to attract company registrations. This becomes apparent when you compare the fees tied to setting up a new company in Connecticut and California (two of the most expensive states) with other states across the country.
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While these fees are only charged once, states with lower costs are preferred by those who are trying to bootstrap a startup. Depending on the state you chose, you may also need to file as a “Foreign Corporation”. This doesn’t mean that you are no longer a U.S. citizen, it does mean is that your company is not registered in the state where it is doing business.
- Annual Fees
Just because you have paid to register your company doesn’t mean that your work is done. To keep your company in good standing you will need to submit an annual filing to the Office of the Secretary of State in the state where your company is registered. This will include details about your business, the stockholders, and the directors.
Failure to do so might mean that your company is no longer considered in good standing and this might mean that your company may be deregistered by the state. In addition, you may also be required to obtain a business license and failure to do so could have significant consequences such as cancellation of your insurance policy or even worse.
Don’t take these matters lightly as ensuring your company is properly registered will ensure that you can continue to operate without interruption. In addition, having a properly registered company will make it easier if you ever decide to bring on investors as they will be less concerned about potential liabilities tied to the operation of the business.
- Don’t Forget the Tax Man
Death and taxes, as the saying goes, are inevitable. In terms of the latter, some states will charge franchise taxes and income taxes. While others will assess a franchise tax in lieu of an annual fee – while others expect companies to pay both.
Though rare, five states have a gross receipts tax as opposed to an income tax. As such, you will want to check out which taxes and fees you will have to pay before setting up your company, or you might end up with a surprise bill a year later.
Remember, if you are registering as a foreign business in another state, then you will also need to ensure that you file and pay any taxes in that state as well. While this can feel like an unnecessary hassle for those trying to run a small business, doing so will ensure that your business remains compliant.
- The Legal System
At this point, you are probably saying to yourself that we live in the U.S. and the laws should be the same throughout the country. While federal laws and regulations are enforced throughout the country, states have their own laws and court systems.
For example, large companies often pick Delaware for incorporation due to the development of laws pertaining to shareholder rights. In fact, the state has set up a separate court system for these disputes – called the Court of Chancery.
However, this system is best suited for large companies. As such, many small businesses will pick states, such as Texas, with low taxes and a fairly business-friendly legal system to incorporate. This is a contrast to states (actually a commonwealth) such as Massachusetts where regulations governing small businesses can add cost and complexity.
One last item to remember when it comes to reviewing a state’s legal system is the preference of your investors – after all, they are paying for your company. In this case, the best way forward to find out their preference as this will ensure that you can close your funding round in a timelier manner.
As you can see, there are several variables which should be considered when setting up a company. Doing so will ensure that you have set up the right structure for your business but will also help you to plan out the filings, fees, and taxes you will need to pay going forward.