A very important factor to consider when registering a new company in the United States is the tax incentives. It is important to note that most entity types (e.g. corporations, partnerships, and limited liability companies) will be paying federal income tax to the I.R.S. This tax will be paid irrespective of what state you register your company in. Certain entities, such as a C corporation will pay double tax, which is the corporation’s income will be taxed and in addition all dividends paid to the shareholders will be reported as well. Whereas, certain entities will have “pass through” taxation where taxes will only be paid by the partners or owners and reported only once, such as the S Corporation or Limited Liability Company.
In addition to this federal income tax law, each state has its own state tax law, thus it is important to seek tax counsel and legal advice as your business enterprise begins to touch and concern more than one state. In addition to federal income tax, most states also collect a personal state income tax. Currently only seven (7) states in the U.S. do not apply a personal income state tax and they include Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
Forty-six (46) of the states impose a direct tax on corporations or other entities which have some type of nexus to the state. The five (5) jurisdictions that do not impose this corporate and/or franchise tax include Nevada, South Dakota, Washington, and Wyoming. Several states also impose a gross receipts tax, which is levied on the seller of goods or services. The states that do impose such a tax include Washington, Arizona, Delaware, Hawaii, Illinois, Mississippi, New Mexico, and Ohio.
In each state property tax is paid, but not imposed by the state itself, but by the county or municipality in which the property is located. This varies per location and should be considered when you decide to establish a physical or “brick and mortar” presence in the U.S. Additionally, each state will require your business to pay state employment tax, which includes workers compensation insurance and unemployment insurance.
Interestingly, forty eight states (48) have entered into information sharing agreements with the IRS. The two that afford some type of privacy to their constituents are the state of Texas and Nevada. This is largely due to the states’ overall protection of privacy, which can be an important decision-making factor if you place a high value on company privacy.
These tax issues mentioned above are not all-inclusive, each jurisdiction has their own unique tax code and to cover every tax implication is beyond a basic jurisdictional analysis. From a tax perspective, four states to seriously consider registering your business in are the states of Nevada, Wyoming, South Dakota, and Washington. There are no personal income taxes paid or corporate tax paid in these jurisdictions. Additionally, the state of Nevada does not have information sharing agreements with the IRS, providing additional privacy to tax reporting in this jurisdiction.