What’s the best US state to incorporate in?

Incorporating your startup is more than just paperwork. It’s a decision that shapes your company’s future. Where you choose to incorporate sets the legal home for your business, which in turn affects your taxes, your reporting requirements and even how appealing you are to investors.

You have a lot of flexibility when it comes to incorporation: you can incorporate in your home state or in another state that offers a more business-friendly environment. But with 50 states to pick from, you need to think carefully as that choice can impact your bottom line, your ability to grow and your chances of raising investment.

Things to consider when incorporating your startup

Choosing a state sets the rules your company will operate under for years to come. Each state has its own approach to corporate law, tax and compliance. And those differences can add up to real costs or advantages as you grow.

Here are some of the key factors to weigh up:

• Taxes: States set their own corporate tax rules. Some, like Nevada, South Dakota and Wyoming, don’t charge corporate income tax at all. Others, like California, do and rates vary widely.
• Filing and annual fees: Every state charges different fees to get incorporated and stay compliant year to year.
• Corporate legal system: Some states are known for being more business-friendly. Delaware, for example, has a specialist business court and a huge body of case law, which makes legal outcomes more predictable.
• Privacy: Rules differ on how much information about owners, directors or shareholders must be made public.
• Corporate regulations: Some states let you customize governance structures or board requirements more easily than others.
• What investors want: Investors often have strong preferences. A Delaware corporation, for example, is instantly recognizable and trusted by most VCs.
• Where you operate: If your main operations are in one state, incorporating elsewhere usually means registering as a ‘foreign entity’ and paying fees in both.

Most popular US states to incorporate in

The right state for your business will depend on your individual needs. But there are a handful of options that are most popular with startup founders. Here’s why:

Delaware

The most popular choice for high-growth startups. Delaware’s specialist Court of Chancery and extensive corporate law give investors confidence and make disputes more predictable. It’s also flexible when it comes to structuring shares and options. The trade-off is extra costs: an annual franchise tax, higher incorporation fees and, if you operate in another state, registering as a foreign entity.

Texas

Texas is often ranked as one of the most business-friendly states. There’s no corporate or individual income tax, though companies pay a modest gross receipts tax. With a large talent pool and big names like Tesla relocating there, Texas has become an attractive option for startups looking to scale.

Nevada

Attractive for its lack of corporate income tax, personal income tax and franchise tax as well as strong privacy protections. But Nevada’s legal system isn’t as established as Delaware’s, so outcomes are less predictable which is something investors may see as a drawback. You’ll also need to register as a foreign entity if you’re operating in another state.

Wyoming

Like Nevada, Wyoming is low-cost and business-friendly, with no corporate income, personal income or franchise taxes and strong privacy protections. It also allows ‘perpetual existence’, meaning the company continues if an owner leaves. However, it’s not as widely recognized by investors and companies operating elsewhere still need to register in their home state.

Florida

Florida is a popular pick for founders thanks to no individual income tax and a relatively low corporate tax. The state has a big customer base, strong job growth and strong international opportunities. Add in tax credits and funding programs, and it’s easy to see why many startups set up here.

Home state

For local or smaller businesses, incorporating where you operate can keep things simple. It avoids duplicate filings and ensures you’re governed by local laws. But if fundraising is on your roadmap, investors will usually prefer you to convert into a Delaware C corp.

Why incorporate in Delaware?

More than two-thirds of Fortune 500 companies and most VC-backed startups are incorporated in Delaware. The reason is simple: Delaware offers a combination of legal certainty, flexibility and investor trust that no other state matches.

The benefits of incorporating in Delaware:

• Tax benefits: The cost of doing business in Delaware is 25% lower than the US average, according to the Delaware Prosperity Partnership. You don’t need a physical office to incorporate there, only a Registered Agent. Other benefits include no corporate income tax on out-of-state revenue, no state or local sales tax, no tax on investment income, no personal property tax and no inheritance tax.
• Speed: Delaware is known for its efficient incorporation process. With expedited services, filings can be processed the same day or even within an hour.
• Flexible structures: Delaware law makes it easier to issue shares, set up option plans and create different classes of stock. It also allows one person to act as director, officer and shareholder, which is useful for very early-stage startups.
• Privacy: Delaware doesn’t require public disclosure of shareholder, director or officer names.
• Specialist business court: The Delaware Court of Chancery deals only with corporate disputes. Its deep body of case law makes outcomes more predictable and resolutions faster.

The disadvantages of incorporating in Delaware:

• Annual franchise tax: Delaware corporations must file an Annual Franchise Tax Report and pay a franchise tax. This increases as the company grows but is usually minimal at an early stage and still low compared to corporate taxes in other states.
• Filing fees: Delaware’s filing fees are higher than in many states. As of August 2024, the fee is $109 for a domestic corporation and $245 for a foreign corporation. For comparison, Florida charges $35. You can find the Delaware Division of Corporations’ full fee schedule here.
• Registered Agent fees: You’ll need a Registered Agent in Delaware to receive official documents. Services usually cost between $50 and $300 per year.
• Foreign entity fees: If your business operates in another state, you’ll need to register there as a foreign entity and comply with local filing and licensing requirements. This can mean duplicate costs.

How to incorporate your startup: LLC, C corp or S corp

There are three main ways to incorporate your startup in the US. The right one for you depends on your stage, your goals and whether you plan to raise outside investment.

LLC (Limited Liability Company)

LLCs are the simplest structure to set up. They give you limited liability, pass-through taxation and fewer compliance requirements. That makes them popular with small businesses and solo founders. In fact, most new US businesses start as LLCs.

But they’re not investor-friendly. Venture capital funds, accelerators and many angels won’t invest in LLCs because of the way they’re taxed. If fundraising is in your future, you’ll need to be a C corp.

S corp

An S corp is a tax status that lets profits and losses pass through to shareholders, avoiding corporate-level tax. They come with restrictions: no more than 100 shareholders, all must be US individuals and only one class of stock. These limits make S corps rare among high-growth startups. They’re a fit for smaller, profitable businesses, but not for venture-backed companies.

C corp

The standard for startups that plan to raise money. A C corp is a separate legal entity that pays corporate tax, but it allows you to issue unlimited shares and multiple share classes (for example, common and preferred stock). This structure makes it easy to bring in investors and set up stock option plans for employees.

Investors overwhelmingly prefer Delaware C corps. They know the legal system, they trust the rules and it makes fundraising much smoother. If you’re planning to scale or seek venture funding, a Delaware C corp is the structure to choose.

Check out our full article on the pros and cons of each company type: Should I incorporate my startup as an LLC, an S corp or a C corp?

Ready to fundraise?

Incorporation is just the first step. As soon as you start thinking about fundraising, investors will expect more than the right state. They’ll want to see clear share structures, a clean cap table and the right legal documents in place.

That’s where SeedLegals helps. From creating SAFEs to setting up a priced round to managing your cap table, we make it simple to raise on the terms that work for you.
Book a call with our team or get started with your 7-day free trial.