This post is part of a series designed to help you prepare to launch a high-impact startup.
Here, we focus on state registration — which applies to founders looking to register in the US.
Considerations
Your choice of location determines the taxes, regulations, and costs of doing business that your organization will be subject to. Your choice of location also affects the incentives (like grants) and markets you may have access to.
California and Delaware are particularly popular states for registration, especially for 501(c)(3) nonprofits.
In the case of Delaware, this is largely because the state has a well-established legal framework for business (including, for example, the Delaware Revised Uniform Limited Partnership Act).
California, on the other hand, brings some regulatory headaches but has access to a particularly strong labour market.
If you plan to do business in multiple states, you may need to qualify as a foreign entity in each state, which can add to your administrative burden and costs.
What you’ll be subject to
Taxes
Consider the tax landscape for the state. This landscape may also vary within states e.g. between counties and cities.
Income tax, sales tax, property tax, and corporate taxes can vary significantly from place to place:
- Income tax: Consider whether the state imposes corporate income tax or individual income tax if you’re forming a pass-through entity like an LLC or S corp. (A “pass-through entity” is a business structure that avoids double taxation — see Choose a business structure for more information)
- Sales tax: Check out the states’ rates if your business involves selling goods and services.
- Franchise tax: Some states, such as California, impose franchise taxes on businesses.
- Tax exemption: Some states may offer better tax exemptions for nonprofits.
In fact, some states, like Delaware, are well-known for creating tax environments that are very friendly to certain kinds of companies. That’s part of the reason why tech startups, financial institutions, and manufacturing tend to concentrate in certain areas of the country.
Tax Foundation offers good overviews of state individual and corporate income tax rates and brackets. You can also visit state and local government websites to find out what the tax landscape for your area looks like.
Regulation
The regulatory burden can vary widely between states. Consider the complexity and cost of compliance with state laws and regulations, for example:
- Recognition of business structure: There are some states where certain business structures aren’t applicable; for example, several states don’t legally recognize B Corps.
- Compliance: Some states may offer more straightforward compliance requirements for nonprofits.
- Fees: States charge different fees for annual reports and renewals, which can add up over time.
When it comes to accommodating your organization’s legal structure and business model, states like Delaware, Nevada, and Wyoming are known for being business-friendly. Delaware, for example, has well-established business laws and a specialized court (Chancery Court) for handling business disputes.
Cost of doing business
Your cost of doing business isn’t affected too much by your business structure. Instead, some states have notoriously high costs of living (like California, New York, New Jersey, Massachusetts, or Connecticut) while others have comparatively low costs of living (like South Dakota).
Besides cost of living, take into consideration the following:
- Labour costs: Consider the state’s minimum wage, average salary levels, and labor laws.
- Real estate costs: Commercial real estate costs can vary significantly between states and even within regions of a state.
- Utilities and other operational costs: Costs such as utilities, transportation, and insurance can differ widely.
- Healthcare premiums: These vary significantly between states, with New York, Delaware, and Texas being on the higher end. (New York forbids insurances providers from using a health census of employees to generate quotes, which means that quotes are on average higher albeit more equal between staff.)
Physical address requirements
Most states require either one or two physical addresses, within that state, associated with your business. These are your:
- Registered agent address: The registered agent is the entity or person designated to receive legal documents on behalf of the business.
- Business address: The principal business address is used for business registration and official correspondence.
If you don’t have a physical address within the state in which you want to register, you have a number of options.
With respect to the registered agent, you can simply outsource this.
With respect to the business address, you may be able to use any of:
- A mailbox service (”PO box”);
- A virtual address (where you pay for virtual office services that provide a physical address and mail forwarding); or
- An address of record (e.g. the address of a business partner or attorney within the state).
Not all states accept all of these address types (most don’t permit a PO box, for example). It’s best to check the specific requirements with the relevant state department.
What you’ll have access to
Incentives
You may be able to mitigate business costs via incentives and grants:
- State incentives: Some states offer tax credits, grants, and other incentives to attract businesses. These can be especially beneficial for startups and small businesses. (For example: Arkansas, Indiana, Iowa, Kansas, and Kentucky offer a Venture Capital Fund tax credit to encourage investment in local businesses. And, going beyond tax credits, Virginia and Rhode Island offer tax subtractions for VC fund investments.)
- Economic development programs: Look for states with robust economic development programs that support new and growing businesses.
Market
Consider the overall market and economy of the state. Does it have a strong economy (like Texas), or is it seeing rapid economic growth (like Florida)?
- Location of customers and suppliers: If most of your customers, suppliers, or employees are in a particular state, it might make sense to incorporate there.
- Operational convenience: Being close to your primary market or operations can reduce logistical costs and make management easier.
- Access to talent: Are potential hires and other collaborators likely to be based in particular states?
- Networking and resources: States with a thriving business ecosystem, such as California for tech startups or New York for finance, can provide valuable networking opportunities and resources.
- Support services: Consider the availability of business support services, such as incubators, accelerators, and advisory services.
City & neighbourhood
Within your chosen state, you’ll be subject to local taxes zoning laws based on the city and neighborhood you choose.
Local taxes
Some cities and neighbourhoods levy local taxes that will be applied on top of the taxes (such as those listed on Tax Foundation). For example, a city might levy a specific sales tax on certain goods.
Make sure to check out the local taxes when choosing a city or neighbourhood in which to do business.
Zoning laws
If you buy, rent, build, or plan to work out of a physical property for your business, make sure it conforms to local zoning requirements:
- Neighborhoods are generally zoned for either commercial or residential use. Zoning ordinances can restrict or entirely ban specific kinds of businesses from operating in an area.
- You might have fewer zoning restrictions if you base your business out of your home, but zoning ordinances can still apply even to home-based businesses.
Zoning laws are typically controlled at the local level, so check with your department of city planning, or similar office, to find out about the zoning laws in your area.
Stay tuned for our next post: Exit your fiscal sponsorship.