Starting a company in the USA: which state is the best home for it?

If you want to start a company in the USA, one question comes up fast: which state should it be based in? Opinions vary wildly, and emotions often count for more than facts.

My view: decide on the best location, meaning the best state, purely on practical and business grounds. It makes no sense to set up in Wyoming just because there is no state corporate income tax. Sure, if you're a rancher, Wyoming is lovely. But when it comes to accessibility, presence, proximity to your market and hiring good people, places like that are at a clear disadvantage.

Start by asking yourself these questions:

• Where do I like it best?
• Where are my customers?
• Do I benefit from having lots of other players in my industry nearby (Silicon Valley, Wall Street)?
• Where will I find employees?
• What image do I want my choice of location to project?
• How easy is the location to reach? From Europe? From within the US?
• Are the costs of the location (rent, wages and so on) in proportion to the revenue I expect?

I'd argue that 90% of all businesses can make the right location decision just by answering these simple questions.

In my experience, the remaining 10% are special cases, which we cover below.

1State of incorporation and/or principal place of business?

In the USA it's quite common, especially for larger companies, to be incorporated in one state while the actual headquarters is in another.

A good example: Facebook. To my knowledge, Facebook is a C Corporation incorporated in Delaware. But we all know Facebook runs its business from Silicon Valley, where its headquarters is. Many US companies choose Delaware as their state of incorporation because Delaware has the best reputation for corporate law in the USA and, thanks to its long legal tradition, a deep body of case law to draw on.

In that case, California tax and commercial law applies, but because liability questions are a matter of corporate law, they are heard and decided in the state of incorporation.

How much this matters for a smaller company, I'll leave open. On this page we're talking about the principal place of business, meaning the actual location. Whether you register a local company there or one from another state is best settled during the exploration and planning phase of your project.

2Do companies in Delaware and Nevada really pay no tax?

Learn more about how US corporations are taxed on this page.

Once you start looking into forming a US company, you'll quickly come across Delaware and Nevada as the supposedly best states. You'll probably get the impression that corporations there enjoy special advantages, above all tax advantages.

That, however, is a myth. It's true that a great many US companies are formed in Delaware and Nevada. Forming a company in either state is certainly quick and easy, and the ongoing administration is especially light.

But corporations in neither Delaware nor Nevada get any special tax advantages. Delaware actually levies a relatively high corporate income tax. Nevada does indeed have no corporate income tax, but the much higher federal tax is still due. That's why we recommend Nevada in some cases, though in the end the same tax advantages can be achieved in other states too.

In fact, we advise most clients against forming their corporation in Delaware or Nevada, precisely because of the reputation both states have. A company in another state simply draws less attention.

3Special cases

In some cases, there are serious external factors that limit your options when choosing a location. We look at four of these special cases here.

3.1Special case 1: large enterprises

If you're setting up a large operation in the USA, plan to create a hundred jobs and invest several million in the site, it definitely makes sense to think about incentives. The USA has them in abundance.

A sarcastic saying about this contradiction (capitalism and public subsidies) goes: “Socialism for the rich, capitalism for the poor.”

Texas spends more on business incentives than any other state. Its main tool is the Texas Enterprise Fund, which since 2003 has awarded grants to companies that create new jobs in the state; the awards and their conditions are published by the Governor's Office. Other typical state incentives include sales tax refunds, temporary local property tax abatements and grants for workforce training. Which programs apply in your case is something you negotiate with the state's economic development agency and often the county's as well; there are no fixed rates.

3.2Special case 2: specialized industries (e.g. marijuana products, dietary supplements)

If you work in a specialized industry like those above, your choice of location is limited, because these areas are all regulated at state level.

The same goes for insurance and financial services, as well as manufacturers and distributors of certain medicines. So if your industry is known for heavy regulation, give this factor extra weight when choosing your location.

3.3Special case 3: visas/green card (e.g. EB-5)

One of the conditions for an EB-5 visa is that you either invest $1,050,000 in any US business or just $800,000 in a Targeted Employment Area.

If you choose the second option, your choice of location is necessarily limited. Here your visa planning has to come before everything else, so the question becomes which rural area gives your investment the best chance of success.

3.4Special case 4: acquiring a business

If you're planning to acquire a business, focus on finding the right target rather than on where it's located (as long as the location doesn't undermine its strategic success).

A good company in a “bad” state always beats a bad company in a “good” state.

Here are the 10 most popular US states for foreign direct investment. How legal form and state work together is explained in our guide Which state? Which legal form?; our location recommendations are under recommended states, and all our services under US Company Formation.

In short

• Choose your state on practical and business grounds: customers, staff, accessibility and costs.
• The state of incorporation and the principal place of business can be in different states; many companies choose Delaware as their state of incorporation.
• Neither Delaware nor Nevada offers special tax advantages; federal tax applies everywhere.
• Special cases are large enterprises with incentives, regulated industries, the EB-5 visa and acquiring an existing business.

How we help you

• US Company FormationLLC, Inc or LP in Delaware, Florida, California, New York, Texas or Wyoming.
• Form a CorporationThe US corporation (Inc) for growth, investors and your visa.
• Form an LLCThe US LLC with a permanent establishment, turnkey in six states.
• Form a Limited PartnershipThe US LP for structures with a general partner and limited partners.
• Company formation consultationEntity type, state and tax consequences, before you commit.