Any company has the option to incorporate in any state. Notably, a significant number of publicly traded corporations choose to incorporate in Delaware, regardless of their actual business activities within that state. However, for smaller companies, incorporating in Delaware is often not economically advantageous. It is generally more cost-effective for these entities to incorporate in the state where they intend to conduct their operations. Each state possesses its own set of business regulations and tax codes, thus the decision regarding the formation of a limited liability company (LLC) or corporation should be approached with careful consideration.

1. Consider will You be Transaction Business in Your Home State
   
   Often, a state will require a business to incorporate in a state if it has some sort of ‘nexus’ with that state. Nexus refers to the relationship or connection that a business has with a particular state. There are two primary criteria used to assess whether a business establishes nexus within a state:
   

   (1)	The company maintains a physical establishment, such as an office, retail outlet, or storage facility, within the state.
   (2)	The company has notable economic activity without a physical presence in a state.

   
   The majority of states establish sales tax thresholds, typically defined as exceeding 200 sales transactions or generating $100,000 in sales within the state on an annual basis, to ascertain whether a business possesses economic nexus.
   
   Failure of a company to register, remit taxes, or submit required reports in any state where it has established nexus may result in the imposition of fines and other sanctions. Additionally, such noncompliance could pose a risk to the personal assets of the business owner.
   
   
2. Consider Registration and Annual Filing Cost
   
   Both registration and annual maintenance costs are operating costs incurred at the company's registered office.
   
   Establishing a new business in any state incurs financial expenses; however, the fees associated with business formation can differ significantly across states. Additionally, certain states mandate the submission of an initial report, which incurs an extra fee that also varies by jurisdiction. It is important to note that while a particular state may impose higher registration fees compared to others, this does not necessarily indicate that the ongoing operational costs for a business in that state will be proportionately higher.
   
   Some states mandate that business entities file annual reports, which serve to verify that the information provided in the company's incorporation documents remains accurate. Additionally, changes to business licences, tax registrations, incorporation documents and registered agents may also be required to be filed and paid for depending on the state..
   
   
3. Understand State Corporate Tax
   
   Some states impose additional corporate income tax that must be paid by business owners or the corporate entity, in addition to federal income taxes. Conversely, some states do not impose either corporate or personal income taxes. It is important to note that a business registered with nexus in a state where a state income tax exists is subject to state income tax in the target state of nexus even if its principal business is conducted in a state where no state income tax exists..
   
   The following states charge no corporate income tax whatsoever: Nevada, South Dakota, Washington, and Wyoming. In addition to Alaska, Florida, and Texas, these states also don't charge any state personal income tax. However, you should note that Ohio, Texas, and Washington levy a tax on your company's gross income (a gross receipts tax).
   
   
4. Consider Franchise Tax
   
   In certain states, business proprietors are required to submit an annual franchise tax report and remit the corresponding tax, either as a substitute for or in conjunction with an annual report and state income taxes. A franchise tax represents a fee imposed by the state on business entities for the privilege of being registered to operate within that jurisdiction. The methodology employed by states to determine the franchise tax differs significantly. For instance, California assesses its franchise tax based on the income of the business, establishing a minimum annual fee of $800. Conversely, Delaware's calculation is predicated on the number of shares held by the company and their par value.
   
   
5. Delaware and Nevada as Examples
   
   Delaware is frequently regarded as the benchmark for corporate incorporation, especially for larger enterprises and those seeking to go public. Nevada is recognized for its favourable business environment, characterized by the absence of a state corporate income tax, franchise tax, and personal income tax.
   
   

   (1)	Advantages of forming a company in Delaware The commercial court system in Delaware is distinguished by its extensive body of case law and expedited decision-making processes, which are facilitated by judges possessing significant expertise and experience in matters of business law, rather than relying on juries. Delaware's tax legislation is advantageous for businesses. For example, if a corporation is incorporated in Delaware while maintaining its principal place of business in another state, it is typically exempt from paying Delaware state income tax.
   (2)	Disadvantages of forming a company in Delaware The advantages associated with establishing a company in Delaware are primarily oriented towards larger corporations rather than small enterprises. Entities conducting business in a state other than their home state are required to obtain the necessary qualifications to operate within that jurisdiction, which may result in increased expenses and administrative complexity. It is important to note that if these entities are domiciled and conduct their operations in their home state, they are also obligated to register their business in that state.
   (3)	Advantages of forming a company in Nevada Nevada has no state corporate income tax, personal income tax, unitary tax, estate tax, gift tax or franchise tax. Liabilities incurred by a business remain the responsibility of the company itself. In Nevada, business owners benefit from a higher level of personal asset protection compared to many other states.
   (4)	Disadvantages of forming a company in Nevada Nevada exhibits elevated incorporation fees and compliance-related expenses in comparison to numerous other states. The absence of a robust corpus of corporate case law in Nevada may result in diminished predictability within the legal framework, particularly when contrasted with a state like Delaware.

   
   

Reference:
[1] Richard D. Freer. The law of corporations in a nutshell. West Pub. Co, 2020.
https://stripe.com/resources/more/what-is-the-best-state-to-incorporate-in
https://www.corpnet.com/blog/best-state-to-incorporate/

See also:
Delaware LLC Registration and Bank Account Package
Nevada Corporation Registration Package