Three Things to Consider Before Starting your Business in Another State

Three Considerations Before Starting a Business in Another State

Starting a business in another state is often presented as a cure-all solution to avoid paying taxes to the state government. However, the reality is more complex. While forming an LLC or corporation in a different state may be beneficial in some cases, it is not a money-saving strategy for every small business.

Prior to deciding to operate out-of-state, entrepreneurs should consider the following:

1. Other fees and regulations may apply

When a business incorporates or forms an LLC in one state but conducts most of its operations in another state, it must qualify as a foreign business entity in the latter state. This means additional fees and requirements must be met. Even if a company saves on state taxes or fees, it may still incur expenses for establishing itself in a state other than where it conducts business. Annual fees are typically higher, and a registered agent must be maintained in the formation state.

2. Another state may not be suitable for all businesses

For traditional brick-and-mortar businesses, staying in their home state is often more advantageous. Dealing with local regulations, fees, and licensing requirements is already challenging. Adding foreign-registration obligations may not be worth the extra burden. However, larger companies or those engaged in interstate commerce may benefit from incorporating in a tax haven state, as it involves less paperwork. Ultimately, it depends on the company’s primary business location and activities.

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3. Potential implications from the home state

Some states enforce regulations based on the majority of a business’s transactions or the residence of its shareholders. These laws override the state of formation’s benefits. Home state income tax, franchise tax, foreign qualification fees, registered agent costs, and increased annual fees can outweigh any potential savings. Incorporating in the home state and establishing a business entity that separates personal and business liabilities may be a simpler and more cost-effective option.

Choosing to operate a business in another state should not be seen as a way to evade the state government’s taxation. It is crucial for business owners to assess their unique needs and consult with tax lawyers or accountants for guidance on the best course of action.

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