We recently surveyed the corporation laws of all 50 states and reported on . In our review, we also considered which states present the worst choice for incorporation. We carefully considered each state’s corporation law, fees, ease-of-use, customer service, periodic and ongoing filing requirements, and of course, tax burden. (For our 50-state incorporation report card, read Best State for Incorporation). What follows are our picks for the worst states for incorporation in the nation. Please keep in mind that this is a general overview, and your specific needs should be brought to an attorney and accountant.
First, Is Out-of-State Incorporation Right for You? (the Foreign Qualification Dilemma)
The first question a business person should ask is, “should I incorporate in a state other than where my business is headquartered?” As a general rule, if your business is small and operates and sells only in one state and you have no need for the special benefits afforded to say, Nevada or Wyoming corporations, you should incorporate in your state of operation. Here’s why: all 50 states generally require out of state (foreign) corporations to register and pay fees in the corporation’s state of operation. Registration in a foreign state is often called qualification.
For example, a Nevada corporation that transacts business in California must register in California as a foreign corporation and pay a filing fee and annual minimum franchise tax. Thus, the benefits of incorporating out of state are limited by such foreign registration rules because you will probably need to register in your home state anyway. If, however, your business operates in several states or if you expect to expand nationally, then you should consider incorporation in the state that is most favorable for you.
The Absolute Worst State for Incorporation: New York
We proudly award New York state as the worst state for incorporation in the nation. New York imposes a corporation taxation system that is so burdensome and complex, it borders on comical. New York imposes a dizzying variety of separate taxes: a Maintenance Fee, a franchise tax, a license fee, an organization tax, and an income tax. And, if your NY corporation earns zero income and holds zero assets in a tax year, you’ll pay an punitive $800 tax–more than you’d pay if your corporation had a $1,000 profit in the same tax year. This tax is so mystifying in its logic, that we invented a term for it: a “reverse income tax“.
Department of State representatives are surly and ill-informed. Need assistance with New York’s dizzying array of rules, regulations and forms? You’re on your own–hold times are periodically worse than the DMV.
The Second Worst State for Incorporation: California
California offers one benefit that New York does not: at least the Secretary of State’s office answers the phone from time to time. Beyond that, California is on par with New York in terms of inconvenience, expense, and regulatory burden. California earns the dubious honor of imposing the most burdensome minimum tax of any state in the Union: an $800 minimum “income” tax for both C Corporations and S Corporations. California imposes this tax upon companies that have zero income.
The Runner Ups: New Jersey and Massachusetts
New Jersey offers a potent anti-business cocktail: high corporate fees, high corporate taxes, and almost non-existent customer service. NJ’s Business Services Division is a nightmare. Representatives are surly and slow. Corporation formation is needlessly complicated.
Massachusetts imposes high taxes on Corporations, and high formation costs. While far less burdensome than our other choices as poor states for incorporation, Massachusetts is still an unattractive choice for incorporation.