Choosing the Right State for Your Business Entity

When starting a business, choosing the right state for your business entity is one of the most critical decisions. Each state has its laws and regulations governing businesses, making it crucial to select the best state for your company to thrive.

Here are some key factors to consider when deciding on a state for your business entity:

Type of Business Entity

The type of entity you choose, such as a limited liability company (LLC) or corporation, may affect which state is best for your business. Some states have more favorable tax and regulatory environments for certain types of entities. For example, Delaware is known for its business-friendly laws and is often the top choice for corporations due to its low taxes and simplified business laws.

Location and Customer Base

The location of your business can also play a role in determining which state is best for your entity. If your company primarily operates in one state, it may make sense to incorporate there to avoid dealing with multiple state regulations. Additionally, incorporating there may simplify tax and legal compliance if you have a large customer base in a particular state.

State Taxes

Taxes are a significant consideration when choosing a state for your business entity. Some states have lower corporate or income tax rates than others, making them more attractive for businesses looking to save on taxes. It’s important to research the tax laws in each state to determine which will be most beneficial for your company.

Business Incentives

States may offer incentives or benefits to attract businesses, such as tax credits, grants, or loan programs. These incentives can vary greatly between states and may play a significant role in deciding where to incorporate your business entity.

State Laws and Regulations

Each state has its own set of laws and regulations governing businesses. Researching these laws and determining how they may impact your business is essential. For example, some states have stricter labor laws or require additional licenses or permits for specific industries. Additionally, some states may have more complex legal processes for starting and maintaining a business.

Choosing the right state for your business entity involves carefully considering several factors, including taxes, location, and state laws and regulations. It’s important to thoroughly research each option and consult with legal and tax professionals to determine the best fit for your company needs. By taking these factors into account, you can ensure that your business is set up for success in the long run.

See the Jurisdiction Comparison Chart below.

Entity Choice

You will create a business entity under state law when establishing a new business. You have three primary options:

Corporations.
Partnerships (as general partnerships, limited partnerships, limited liability partnerships, or limited liability limited partnerships).
LLCs.

For taxation, the Internal Revenue Service (IRS) will classify the business entity as one of the following:

Disregarded entity
Partnership
S Corporation
C Corporation

See Tax Choice Considerations Chart below.

Jurisdiction Comparison Chart

	Delaware	Georgia	Florida
Management	Managed by members unless the LLC agreement provides for management by one or more managers. See Del. Code Ann. tit. 8, § 102(b)(6).	Managed by members unless the articles of organization or operating agreement vests management in one or more managers. Ga. Code Ann. § 14-11-304(a).	Managed by members unless the articles of organization or operating agreement expressly provide that LLC. See Fla. Stat. § 605.0407.
Ownership	May have one or more owners (members). See Del. Code Ann. tit. 6, §§ 18-101, 18-301. A single-member LLC is a disregarded entity for tax purposes (all profit and losses are reported on Schedule C to IRS Form 1040). A multimember LLC receives pass-through tax treatment (the LLC must file Form 1065).	Same as Delaware. See Ga. Code Ann. § 14-11-505.	May have one or more owners (members). See Fla. Stat. § 605.0401. A single-member LLC is a disregarded entity for tax purposes (all profit and losses are reported on Schedule C to IRS Form 1040). A multimember LLC receives pass-through tax treatment (the LLC must file Form 1065).
Governing Documents	A certificate of formation must be filed with the state. Del. Code Ann. tit. 6, § 18-201(a). An LLC agreement is required, although it is not required to be in writing. Del. Code Ann. tit. 6, §§ 18-101(9), 18-201(d).	Articles of organization must be filed with the state. Ga. Code Ann. § 14-11-203. An operating agreement is not required but is recommended. See Ga. Code Ann. § 14-11-101(18).	Articles of organization must be filed with the state. Fla. Stat. § 605.0201. An operating agreement is not required but is recommended. See Fla. Stat. § 605.0105.
Fiduciary Duties	Managers and/or members owe traditional fiduciary duties of care and loyalty to each other and to the LLC; provided, however, that the fiduciary duties (other than the implied covenant of good faith and fair dealing) may be expanded, restricted, or eliminated in the LLC agreement. See Del. Code Ann. tit. 6, § 18-1101(c).	Members or managers must act in a manner they believe in good faith to be in the best interests of the LLC and with the care an ordinarily prudent person in a like position would exercise under similar circumstances. Ga. Code Ann. § 14-11-305(1). Fiduciary duties may be modified in the operating agreement as set forth in Ga. Code Ann. § 14-11-305(4).	Each manager of a manager-managed LLC and member of a member-managed LLC owes fiduciary duties of loyalty and care to the LLC and to its members, subject to modifications permissible under Fla. Stat. § 605.0105(4). See Fla. Stat. § 605.04091.
Liabilities	Members and managers are not personally liable for the debts or obligations of the LLC. Del. Code Ann. tit. 6, § 18-303.	Same as Delware. See Ga. Code Ann. § 14-11-303.	Members and managers are not personally liable for the debts, obligations, or other liabilities of the LLC. Fla. Stat. § 605.0304.
Distributions	Distributions are allocated among members as provided in the LLC agreement. Del. Code Ann. tit. 6, § 18-504.	A member is entitled to receive distributions only to the extent, and at the times or upon the happening of the events, specified in the articles of organization or a written operating agreement or as otherwise approved by all of the members. If the articles of organization or a written operating agreement do not provide how distributions are to be shared, distributions must be shared equally among the members. Ga. Code Ann. § 14-11-404.	Distributions are shared based on the agreed value of the contributions made by each member (and persons dissociated as members). Fla. Stat. § 605.0404(1).

Tax Choice Considerations Chart

Tax Classification	Single Owner	Two Owners	Three or more Owners
Disregarded Entity	This is the default classification for a single-owner LLC. The IRS ignores or “disregards” the LLC for tax purposes and the owner reports the LLC’s income and expenses on their personal tax return. This means the LLC does not file an income tax return.	Not available.	Not available.
Partnership	Not available.	This is the default tax classification for an LLC with two or more members. Like an S Corporation, a partnership is a “pass-through” entity. Its profits and losses generally pass through to its members, who include their respective shares of those items on their income tax returns (whether or not distributed). Unlike an S-corporation, a partnership does not have any restrictions on the number (other than the requirement that it have two or more owners), type, or residency of its owners. A partnership has much more flexibility than an S Corporation in dividing profits and losses among its owners.
S Corporation	The owners must file an election with the IRS to treat their LLC or corporation as an S Corporation, whether single or multiple owners. Unlike a C Corporation, an S Corporation is a “pass-through” entity, meaning the S-corporation’s profits and losses generally pass through to its stockholders, who include their respective share of those items on their income tax returns (whether or not distributed). An S Corporation has numerous restrictions, including that it can have only one class of stock, no more than 100 stockholders, and, with certain limited exceptions, only US individuals (citizens or residents) can be stockholders. An S Corporation must file its own income tax return, Form 1120-S.
C Corporation	This is the default classification for a corporation, regardless of the number of owners. The corporation’s income is taxed twice: (a) at the entity level when earned and (b) at the stockholder level when distributed (also known as double taxation). If the stockholders have no plans to make distributions, then a C Corporation can be advantageous because the corporate tax rate is 21%. The C Corporation must file its own income tax return, Form 1120. An LLC can make an election with the IRS to be taxable as a C Corporation.