Want to start a corporation? Discover which states offer better tax rates so that you can pay fewer taxes and earn more profit.
The goal of every business is to lower its expenses and earn more profit. In order to respect the rules of the state in which they run their business, companies need to pay taxes – a charge imposed by the government on their income, product, or activity.
If you want to start a corporation, among many other things, you need to consider the amount of taxes you will have to pay. TRUiC can give you lots of useful information on how to start a corporation and advice on what you will need to pay attention to when you select the state in which you want to operate your business.
How Are Corporations Taxed?
Depending on the corporation type, taxes that the business owners should pay can differ. For some corporations, owners will pay taxes twice – once when the profit is earned and then a second time when they pay dividends to shareholders. This is the case with the C Corps so for those who have selected this type of corporation, it is important to know that their business will be “double taxed”. For S Corps, taxes are paid differently – owners’ profits are passed through their individual tax returns.
There are several other taxes that every business owner needs to consider. Depending on the state the owner has selected to establish the business in, additional state or local corporate taxes may also be imposed. One of these is the U.S. federal corporate tax, which is currently at 21%.
Why is a Tax Decision Important for Corporations?
Taxes affect every business decision. The more taxes a corporation has to pay the less profit it will earn. Fewer profits mean a higher cost of the product, lower wages to employees and lower dividends.
Decisions about taxes are connected to other very important things for the company, and include job creation, infrastructure, location, competitiveness on the market, and transparency; not only of the tax system but of the whole state’s economy.
What are the States With the Lower Tax Rates?
Even though it seems much easier to open a corporation in the state where you are located or where you will do the majority of your business, some business owners base their decision on the amount of taxes they would need to pay.
States that offer lower taxes can be more attractive for a business. In order to make the final decision, business owners usually start by comparing their state’s taxes (income taxes, sales taxes, other business taxes, unemployment taxes) with the tax systems of the other states and select the best option.
According to the Tax Foundation, these are 10 “tax haven” states which owners of corporations can select to enjoy more earnings while paying fewer taxes.
1. Wyoming
The number one state on the list, Wyoming is considered as the best state for business taxes. Even though it is one of the least densely populated states, it has no individual income tax and it is one of the two states which doesn’t impose a corporate income tax.
2. South Dakota
In the overall business tax ranking, South Dakota is in second place. It is also the second state with no corporate income tax and it has no individual income tax.
3. Alaska
Alaska is considered as the state with the lowest tax burden in the whole US. It has no state income or state-level sales tax. The percentage of total state and local tax burden is 5,1% of personal income and it includes income tax, sales tax, income tax, and excise tax. By comparison, the tax burden in New York is 12.9% of income.
4. Florida
Known for its warm temperature and a large population of seniors, Florida does not have an individual income tax. What also makes Florida attractive for a business is that the unemployment insurance tax in this state is very low.
5. Montana
Montana taxes corporate income, but it has limited its sales tax to 4%. That’s why Montana is ranked among the best states in the US in sales tax rankings. Unlike many states, Montana does not impose state taxes like franchise tax or a privilege tax.
6. New Hampshire
The advantage of the New Hampshire tax system for businesses is that it does not tax earned income and has no state-level sales tax.
7. Nevada
Nevada is a US state that has no corporate income tax, individual income tax, and franchise tax. Still, it imposes high sales taxes and it depends on revenue from taxes on gambling, casinos, hotels, and alcohol.
8. Oregon
The ninth largest state in the US, Oregon, is ranked among the best states for its low sales tax, but compared to the other states it has one of the highest individual income tax rates.
9. Utah
Utah has low property tax and it ranks very well in individual tax rates among other US states.
10. Indiana
If you want to pay a low property tax, then you should consider Indiana, as it ranks among the best compared to the other US states.