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#FavoriteStateOfTheUnion2020 Posting 2: How a “favorite” fits in with our setting-up process

If you’re about to launch a venture in a foreign country, you had better have a plan, and do your homework in advance to have a chance at success. Over the past few decades of helping non-US residents set up US companies, we have come up with a suggested process to follow.

Many clients have come to us having already decided where in the US to set up their business, but others have not yet made the decision. This is something that needs to be addressed in the first stage of the process.

The process of setting up a business in the US as a non-resident involves three steps:

1. Determining what you will do, who will do it, and where
2. Planning for how to carry out step 1
3. Carrying out the steps to set up the business as worked out in step 2

Setting up a business and setting up a company are two different decisions. Most of the time, one will set up a new company in the same state as the new business, but this is not required. It is cheaper and easier to set up in the same state, so why would a new business go through the complexity and expense of setting up in a different state?

Why advanced planning is so important. Thinking about your business’s future, will you be staying in one state, or expanding into different states? In this case, it may be justified to set up in a different state where the administrative costs are low, and it is fast to get the proper documentation in order to register in a new state.

What if the state you start out in doesn’t work out, and you need to move to a better location? This happens a lot. In this case, you have to either set up in a new state and merge the old company into it, or continue to deal with the original state’s compliance while doing all your business in the new state. If you are lucky you can “redomiciliate” or “convert” your company from its old location to the new one, but not every state allows this – and both states must allow such movement. This happens more often than one might think. For example, a couple wants to start a business in New York City but already has plans to move, maybe to Pennsylvania or maybe to Ohio. But within a few years, they plan to move to the West Coast for the long term. Where to incorporate in this case?

In Step 1 of our Set Up Process, you will be deciding where in the US to set up your business. There are several helpful lists of “best states” that are published by different organizations, which will be discussed in the next posting. In the final posting of this series, we will disclose our own favorite. What your favorite state will be will be determined by your intended activities, your priorities for culture, climate and any other preferences and biases you have.

Taxes are just one consideration. Potential customers ask us every day about what state has the lowest taxes. State and local taxes are one consideration for choosing a location, but the rule of thumb is: Don’t let tax drive your business strategy. The heaviest income taxes are levied by the federal government, and this tax burden is the same regardless of your location in the US.

By the time you get to Step 2 (Planning Stage), you will know where in the US you want to set up your business. Want to become a global media player? New York City is probably your best location. Want to set up a mining business? Wyoming comes to mind. Setting up or expanding your Energy business? Texas leads there, not only with opportunities but also the people with the skills you will want to hire. Are you from Canada? Setting up a business in upstate New York, Michigan or Washington State is easiest, especially for banking.

A new firm looking to establish a niche can set up in almost any state. A marketing firm can be regional while getting established, so in theory it can be anywhere as long as there is an adequate market to get established. There are mining opportunities throughout the US, and energy companies can find resources and markets throughout the country.

A “favorite” state, then, is one that has features that provide a fertile ground for growth and minimal impediments to conducting business. If you are in the determination stage and have not yet determined where in the US to set up your business, or are in the planning stage and want to make sure that the location is appropriate before committing to it in Step 3, then consider what the “favorite” state is for you.

Your choice of “favorite” state to set up your business should be based on operational considerations like evaluating potential competition, analyzing the local labor market, calculating the impact of state-specific minimum wage and other labor and employment laws, and considering supply chain dependencies. On the other hand, the decision to choose a state for organizing or incorporating your new business should hinge more on legal, compliance and financing considerations.

In our next post, we will look at lists of “Best States” by different organizations, each with their own bias and orientation.