Serving business owners since 2007
The Best and Worst States for Incorporation and Starting a Business
Which states have the best business tax climate for forming an LLC or corporation?
FREE business incorporation, including registered state agent
Just pay state fees, order in 5 minutes or less
1. Wyoming
2. South Dakota
3. Alaska
4. Florida
5. Montana
1. Maryland
2. Connecticut
3. California
4. New York
5. New Jersey
Why isn’t Delaware in the top 5 for best business tax climates?
Delaware is indeed a popular choice for businesses to incorporate, despite its low ranking in terms of corporate tax.
Here are a few reasons:
- Favorable legal environment: Delaware has a very well-developed body of corporate law that is particularly favorable to businesses. The Delaware Court of Chancery is a specialized court that hears corporate law cases without juries, which can lead to more predictable outcomes.
- Flexibility: Delaware’s corporate laws are very flexible. For example, shareholders, directors, and officers don’t need to be residents of Delaware.
- Privacy: Delaware offers greater privacy for corporations. For example, Delaware does not require director or officer names to be listed in the formation documents.
- Tax benefits: While Delaware does have a corporate income tax, it does not tax royalty payments or other “intangible income”. Also, businesses that are formed in Delaware but do not conduct business there do not need to pay state corporate income tax.
- Precedence: Many investors and venture capitalists prefer to invest in Delaware corporations, so many start-ups choose to incorporate there to make themselves more attractive to potential investors.
In summary, while Delaware may not have the lowest corporate tax rate, it offers many other benefits, making it an attractive option for businesses.
Guide to the business tax climate and the legal landscape for starting a business in the U.S.
When you’re in the early stages of starting a business and going it alone, it can be easy to think of incorporation as unnecessary or even a hassle. We won’t tell you there isn’t a lot of paperwork involved (because there is!).
However, for many individuals, there are real and tangible benefits of incorporation that make it worth the investment.
Protecting personal assets through business incorporation
Incorporating your business separates your finances from those of your business. This means creditors or anyone else filing legal action can’t come after you personally.
This aspect of protecting your assets from seizure might make the incorporation process worthwhile for you when you start a business.
Tax benefits of incorporating your business
An incorporated business structure can do things a sole proprietor can’t. Namely, an array of tax deductions are offered to corporations that are not available to sole proprietors.
In the United States, corporations and sole proprietors can take advantage of many of the same tax deductions, such as home office expenses, travel expenses, and business meals.
However, certain tax benefits are unique to corporations, particularly C corporations:
- Fringe benefits: C corporations can deduct the cost of fringe benefits provided to employees, such as health insurance, life insurance, and retirement plan contributions. While sole proprietors can also deduct some of these expenses, they cannot deduct the cost of benefits provided to themselves or their family members.
- Retained earnings: C corporations can retain earnings (up to a certain limit) from year to year without being taxed on them until they are distributed as dividends. This allows the corporation to reinvest its earnings and defer some taxes. Sole proprietors, on the other hand, are taxed on all business income in the year it is earned, regardless of whether it is reinvested in the business or taken out as personal income.
- Income splitting: A C corporation can potentially reduce its overall tax liability by splitting income between the corporation and its owners or employees in the form of salaries and dividends. This can be a way to manage the overall tax rate, as corporate and individual tax rates may differ. Sole proprietors do not have this flexibility, as all business income is considered personal income and is taxed at the individual’s tax rate.
While C corporations have these potential tax benefits, they are also subject to double taxation, meaning their profits are taxed at the corporate level. Then, any dividends distributed to shareholders are taxed again at the individual level.
This is a significant consideration when deciding on a business structure. Other types of corporations, like S corporations, avoid double taxation but do not have all the same tax benefits as C corporations.
Navigating these complexities can be challenging, so contact MaxFilings, the leader in business incorporation for the last 25+ years, to ensure you make the right decisions for your business!
Attracting investors by forming a corporation
Finally, while you may be operating solo now, most entrepreneurs aspire to achieve greater things. That likely means getting more capital, which means attracting investors.
An established corporate structure—with all those legal requirements that can seem so onerous—now works to your benefit. The legal standards a corporation must meet also lend significant legitimacy to the business, making it easier to attract new capital.
This is a key advantage to consider when planning to start a business and evaluating different options for incorporation.
Top 10 states: Common factors
In our rankings below, the absence of a major tax is a common factor among most of the Top 10 states.
While most of these states levy property and unemployment insurance taxes, several do without one or two of the major taxes: sales tax, corporate income tax, or individual income taxes.
- No individual or corporate taxes: Wyoming, Nevada, and South Dakota
- No sales or individual income taxes: Alaska
- No individual income tax: Tennessee and Florida
- No sales tax: Montana and New Hampshire
- Low tax rates: Utah and Indiana impose all the primary taxes, but their rates are very low.
Bottom 10 states: Common issues
Meanwhile, the states making up the Bottom 10 of our rankings share several issues – mainly, complex tax structures with arguably high rates.
Ranked last on the list, New Jersey is one of the worst states to start a business due to its terribly structured individual income taxes, the highest corporate income tax rate in the country (a maximum of 11.5%), one of the highest individual tax rates (up to 10.75%), a nearly hostile attitude towards international income, and the imposition of an inheritance tax.
To assist you in evaluating each state’s business tax climate, here are the results of a study performed by the Tax Foundation—a non-partisan tax research group based in Washington, DC founded in 1937.
According to the Tax Foundation’s 2022 State Business Tax Climate Index, here’s how all 50 states stack up to each other in terms of business friendliness.
2022 State business tax climate index
10 BEST states to form an LLC or corporation
1. Wyoming
- Corporate tax rate rank: 1st
- Individual income tax rank: 1st
- Sales tax rank: 6th
- Property tax rank: 35th
- Unemployment insurance tax rank: 31st
Wyoming keeps going strong with another year at the top of the charts. The twin #1 rankings in corporate and personal income tax, along with a high sales tax ranking, are clearly the keys to the state’s success. But even the areas that aren’t as strong are improving. Wyoming is a great place to do business and is only getting better.
2. South Dakota
- Corporate tax rate rank: 1st
- Individual income tax rank: 1st
- Sales tax rank: 34th
- Property tax rank: 18th
- Unemployment insurance tax rank: 38th
South Dakota follows the pattern set by Wyoming of eliminating corporate and individual income taxes as the foundation of their strategy to attract business. South Dakota also follows the Wyoming pattern in making some modest improvements under the radar. The state’s rankings on sales tax and unemployment tax have nudged upward. The unemployment tax is the biggest hindrance to South Dakota moving to the top. Business owners like tax stability, so figuring this out is the opportunity for South Dakota to improve.
3. Alaska
- Corporate tax rate rank: 28th
- Individual income tax rank: 1st
- Sales tax rank: 5th
- Property tax rank: 24th
- Unemployment insurance tax rank: 43rd
Alaska holds firm at #3 with a lot of across-the-board stability. The property tax rank made marginal improvement, and the unemployment insurance tax rank showed slight slippage. Essentially, they canceled each other out. The middle-of-the-pack corporate tax ranking holds The Last Frontier back in terms of attractiveness for entrepreneurs. But no income tax and minimal sales tax are still pretty nice advantages and they are the main reason why Alaska remains one of the best states to start a business.
4. Florida
- Corporate tax rate rank: 7th
- Individual income tax rank: 1st
- Sales tax rank: 21st
- Property tax rank: 12th
- Unemployment insurance tax rank: 2nd
The Sunshine State keeps grinding forward while staying in place. By that we mean that Florida holds at #4 for the 5th straight year. They keep making modest improvements, this year with nudges upward in ranking for sales taxes and property taxes. Florida is using the motto that slow and steady wins the race, offering entrepreneurs both an attractive tax structure and the comfort of stability.
5. Montana
- Corporate tax rate rank: 22nd
- Individual income tax rank: 24th
- Sales tax rank: 3rd
- Property tax rank: 29th
- Unemployment insurance tax rank: 19th
Montana’s only real area of strength is in sales taxes, where the state holds steady at fifth-best in the country. What helps the state remain strong is that none of the areas are really bad, all huddling around the middle of the pack. That fact, combined with the low sales taxes, is keeping Montana a good place to do business.
- Corporate tax rate rank: 41st
- Individual income tax rank: 9th
- Sales tax rank: 1st
- Property tax rank: 46th
- Unemployment insurance tax rank: 44th
The Granite State lets you make money and spend it in a tax-friendly way, with their lack of sales tax and low income tax leading to strong rankings in both categories. That has been more than enough to make up for high taxes and poor rankings in the other 3 areas. New Hampshire’s overall #6 ranking holds steady, rounding out a national Top 6 that is identical to 2020.
7. Nevada
- Corporate tax rate rank: 25th
- Individual income tax rank: 5th
- Sales tax rank: 44th
- Property tax rank: 5th
- Unemployment insurance tax rank: 45th
Nevada’s tax structure, with its strong rankings on income and property taxes, attract businesses that require large amounts of commercial space and can generate high revenue. That’s enough to make up for a poor position on sales and unemployment insurance tax rank.
8. Tennessee
- Corporate tax rate rank: 26th
- Individual income tax rank: 6th
- Sales tax rank: 46th
- Property tax rank: 33rd
- Unemployment insurance tax rank: 20th
This state popped onto the Top 10 rankings due to the phaseout of its Hall Tax, which solely targeted interest and dividends income. This change is due to the state already deciding not to tax wage income. Now that the Hall Tax has been phased out, all that remains of Tennessee’s non-corporate income tax is how the state treats S Corporations and a low-rate gross receipts tax only applicable to passthrough businesses. These changes, coupled with other states weakening treatment of unemployment insurance, brought Tennessee’s overall ranking from 17th in 2021 to 8th.
9. Indiana
- Corporate tax rate rank: 11th
- Individual income tax rank: 15th
- Sales tax rank: 19th
- Property tax rank: 1st
- Unemployment insurance tax rank: 25th
Indiana’s overall position is mostly stable, but at the granular level, the way the Hoosier State got there has significantly changed. Corporate taxes improved, while individual income tax position worsened. They cancelled each other out and strong gains in the sales and property tax categories helped Indiana clock in at #9.
10. Utah
- Corporate tax rate rank: 14th
- Individual income tax rank: 10th
- Sales tax rank: 22nd
- Property tax rank: 7th
- Unemployment insurance tax rank: 17th
Two trends continue for Utah. The first is that they continue to be in the overall top 10, meaning this is clearly a good state to start a business in. But the other trend, building for the past couple years, is not a positive one. In 2018, Utah ranked third on corporate taxes. They’ve been gradually slipping since then and now sit at 14th.
The Tennessee Hall Tax was imposed on individuals and businesses receiving interest from bonds, notes, and dividends from stock. It was named after Senator Frank S. Hall, who sponsored the legislation creating the tax in 1929. The tax rate was 6% of the total income from interest and dividends, although certain exceptions and deductions were available.
However, the Tennessee Hall Tax has been fully repealed as of January 1, 2021. The repeal process was gradual, with the tax rate being reduced by 1% each year starting in 2016 until it was eliminated. This was part of a broader effort by the state of Tennessee to eliminate income taxes and rely more on sales taxes for revenue.
10 WORST states to form an LLC or corporation
1. Hawaii
- Corporate tax rate rank: 19th
- Individual income tax rank: 46th
- Sales tax rank: 28th
- Property tax rank: 30th
- Unemployment insurance tax rank: 29th
Hawaii currently has 13 different tax brackets, the most of any state. The state does have a relatively low 4 percent state-level sales tax. It’s predicted that Hawaii will slip to No.43 in 2023 for the worst states to start an LLC due to its business tax climate, with increased property taxes as a leading reason.
2. Louisiana
- Corporate tax rate rank: 34th
- Individual income tax rank: 34th
- Sales tax rank: 48th
- Property tax rank: 23rd
- Unemployment insurance tax rank: 5th
The strong ranking on unemployment insurance taxes isn’t enough to overcome the lack of any other clear strengths. Like Alabama, Louisiana makes it expensive to buy a product with their sales tax structure. The corporate and income taxes only add to the problems entrepreneurs face in going to Louisiana.
3. Vermont
- Corporate tax rate rank: 43rd
- Individual income tax rank: 40th
- Sales tax rank: 16th
- Property tax rank: 49th
- Unemployment insurance tax rank: 15th
Acquiring property comes at a significant cost in Vermont, with that #49 ranking in property taxes. This clearly works against any business venture requiring large amounts of commercial space. Entrepreneurs take a further hit in corporate and individual income taxes. At least sales and unemployment insurance taxes are pretty good, allowing the state to nudge up a spot from last year.
4. Arkansas
- Corporate tax rate rank: 30th
- Individual income tax rank: 39th
- Sales tax rank: 45th
- Property tax rank: 27th
- Unemployment insurance tax rank: 33rd
Arkansas and Maryland might have different political climates, but their business tax climates remain much the same—another year in the bottom 10 and losing ground in the process. Arkansas’ position on individual income taxes slipped a spot and there are no real advantages in the state’s tax structure.
5. Minnesota
- Corporate tax rate rank: 45th
- Individual income tax rank: 43rd
- Sales tax rank: 29th
- Property tax rank: 32nd
- Unemployment insurance tax rank: 30th
Minnesota has its share of problems from a tax standpoint, but there are some signs of light. Property taxes and unemployment insurance taxes each improved in this year’s rankings. If their trend can continue, and Minnesota can address its corporate and income tax structure, the state could make its way out of the bottom 10.
6. Maryland
- Corporate tax rate rank: 33rd
- Individual income tax rank: 45th
- Sales tax rank: 26th
- Property tax rank: 43rd
- Unemployment insurance tax rank: 46th
Bad and getting worse would be the way to sum up the tax appeal for businesses in Maryland. The state continues to be in the bottom 10 and is down 2 spots. The sales taxes are the only notable strength, but entrepreneurs pay through the nose everywhere else.
7. Connecticut
- Corporate tax rate rank: 27th
- Individual income tax rank: 47th
- Sales tax rank: 23rd
- Property tax rank: 50th
- Unemployment insurance tax rank: 22nd
Connecticut is holding “strong,” if you want to use that word to describe a third straight finish at #47. Connecticut’s problems are driven by the cost of commercial property, with that last-place ranking for property tax also holding for the third straight year.
8. California
- Corporate tax rate rank: 46th
- Individual income tax rank: 49th
- Sales tax rank: 47th
- Property tax rank: 14th
- Unemployment insurance tax rank: 23rd
It’s attractive to buy commercial property in California, thanks to that #14 ranking in property taxes. But it’s not attractive to do much else, at least from a financial standpoint. Debilitating income taxes, heavy sales taxes and mediocre corporate taxes keep the Golden State near the bottom of the rankings yet again.
9. New York
- Corporate tax rate rank: 24th
- Individual income tax rank: 50th
- Sales tax rank: 42nd
- Property tax rank: 47th
- Unemployment insurance tax rank: 36th
This year, New York dropped down a spot, ceding its former ranking to California. This shift was due to increases in several of New York’s taxes: Corporate tax (from 15th to 24th), Individual income tax (from 45th to 50th), and property tax (from 45th to 47th).
10. New Jersey
- Corporate tax rate rank: 48th
- Individual income tax rank: 48th
- Sales tax rank: 43rd
- Property tax rank: 44th
- Unemployment insurance tax rank: 32nd
Not much changed in the Garden State over the past year. Minor improvement in corporate tax ranking was offset by minor decline in unemployment insurance tax ranking. Finishing dead last in the nation is New Jersey’s dubious reward.
Where does your state rank?
Check out the accompanying chart.
Keep in mind that when you see duplicate numbers (i.e. the first 2 states both ranking first in corporate tax rank), that indicates a tie.
State-Rank |
Corporate tax rank |
Individual income tax rank |
Sales tax rank |
Property tax rank |
Unemployment insurance tax rank |
1 |
1 |
6 |
35 |
31 |
|
1 |
1 |
34 |
18 |
38 |
|
28 |
1 |
5 |
24 |
43 |
|
7 |
1 |
21 |
12 |
2 |
|
22 |
24 |
3 |
29 |
19 |
|
41 |
9 |
1 |
46 |
44 |
|
25 |
5 |
44 |
5 |
45 |
|
26 |
6 |
46 |
33 |
20 |
|
11 |
15 |
19 |
1 |
25 |
|
14 |
10 |
22 |
7 |
17 |
|
4 |
16 |
20 |
13 |
12 |
|
20 |
12 |
10 |
21 |
7 |
|
3 |
21 |
25 |
8 |
4 |
|
47 |
7 |
36 |
37 |
14 |
|
39 |
7 |
49 |
20 |
24 |
|
50 |
44 |
2 |
4 |
3 |
|
29 |
20 |
9 |
3 |
47 |
|
15 |
17 |
13 |
21 |
49 |
|
9 |
26 |
30 |
10 |
9 |
|
6 |
14 |
38 |
34 |
41 |
|
18 |
28 |
18 |
9 |
26 |
|
49 |
42 |
4 |
17 |
39 |
|
23 |
18 |
40 |
11 |
11 |
|
21 |
22 |
27 |
31 |
16 |
|
16 |
32 |
11 |
26 |
42 |
|
10 |
30 |
37 |
28 |
1 |
|
31 |
37 |
7 |
16 |
28 |
|
12 |
36 |
41 |
2 |
8 |
|
44 |
19 |
17 |
15 |
21 |
|
13 |
25 |
32 |
38 |
6 |
|
5 |
33 |
31 |
36 |
27 |
|
8 |
35 |
33 |
25 |
37 |
|
35 |
23 |
8 |
41 |
35 |
|
36 |
11 |
12 |
45 |
50 |
|
32 |
29 |
14 |
40 |
13 |
|
42 |
13 |
39 |
48 |
40 |
|
40 |
41 |
35 |
6 |
10 |
|
38 |
38 |
15 |
39 |
34 |
|
17 |
27 |
50 |
19 |
18 |
|
37 |
31 |
24 |
42 |
49 |
|
19 |
46 |
28 |
30 |
29 |
|
34 |
34 |
48 |
23 |
5 |
|
43 |
40 |
16 |
49 |
15 |
|
30 |
39 |
45 |
27 |
33 |
|
45 |
43 |
29 |
32 |
30 |
|
33 |
45 |
26 |
43 |
46 |
|
27 |
47 |
23 |
50 |
22 |
|
46 |
49 |
47 |
14 |
23 |
|
24 |
50 |
42 |
47 |
36 |
|
48 |
48 |
43 |
44 |
32 |
Note: A rank of 1 is best, 50 is worst. Rankings do not average to the total. States without a tax rank equally as 1. D.C.’s score and rank do not affect other states. The report shows tax systems as of July 1, 2021 (the beginning of Fiscal Year 2022). Source: Tax Foundation
2022 corporate tax rate
State |
Rates |
|
Brackets |
Gross receipts tax rate (a) |
Alabama |
6.5% |
> |
$0 |
|
Alaska |
0.0% |
> |
$0 |
|
|
2.0% |
> |
$25,000 |
|
|
3.0% |
> |
$49,000 |
|
|
4.0% |
> |
$74,000 |
|
|
5.0% |
> |
$99,000 |
|
|
6.0% |
> |
$124,000 |
|
|
7.0% |
> |
$148,000 |
|
|
8.0% |
> |
$173,000 |
|
|
9.0% |
> |
$198,000 |
|
|
9.4% |
> |
$222,000 |
|
Arizona |
4.9% |
> |
$0 |
|
Arkansas |
1.0% |
> |
$0 |
|
|
2.0% |
> |
$3,000 |
|
|
3.0% |
> |
$6,000 |
|
|
5.0% |
> |
$11,000 |
|
|
6.0% |
> |
$25,000 |
|
|
6.2% |
> |
$100,000 |
|
California |
8.84% |
> |
$0 |
|
Colorado (b) |
4.5% |
> |
$0 |
|
Connecticut (c) |
8.25% |
> |
$0 |
|
Delaware |
8.7% |
> |
$0 |
0.0945% – 0.7468% (d) |
Florida |
4.458% |
> |
$0 |
|
Georgia |
5.75% |
> |
$0 |
|
Hawaii |
4.4% |
> |
$0 |
|
|
5.4% |
> |
$25,000 |
|
|
6.4% |
> |
$100,000 |
|
Idaho |
6.5% |
> |
$0 |
|
Illinois (e) |
9.5% |
> |
$0 |
|
Indiana |
4.90% |
> |
$0 |
|
Iowa |
5.5% |
> |
$0 |
|
|
9.0% |
> |
$100,000 |
|
|
9.8% |
> |
$250,000 |
|
Kansas |
4.0% |
> |
$0 |
|
|
7.0% |
> |
$50,000 |
|
Kentucky |
5.0% |
> |
$0 |
|
Louisiana |
4.0% |
> |
$0 |
|
|
5.0% |
> |
$25,000 |
|
|
6.0% |
> |
$50,000 |
|
|
7.0% |
> |
$100,000 |
|
|
8.0% |
> |
$200,000 |
|
Maine |
3.5% |
> |
$0 |
|
|
7.93% |
> |
$350,000 |
|
|
8.33% |
> |
$1,050,000 |
|
|
8.93% |
> |
$3,500,000 |
|
Maryland |
8.25% |
> |
$0 |
|
Massachusetts |
8.0% |
> |
$0 |
|
Michigan |
6.0% |
> |
$0 |
|
Minnesota |
9.8% |
> |
$0 |
|
Mississippi |
3.0% |
> |
$0 |
|
|
4.0% |
> |
$5,000 |
|
|
5.0% |
> |
$10,000 |
|
Missouri |
4.0% |
> |
$0 |
|
Montana |
6.75% |
> |
$0 |
|
Nebraska |
5.58% |
> |
$0 |
|
|
7.81% |
> |
$100,000 |
|
Nevada (f) |
|
None |
|
0.051% – 0.331% (d) |
New Hampshire |
7.7% |
> |
$0 |
|
New Jersey (g, h) |
6.5% |
> |
$0 |
|
|
7.5% |
> |
$50,000 |
|
|
9.0% |
> |
$100,000 |
|
|
11.5% |
> |
$1,000,000 |
|
New Mexico |
4.8% |
> |
$0 |
|
|
5.9% |
> |
$500,000 |
|
New York (g) |
6.50% |
> |
$0 |
|
|
7.25% |
> |
$5,000,000 |
|
North Carolina |
2.5% |
> |
$0 |
|
North Dakota |
1.41% |
> |
$0 |
|
|
3.55% |
> |
$25,000 |
|
|
4.31% |
> |
$50,000 |
|
Ohio |
|
(a) |
0.26% |
|
Oklahoma |
6.0% |
> |
$0 |
|
Oregon |
6.6% |
> |
$0 |
0.57% |
|
7.6% |
> |
$1,000,000 |
|
Pennsylvania |
9.99% |
> |
$0 |
|
Rhode Island |
7.0% |
> |
$0 |
|
South Carolina |
5.0% |
> |
$0 |
|
South Dakota |
|
None |
|
|
Tennessee |
6.5% |
> |
$0 |
|
Texas |
|
(a) |
|
0.331% – 0.75% (d) |
Utah |
4.95% |
> |
$0 |
|
Vermont |
6.0% |
> |
$0 |
|
|
7.0% |
> |
$10,000 |
|
|
8.5% |
> |
$25,000 |
|
Virginia |
6.0% |
> |
$0 |
0.02% – 0.58% (d) |
Washington |
|
(a) |
|
0.13% – 3.3% (d) |
West Virginia |
6.5% |
> |
$0 |
|
Wisconsin |
7.9% |
> |
$0 |
|
Wyoming |
|
None |
|
|
District of Columbia |
8.25% |
> |
$0 |
|
Source: Tax Foundation
Simple & straightforward small business incorporation across all 50 states
While your home state may not be the cheapest state to start a business and incorporate, it could still be the most cost-effective choice for various reasons.
This concept is known as “home state incorporation.”
MaxFilings helps entrepreneurs and businesses across all 50 states and the District of Columbia to incorporate and meet their state’s requirements. Our secure and user-friendly online incorporation system provides transparent pricing for your state and corporate structure.
Start forming your corporation online today.
