The Best (and Worst) States to Incorporate In: A Guide (2020)
Which states have the best business tax climate for forming an LLC or corporation?
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When you’re starting a business and still in the early stages of 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 that goes with it (there is!). But there are real and tangible benefits of incorporation that make it worth the investment of time.
Incorporating your business serves to separate your individual finances from those of the business. This means creditors or anyone else filing legal action can’t come after you personally. The small business owner who incorporates generally won’t lose their house because of the business, and protecting yourself from this alone might make incorporation worthwhile for you.
An incorporated business structure can also do things a sole proprietor can’t. Namely, there are an array of tax deductions offered to corporations. You can write off travel and insurance costs, just to name a couple.
Finally, you may be flying solo right now, but most entrepreneurs have dreams of bigger 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 give a powerful legitimacy to the business that make it easier to attract new capital.
To assist you in evaluating each state’s business tax climate, we call your attention to the results of a study performed by the Tax Foundation—a non-partisan tax research group based in Washington, D.C. founded in 1937. According to the Tax Foundation’s 2020 State Business Tax Climate Index, here’s how all 50 states stack up to each other in terms of business friendliness:
2020 state business tax climate index
10 BEST states to form an LLC or corporation in 2020
1. Wyoming
- Corporate tax rate rank: 1st
- Individual income tax rank: 1st
- Sales tax rank: 6th
- Property tax rank: 39th
- Unemployment insurance tax rank: 37th
Wyoming continues to be the gold standard of business tax-friendliness, with its twin #1 rankings in corporate and personal income tax. However, the state did slip back modestly in the unemployment and property tax areas. This continues a 3-year pattern of modest change in either direction in these areas, but never affecting the state’s overall status.
2. South Dakota
- Corporate tax rate rank: 1st
- Individual income tax rank: 1st
- Sales tax rank: 35th
- Property tax rank: 22nd
- Unemployment insurance tax rank: 24th
Two years ago, South Dakota’s unemployment tax ranking was 40th. It nudged to 39th last year and then made a big leap to 22nd this year. That’s the biggest change that allowed South Dakota to nudge past Alaska for the #2 spot nationally.
3. Alaska
- Corporate tax rate rank: 26th
- Individual income tax rank: 1st
- Sales tax rank: 5th
- Property tax rank: 25th
- Unemployment insurance tax rank: 46th
Unemployment taxes were a factor in Alaska’s modest slip from the #2 spot. The Last Frontier took a tumble from #25 all the way to #46 in this area. But no income tax is still a pretty nice advantage and it’s the main reason why Alaska remains one of the best states to start a business.
4. Florida
- Corporate tax rate rank: 9th
- Individual income tax rank: 1st
- Sales tax rank: 23rd
- Property tax rank: 13th
- Unemployment insurance tax rank: 2nd
The Sunshine State is #4 for the third straight year, but its position gets progressively stronger. In recent years, Florida has sought to cut corporate taxes. After 2 straight years at #19 in this area, it jumped into the top 10.
5. Montana
- Corporate tax rate rank: 21st
- Individual income tax rank: 25th
- Sales tax rank: 3rd
- Property tax rank: 12th
- Unemployment insurance tax rank: 20th
Montana is noteworthy for not having strong rankings in the corporate and individual income tax areas, a trait shared only by Oregon among those in the top 10. But the state’s low sales tax and overall position in each individual area is relatively unchanged over a 3-year period.
- Corporate tax rate rank: 43rd
- Individual income tax rank: 9th
- Sales tax rank: 1st
- Property tax rank: 44th
- Unemployment insurance tax rank: 45th
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.
7. Oregon
- Corporate tax rate rank: 33rd
- Individual income tax rank: 38th
- Sales tax rank: 4th
- Property tax rank: 18th
- Unemployment insurance tax rank: 36th
A lot of Oregon’s numbers don’t necessarily look good on the surface, but the state’s strong sales tax ranking and a solid property tax position means Oregon is a friendly state to set up a physical store.
8. Utah
- Corporate tax rate rank: 12th
- Individual income tax rank: 10th
- Sales tax rank: 22nd
- Property tax rank: 5th
- Unemployment insurance tax rank: 15th
Utah’s presence in the top 10 obviously means it’s a good state to do business in, but the trend is not positive for the Beehive State. Specifically, it’s losing ranking on corporate taxes, falling from a high of 3rd place just 2 years ago.
9. Nevada
- Corporate tax rate rank: 25th
- Individual income tax rank: 5th
- Sales tax rank: 44th
- Property tax rank: 10th
- Unemployment insurance tax rank: 47th
Nevada used to be one of the states that shared the top spot for individual income taxes. Some ground has been lost there, while a ranking share has been gained in corporate taxes, which were 34th just a year ago.
10. Indiana
- Corporate tax rate rank: 11th
- Individual income tax rank: 15th
- Sales tax rank: 20th
- Property tax rank: 2nd
- Unemployment insurance tax rank: 25th
The Hoosier State did a lot of shuffling to remain in the top 10. Indiana made sharp improvements on ranking for corporate and sales taxes, while declining on unemployment tax. Still, the overall ranking moved from just 9th to 10th.
10 WORST states to form an LLC or corporation in 2020
41. Louisiana
- Corporate tax rate rank: 37th
- Individual income tax rank: 32nd
- Sales tax rank: 48th
- Property tax rank: 33rd
- Unemployment insurance tax rank: 4th
Louisiana has made strides, moving off the dreaded 50-line for sales taxes. The state also made some modest moves upward in corporate and unemployment taxes. But it remains at #41 for the third straight year, unable to escape the last 10.
42. Iowa
- Corporate tax rate rank: 48th
- Individual income tax rank: 42nd
- Sales tax rank: 15th
- Property tax rank: 35th
- Unemployment insurance tax rank: 35th
Iowa’s overall position hasn’t changed much over the last 3 years. Those high taxes on corporate income, individual income and property are difficult to overcome. But the sales tax ranking is steadily improving, from 21st (2018) to 19th (2019) to 15th (2020).
43. Maryland
- Corporate tax rate rank: 32nd
- Individual income tax rank: 45th
- Sales tax rank: 19th
- Property tax rank: 42nd
- Unemployment insurance tax rank: 33rd
Much like Iowa, Maryland’s overall position in the national rankings is stable. Unlike Iowa, the Terrapin State is moving in the wrong direction beneath the surface, losing significant ground on corporate and property taxes.
44. Vermont
- Corporate tax rate rank: 45th
- Individual income tax rank: 39th
- Sales tax rank: 16th
- Property tax rank: 49th
- Unemployment insurance tax rank: 16th
Vermont has nudged up 3 spots overall, from 47th the last 2 years to 44th this year. Even though it lost ground on corporate taxes, it was countered with an improvement in its income tax ranking.
45. Minnesota
- Corporate tax rate rank: 44th
- Individual income tax rank: 46th
- Sales tax rank: 28th
- Property tax rank: 26th
- Unemployment insurance tax rank: 34th
Very little has changed in the Minnesota tax climate over the last 3 years and that means the overall ranking continues to lag. Businesses can expect high corporate and personal taxes to go with the cold weather.
46. Arkansas
- Corporate tax rate rank: 34th
- Individual income tax rank: 40th
- Sales tax rank: 46th
- Property tax rank: 29th
- Unemployment insurance tax rank: 23rd
Arkansas is a new addition to the bottom 10, although it barely escaped the last 2 years with national rankings of 38th and 39th. A further weakening of its position on income taxes, property taxes and unemployment taxes is the reason why this state ranked so low in 2020.
47. Connecticut
- Corporate tax rate rank: 27th
- Individual income tax rank: 43rd
- Sales tax rank: 26th
- Property tax rank: 50th
- Unemployment insurance tax rank: 21st
Connecticut is known as the Land of Steady Habits and that’s proven regrettably true for businesses looking to incorporate. The state continues to hold its spot in the bottom 10, even securing last place for property taxes this time around.
48. California
- Corporate tax rate rank: 28th
- Individual income tax rank: 49th
- Sales tax rank: 45th
- Property tax rank: 16th
- Unemployment insurance tax rank: 22nd
California is making some progress with its corporate tax rates and the unemployment insurance tax. But the needle isn’t being moved significantly because of the income tax problem. Last year, California fell from 33rd to 50th in this area and really didn’t improve over the last 12 months.
49. New York
- Corporate tax rate rank: 13th
- Individual income tax rank: 48th
- Sales tax rank: 43rd
- Property tax rank: 46th
- Unemployment insurance tax rank: 38th
The relatively lower corporate tax rate is clearly where the Empire State is trying to be attractive for business. But even that comes with a gray cloud—it used to be in the top 10. New York’s unemployment insurance ranking is also slipping.
50. New Jersey
- Corporate tax rate rank: 49th
- Individual income tax rank: 50th
- Sales tax rank: 42nd
- Property tax rank: 47th
- Unemployment insurance tax rank: 30th
If you’re looking for a positive here, it’s that New Jersey has made substantial improvement in its unemployment tax ranking. But that comes in conjunction with already-poor rankings for corporate and income taxes getting worse.
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 business tax climate index table
State-Rank |
Corporate Tax Rank |
Individual Income Tax Rank |
Sales tax rank |
Property Tax Rank |
Unemployment Insurance Tax Rank |
1 |
1 |
6 |
39 |
37 |
|
1 |
1 |
35 |
22 |
44 |
|
26 |
1 |
5 |
25 |
46 |
|
9 |
1 |
23 |
13 |
2 |
|
21 |
25 |
3 |
12 |
20 |
|
43 |
9 |
1 |
44 |
45 |
|
25 |
5 |
44 |
10 |
47 |
|
33 |
38 |
4 |
18 |
36 |
|
12 |
10 |
22 |
5 |
15 |
|
11 |
15 |
20 |
2 |
25 |
|
50 |
41 |
2 |
6 |
3 |
|
18 |
12 |
9 |
24 |
17 |
|
47 |
6 |
36 |
38 |
12 |
|
5 |
24 |
24 |
7 |
9 |
|
3 |
16 |
21 |
34 |
10 |
|
19 |
20 |
27 |
3 |
13 |
|
7 |
14 |
37 |
14 |
43 |
|
24 |
8 |
47 |
31 |
24 |
|
41 |
6 |
49 |
27 |
19 |
|
22 |
17 |
40 |
8 |
6 |
|
29 |
26 |
12 |
4 |
48 |
|
20 |
31 |
41 |
1 |
8 |
|
15 |
28 |
18 |
17 |
29 |
|
17 |
18 |
14 |
36 |
49 |
|
14 |
35 |
11 |
32 |
41 |
|
30 |
37 |
7 |
23 |
37 |
|
8 |
33 |
39 |
19 |
1 |
|
31 |
21 |
10 |
41 |
11 |
|
46 |
19 |
17 |
21 |
42 |
|
4 |
34 |
31 |
30 |
26 |
|
10 |
27 |
34 |
37 |
5 |
|
6 |
36 |
29 |
28 |
39 |
|
38 |
22 |
8 |
43 |
32 |
|
35 |
23 |
38 |
20 |
14 |
|
36 |
13 |
33 |
40 |
40 |
|
39 |
11 |
13 |
48 |
50 |
|
16 |
47 |
30 |
11 |
28 |
|
42 |
44 |
32 |
9 |
7 |
|
40 |
29 |
25 |
45 |
31 |
|
23 |
30 |
50 |
15 |
18 |
|
37 |
32 |
48 |
33 |
4 |
|
48 |
42 |
15 |
35 |
35 |
|
32 |
45 |
19 |
42 |
33 |
|
45 |
39 |
16 |
49 |
16 |
|
44 |
46 |
28 |
26 |
34 |
|
34 |
40 |
46 |
29 |
23 |
|
27 |
43 |
26 |
50 |
21 |
|
28 |
49 |
45 |
16 |
22 |
|
13 |
48 |
43 |
46 |
38 |
|
49 |
50 |
42 |
47 |
30 |
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, 2019 (the beginning of Fiscal Year 2020). Source: Tax Foundation
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