What Are the Advantages of Forming a Business in the State You Reside In?
If you work as a day trader, incorporating your enterprise is a smart move. There will be a lot of considerations for you to make as you begin to make your business official—what type of entity you want to be, who (if anyone) will help you with operations, and which state is the most ideal for registration.
Many small business start ups think their best option is to incorporate in a state that is considered more “business friendly” when it comes to fees, taxes, process, etc, such as Delaware, Nevada, or Wyoming. Forming your business in the state you live in (home state incorporation or organization), however, typically ends up being more convenient and cost-effective, especially for traders.
Avoid double taxation when you file in your resident state.
Some aspiring entrepreneurs make the mistake of thinking if they establish their business in a state with more accommodating business taxation laws, they’ll be better off when it comes time to file. Unfortunately, that’s not always the case.
Taxes must be paid in every state in which you have a physical or economic presence. This includes anywhere you have employees or a physical operation (storefront, office, manufacturing warehouse, etc.), and any state in which you actively rely on their economy for income. Depending on the state, this means you may have to pay double of commonly required business taxes, such as:
- Corporate tax
- Franchise tax
- Employment taxes
- Annual reporting fees
- Sales & use taxes
Most traders will start out with an LLC. An LLC is a passthrough entity, which means that your income from the LLC will pass through to your personal return and that is where you will pay your state and federal tax.
For example, let’s say that you live in Arizona, but you have an LLC formed in Nevada. Although your LLC is formed in NV, you still live and ultimately operate your business out of AZ. Therefore, you will still have to pay state tax in AZ in addition to NV.
Employees who don’t live in the same state where the business they work for is filed may also have to pay personal income taxes to both states, depending on where you incorporate.
Make compliance easier.
With home state incorporation, you only have to meet the mandates of the state you’re in. When you file as a foreign entity (out-of-state), your business must comply with the requirements of both states. Double the compliance means double the paperwork to file, double the business regulations to follow, and double the headache.
When you form your business in the state you reside in, you’ll only have to educate yourself on one set of local and state laws. You’ll also lower the risk of running into hefty fines or issues with your business because you failed to maintain compliance in one or both states.
Save on business costs.
If you operate your business in one state and incorporate it in another, you may be almost doubling your startup and maintenance costs.
Legally you will be required to have a Registered Agent, (RA) in the state in which your business is formed in.
What is an RA? Think of an RA as a glorified mailman. All of your mail will go to the RA address and they will then forward it on to you. If you form your business in the state in which you reside, you may legally act as your own RA. However, if you form outside of the state that you reside in, you will need to hire someone to act as an RA on your behalf.
Forming your business out of state will also stick you with double the business regulation and paperwork fees. When it comes down to it, registering as a foreign entity can be the same or close to the cost of incorporation itself.
When you decide to turn day trading into a business, enlisting a professional to help you navigate the costs and requirements is your best solution.
The experts at Trader’s Accounting will help you determine which entity is right for you, handle the process of forming that entity, provide you with tax strategies, and give you the tools you need to make the most of your trading business.
Give us a call at 800-938-9513 to discuss our services and schedule your free consultation with our team!