Of course it’s easier to hand pick where you’ll set up shop or incorporate as a startup or entrepreneur, but that’s not always the easiest time. Maybe your partner is finishing a graduate program, you don’t want to move your kids in the middle of the year, or you have geo-specific responsibilities to consider. However, where your business is located can make a huge difference when it comes to taxes, exemptions, statuses and write-offs. If moving is beneficial to your business and family (if applicable), the sooner the better.
As an American entrepreneur, different states offer different pros, cons, and difficulties when it comes to becoming a small business owner. However, don’t think you have to be “stuck” in the US if that doesn’t strike your fancy. An increasing number of businesses offer virtual offices according to Technology Review, and it’s more possible than ever to operate a “US business” from abroad. Here are a few things to consider if a move or new incorporation is in your future:
1. Foreign exemption status
The US has agreements with a number of countries that prevents double taxation and may allow for “foreign income exemption” for some ex-pats living abroad. The rules require that you stay in your adopted country (or at least outside the US) for 330+ days per year. There’s a cap on how much federal tax exemption you’re allotted, but last year it was $94,500. Bear in mind that you will still be responsible for “double” taxes for Medicare and Social Security, just like if you were located in the US, since you’re both “employer” and “employee”.
2. Some states have no income tax
There are a few states, including Nevada and Washington, where you’ll only have to pay federal taxes. Check out USA Today for a complete list of states with no income tax, but remember that’s not the only tax to consider. There are also various sales taxes throughout the country, while some states (like Oregon) have none. That can make a big impact for your business, especially if you plan on kitting out an entire office with furniture.
3. Property taxes for commercial spaces
Whether you decide to buy or lease commercial space, know that the state property taxes will play a big role. Even if you rent, the landlord will probably require a higher rent in order to make up for that difference. Obviously living in a metro will also be more expensive than setting up shop in a rural area. Downsize where you can, and make sure your business budget accounts for any property taxes.
4. Where’s the talent?
You have two options for attracting the best talent to your business: Either set up shop where they are (the plus side of Silicon Valley even with costly income taxes) or offer good enough benefits to attract them to you. A business is only as good as its weakest link, so don’t try to get by with what the local scene has to offer if it’s not up to snuff. Where you live plays a role in the kind of employees that are available.
5. Don’t forget about stigmas
As an example, in recent years Nevada has pushed hard to become the latest startup hub and for the most part it’s succeeded. However, there’s still a stigma around businesses in Nevada since a number of shoddy “entrepreneurs” have incorporated in the state to avoid income tax and because of the anonymity offered business owners. It might not be the best place to set up a religious-based non-profit, for example.
Where you do business matters, and it can make or break your bottom line. Don’t open shop where you are just because of convenience.