What is the Best State to Start a Business for Tax Purposes?

Choosing a state to start a business involves weighing many financial and legal factors. A state’s tax environment is a major component of this decision, capable of influencing everything from profitability to long-term growth. The ideal location is not universal; it depends heavily on the specific industry, business model, and structure of the company. What is “tax-friendly” for a large manufacturing corporation may be different for a small, service-based online business. A thorough analysis of a state’s complete tax landscape is a necessary step for any entrepreneur.

Key State-Level Business Taxes

The most prominent state-level tax is the corporate income tax, a tax on the profits of a corporation. For 2025, forty-four states levy a corporate income tax, with top marginal rates ranging from 2.25% in North Carolina to 11.5% in New Jersey. This tax is calculated on a company’s taxable income, which is its revenue minus allowable deductions.

For many small businesses, the personal income tax of the state is more important. This is because many businesses are structured as “pass-through” entities, where profits are not taxed at the company level. Instead, the income “passes through” to the owners, who report it on their personal tax returns and pay tax at their individual income tax rates.

Another business tax is the franchise tax. Unlike an income tax, a franchise tax is levied on a company’s net worth or capital. Some states have replaced their corporate income tax with a broad-based gross receipts tax, which is calculated on a company’s total sales without deductions for business expenses.

Businesses must also contend with sales tax, which 45 states charge on the sale of goods and certain services. Companies are responsible for collecting these taxes from customers and remitting them to the state. Finally, property tax is a local tax levied on the real estate and, in many states, the tangible personal property owned by a business, such as machinery and equipment.

The Role of Business Structure in State Taxation

The legal structure a business adopts is a determining factor in how it is taxed at the state level. The distinction between C corporations and pass-through entities—such as S corporations, LLCs, and partnerships—is fundamental. C corporations are treated as separate taxable entities from their owners. The corporation itself pays state corporate income tax on its profits. If the corporation then distributes these profits to shareholders as dividends, the shareholders must pay personal income tax on that income, creating “double taxation.”

In contrast, pass-through entities do not pay income tax at the business level. The profits and losses of these businesses are “passed through” directly to the owners’ personal tax returns. The owners then pay tax on their share of the profits at their individual state income tax rates, making the state’s personal income tax rate a primary concern.

The flexibility of an LLC is a notable aspect of its tax treatment. An LLC can elect to be taxed as a pass-through entity, a C corporation, or an S corporation, allowing owners to choose the tax structure that best fits their strategy. While most states follow this federal framework, some impose an entity-level tax on pass-through businesses, such as a franchise tax, in addition to the owners’ personal income tax obligations.

Understanding Physical and Economic Nexus

A business’s obligation to pay taxes in a state is determined by “nexus,” a connection that gives the state the right to impose its tax laws. Historically, this was based on physical presence, but the rise of e-commerce has led to an evolution of this standard. A business may be required to pay taxes in states far beyond where it is incorporated.

Physical nexus is the traditional standard and is established when a business has a tangible footprint within a state. This can be created by having a physical location like an office, warehouse, or retail store, employing individuals who work within a state, or storing inventory in a fulfillment center.

The landscape of state taxation was altered by the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc. The Court affirmed that an “economic nexus” could be sufficient, meaning a significant volume of economic activity in a state could create a tax obligation, even with no physical footprint.

Following the Wayfair decision, nearly every state with a sales tax has enacted economic nexus laws. These laws are based on a business exceeding a certain threshold of sales revenue or a specific number of transactions within the state. While the case specifically addressed sales tax, its principles have prompted some states to apply economic nexus standards to other taxes, including corporate income taxes.

Evaluating Top Contender States

When entrepreneurs search for a tax-friendly home, several states consistently appear in the discussion. The absence of one tax is often compensated for by the presence of others. A few states, including Wyoming and South Dakota, are notable for not having either a corporate income tax or a personal income tax. This makes them attractive for pass-through entities whose owners would face no state income tax. Wyoming also has low property taxes and no franchise tax, while South Dakota has a state sales tax. Nevada also forgoes corporate and personal income taxes but levies a gross receipts tax on businesses with significant revenue.

Another group of states appeals to business owners by having no personal income tax. As of 2025, this group grew to nine states with New Hampshire’s elimination of its tax on interest and dividend income. Florida, for example, has no personal income tax but does levy a corporate income tax on C corporations. Texas also lacks a personal income tax but imposes a franchise tax based on a company’s “margin.” However, for 2025, businesses with total annualized revenue below $2.47 million do not owe any franchise tax, though they may still need to file a return.

Washington does not have a personal income tax on wages but does levy a 7% tax on certain long-term capital gains and has a Business and Occupation (B&O) tax, a gross receipts tax that varies by industry. Alaska has no personal income or statewide sales tax but does have a high corporate income tax rate.

Delaware holds a unique position in these discussions. While often cited for incorporation, its advantages are more legal than tax-related. Delaware has a corporate income tax with a rate of 8.7% and a franchise tax that can be costly. The state’s primary appeal lies in its highly developed body of corporate law, managed by a specialized Court of Chancery that handles business disputes. This legal stability and the privacy protections offered are often the main drivers for incorporating in Delaware.

Other State-Mandated Financial Considerations

Beyond taxes, starting and maintaining a business involves other state-mandated fees that vary significantly. Nearly every state requires businesses to file an annual or biennial report to keep their information current with the secretary of state. The fees for these reports can range from under $20 to several hundred dollars, and failure to file on time can result in penalties or the administrative dissolution of the business.

The initial filing fees to legally form a business entity, such as an LLC or a corporation, also differ widely. These one-time costs can be around $100 in some states or several hundred dollars in others.

Businesses may also need to obtain various state, county, or city-level business licenses and permits to operate legally. The costs for these depend on the industry and location, with some businesses facing a more complex and expensive licensing process than others.