WHERE TO ESTABLISH A US BUSINESS

Please note that the guidance below is not a substitute for professional legal and/or tax advice. Any tax advice contained in the body of this e-mail is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

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Many entrepreneurs (US and Foreign entrepreneurs alike) are under the illusion that establishing a business in an income-tax free state will save them money. That is simply not the case.

First off, a US business (or its owners) will be subject to Federal income tax. Most states also add State income tax, while a few do not (Nevada, Texas, etc.). Some states add high income taxes (California, New York, Massachusetts, etc.) while some states add lower rates. 

The states in which your business will generate income taxes is entirely determined by the notion of “physical presence”. Presence is determined based on the following questions:

• In which states do my employees work?
• In which states do my business have fixed assets?
• In which states do my business have inventory?

Any state that is identified in the questions above is a state wherein your business has a “physical presence”.

When establishing a business in the US, many factors should be considered. Your first consideration should obviously be operations, after which income tax, sales tax, property tax, etc should likely also be considered. However, don’t be fooled into thinking that State income tax can be avoided merely by establishing the legal framework of your business in an income-tax free state