Choosing the Best State to Incorporate: Colorado, Kansas, Missouri, or Delaware?

If you’re thinking about creating an LLC or corporation, you’ll need to file formation documents with the Secretary of State in one of the 50 states. Which state should you choose? The most common option is to form your company in the state where it will operate. For example, if you plan to run your business in Colorado, you’ll likely form it in Colorado. However, depending on your situation, you might decide to incorporate in Delaware instead.

Let’s explore the different options, along with the benefits and disadvantages of each. 

Your State is Usually Best

If you’re running a freelance business, a small business, or even a startup with high-growth potential but no immediate need for professional investment, it’s usually best to incorporate in the state where you’ll operate.

However, if you plan to raise funds from professional investors or want to “go public” in the future, you might want to incorporate in Delaware (and may need a C-Corporation rather than an LLC). We’ll discuss why Delaware might be a good choice later.

Formation Fees & Periodic Reports

Each state has different fees and ongoing filing requirements. For example:

• The fee to create an LLC is $50 in Colorado and Missouri, $160 in Kansas, and $90 in Delaware.

• Colorado LLCs must file an annual report with the Colorado Secretary of State, while Kansas LLCs must file a periodic report every other year. Missouri LLCs don’t have to file any kind of periodic report.

• Some states, like Delaware, don’t require an annual report for LLCs but do have annual franchise tax payments to keep the LLC in good standing.

Operating in Multiple States

Once you form a business in a state, you are authorized to conduct business in that state. However, that doesn’t automatically mean your LLC can operate in other states. You may need to register your LLC in additional states, depending on your activities.

You might need to register in another state if:

• You buy or lease property there.

• You hire employees in that state.

• You have a physical presence or extensive marketing there.

• You earn significant revenue in that state.

Forming your company in the state where you’ll primarily operate can simplify things—you won’t need to get authorization from other states to operate locally. This can be particularly helpful if you operate near state borders. For example, many Missouri LLCs based in Kansas City need to register with the Kansas Secretary of State, and vice versa.

Maintaining Registered Agent(s)

You must maintain a registered agent in each state where your LLC is formed or registered to conduct business. If you incorporate in your home state, you can likely serve as your own registered agent, which saves costs. Alternatively, you could have an accountant or lawyer serve as your agent.

If you incorporate in a different state from where you operate, you’ll need a registered agent in both states. This often means paying for a professional service in the incorporating state, even if you can serve as your own agent in your home state.

State Laws & Courts

Depending on the nature of your business, the laws in the state where you form your business might or might not be important. Delaware, for instance, is known for its business-friendly laws and a court system that specializes in business disputes. This can be a significant benefit for some companies. However, for freelancers and small businesses, these advantages may not outweigh the additional costs and complexity.

Why Form in Delaware?

If you’re planning to raise money from professional investors, like venture capitalists, consider incorporating in Delaware. You may also want to create a C-Corporation instead of an LLC. Professional investors are familiar with Delaware laws and appreciate the state’s business court system, making Delaware the “go-to” choice for venture-backed companies.

Keep in mind that incorporating in Delaware involves paying franchise taxes and maintaining a registered agent there. You’ll also likely need to register your Delaware entity in your operating state, which means maintaining additional registered agents and filing periodic reports. For venture-backed companies, these may be minor concerns compared to the larger benefits.

(This article is general in nature and is not legal advice.)