Setting up an online business is now easier than ever. In the United States, it is possible to legally incorporate certain types of internet businesses in a way that grants the business and its beneficiaries a very low tax rate.
Starting an internet-based business is one of the most accessible ways to launch a profitable venture. Whether you’re selling products, offering a niche service, or running a creative store, the legal setup can be surprisingly straightforward. Here’s how to get started and structure your business for maximum profitability, especially if you're considering states with tax advantages like Wyoming, Nevada, or North Carolina.
The first step is selecting a legal structure for your business. For most internet businesses that are turnkey, profitable, and have minimal investors or partners, forming an LLC with an S-Corp tax election is an excellent option. Here’s a quick overview of the two types of corporations:
Protects your personal assets from business liabilities. Easy to set up and operate. Provides flexibility to elect S-Corp taxation for additional tax savings.
Helps reduce self-employment taxes. You’ll pay yourself a reasonable salary subject to payroll taxes, but additional profits can be distributed to you at a lower tax rate. Avoids double taxation, unlike C-Corps. Ideal for businesses with a small number of owners or investors.
Where you form your business can significantly impact your taxes and overall costs. Consider these state options:
No state income tax, reducing your overall tax burden. Business-friendly regulations with low annual fees.
Corporate tax rate of just 2.5%, one of the lowest in the U.S. Ideal for businesses where an S-Corp election is planned, balancing personal income and corporate tax advantages.
You can incorporate in these states even if you don’t physically live there, although you need a mail-recieving address or a registered agent to represent your business locally. It is also possible to act as your own registered agent and use a business-address provider. It should also be a priority to ensure you have properly registered a merchant tax account or similar account for your business in the state and/or county in which your business is incorporated.
In South Dakota v. Wayfair, Inc. (2018), the U.S. Supreme Court ruled that physical presence is not a requirement for states to enforce sales tax collection from online retailers. This decision clarified that digital businesses can establish economic nexus—where their "business activity" occurs—without being physically present in a state.
While this case primarily addressed taxation, it highlights a broader principle: internet businesses are not inherently tied to the physical location of their owners. Instead, their operational activities—such as hosting servers, conducting transactions, or fulfilling orders—define where the business is active. This aligns with the practice of incorporating in states like Nevada or Wyoming, where economic benefits and supportive legal frameworks are advantageous.
If your online business uses cloud servers based in Nevada or works with fulfillment centers in Wyoming - or you have access to a business address and merchant tax account for your business in one of these states - you can reasonably argue that these states serve as the operational hub of your business.
Internet businesses are often lean, profitable, and don’t require large investor pools, making S-Corp taxation ideal:
With the right legal structure, incorporation strategy, and tax election, you can maximize your profits and protect your assets. Focus on building your business, and let the legal setup work for you! If you have questions, feel free to contact me at ben@palaskasconsulting.com or call 805-886-9173