What’s the Best State to Incorporate Your Staffing Agency In?

It’s no secret that the US is one of the most lucrative markets for staffing agencies. In 2023, the American Staffing Industry was valued at nearly $218 billion. Similarly, according to the Staffing Industry Analysts, over 241 US agencies cleared $100 million in revenue in 2023. 

Put simply, the US offers a bigger market, with Dhigher mark-ups and less competition than places like the UK. This makes it a very attractive option for those looking to add revenue to their staffing agency or even scale up its operations. As a result, many companies look to register an entity in the US. 

However, expanding a staffing agency in the US is not as simple as sending some recruiters over and making a start. You must consider state legislation.

The power of each state is a key difference between the US and the UK. While in the UK, each county must abide by the same business laws, such as minimum wage, holiday pay, or tax payments, each state in the US has its own unique and often convoluted laws. 

For example, a registered company in Delaware does not need to pay any income tax to the state (although there are other franchise fees due); compare this to California, where all businesses pay tax at a rate of 7.25%.

Companies looking to scale up in the US or enter the country for the first time may be tempted to simply register where they plan to operate. Many staffing agencies will look to register in California simply due to the bigger pool of tech talent. 

However, it’s worth noting that you aren’t required to register in the state you plan to operate in, so taking advantage of this can be hugely beneficial.

What State is The Best?

Some Americans might disagree, but unfortunately, there is no one “best” state. While 72.3% of all US businesses (and the majority of S&P 500 companies) choose to register in Delaware, and it’s often pointed to as the state for business, there are some drawbacks. In Delaware, major business disputes, including some employee court cases, must be held in a Delaware court. This means you must travel to Delaware for a hearing, even if you live out of state or in the UK. 

Every US state will have pros and cons, depending on what you’re trying to achieve by expanding your staffing agency into the US. The best state will be the one that is the best fit for you. 

How to Choose The Right State?

Choosing the right state to register in is all about considering what matters to your staffing agency. 

Formation Fees

Formation fees are a one-time filing fee your business must pay when registering within a state. In some states, like Texas, this fee is higher, while in some states, like New Mexico, it’s less than $50. Since formation fees are a one-time fee, they shouldn’t influence your decision too much; however, it’s worth noting that you’re setting aside your budget for expansion into the US. 

Annual Fees 

Annual fees vary from state to state; as mentioned earlier, Delaware has minimal yearly fees or reporting requirements depending on the type of entity you form. However, somewhere like Tennessee, there is a $300 minimum, which increases by $50 for each employee added to the organization.  With these fees come strict annual filing requirements, so it’s worth weighing whether your organization has the time and expertise to file annual paperwork within the state.

Tax Rates 

Tax rates can be one of the most influential factors that affect how your staffing agency operates in the US. Most states have three separate taxes: income, corporation, and franchise. 

Places like Wyoming and South Dakota don’t charge any corporation tax, which makes them popular. Texas also doesn’t charge a corporation tax. However, note that you will likely need to pay taxes in every state where you have considerable activity (called "nexus"), so your choice of domicile will not help you too much on the income tax front.

Nonetheless, if paying as little tax as possible is your primary concern, there are plenty of options out there as the best state for you. 

Corporate Laws

It may be tempting only to consider the upfront and annual costs inherent in establishing an entity in the US; however, as a staffing agency, it’s vital to examine each state’s corporate laws. Fighting a frivolous lawsuit can be very costly, with a summary judgment costing anywhere from $75,000 to $120,000 on average. 

Some states are more favorable than others regarding regulations and what cases can be brought to trial, while some states, like California, are much more strict, which can increase the chance of lawsuits. Some states, like Delaware, Wyoming, and Nevada, have a history of stable, company-favorable laws, whereas places like California are known for more shareholder-friendly and employee-friendly laws.

Somewhere like Georgia, for example, has former staffing agency owners within their House of Representatives. This creates more favorable regulations for staffing agencies and significantly reduces the likelihood of your agency dealing with a frivolous lawsuit. 

One aspect, many staffing agency owners also fail to consider when expanding into the US is their own personal preference. America has a lot to offer, so consider what you’re looking for. For example, if you want good weather, southern states like Florida may be the way to go. But if you’re looking for more of an urban life New York is the obvious choice. Nonetheless, remember that where you incorporate is not where you need to live. If you incorporate in Delaware, for instance, usually all you need to do to operate in another state is file for a Foreign Qualification with the Secretary of State where you want to do business.

Ascen

One option for staffing agencies to expand into the US is to use an Employer of Record (EOR) solution. This doesn’t require a staffing agency to set up a US entity; instead, the agency employs its staff through an EOR. 

At Ascen, we’ve developed an EOR platform with Staffing Agencies in mind. Ascen allows you to onboard employees regardless of their contract status, such as W-2 or 1099, without registering a single entity in the US. 

Ascen also provides an effective management platform if you’ve already established an entity in the US and are simply looking to expand. We can handle the back-office headache of adapting to new state legislation and cover employee management from payroll to timesheets. 

If you’d like to see Ascen in action, please book a demo here.