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Does Formation Location Matter to Your Business? Ask LeBron James
Published on Jul 9, 2010
Read 'Does Formation Location Matter to Your Business? Ask LeBron James' at 'Time to Start Up,' the small business blog by BizFilings.
Let's say you have a sure-fire idea for a business. It is guaranteed to work. You have everything lined up, and you can see it will be profitable right away and over time. It is not a matter of will you have success, but how much and how will you manage it? But first, you must decide where to launch the business, and how local factors may impact it.
Of course, I'm talking about NBA basketball star LeBron James' decision to leave Cleveland for Miami. (What else could it be?)
According to some published reports, one of the factors used by Miami Heat management to lure James (besides his two big-star free-agent friends) was the fact that Florida has no state income tax, while Ohio has a 6 percent rate. James could have secured a bigger contract had he stayed in Cleveland, but apparently he and his team did the math - just like any small business owner must do when launching a new enterprise.
Sure, as it should be, the primary considerations were the organization, the co-workers, the path for professional growth (championships!), ancillary opportunities for new revenue (endorsements!), etc. - which sound pretty typical for a startup company. But the cost, tax and regulatory environments are other factors to be considered, because of the impact to the bottom line.
James is likely to earn $100 million in endorsements and $100 million in basketball salary over the next five years. Half of the salary will be earned in Florida (with no state income tax) and half will be earned at road games in other NBA cities (subject to local and state income taxes). The endorsement money will all be earned in Florida.
So with $150 million in earnings for his new startup business venture located in Miami, James will pocket an extra $9 million in tax savings by leaving Ohio. This doesn't even consider the enhanced future endorsement opportunities for moving to a more high-profile market (and the further tax savings).
The same principles hold true for any small business owner. Let's take the annual owners' salary down to a fraction, say $200,000. The difference in state income tax rates results in $12,000 a year in extra money. Depending on the house, that money could go a long way toward covering a new mortgage after the move. Or it could be the difference between profit or loss, keeping or letting an employee go. After all, the margins in small business are not quite as forgivable as in LeBron James's world.
An illustration of this impact also can be found at Business Owner's Toolkit, where an infographic lists the best and worst states for starting a new business, based on a number of local factors, including state income tax. As it turns out, Florida is in the top five.
We're not recommending this be the deciding factor in starting a business - there are too many other influences that are more important. But it's hard to ignore.
Just ask LeBron James.
About the authorJohn L. Duoba is publisher/managing editor of the small business resource Business Owner's Toolkit and is eagerly awaiting any maximum contract offer from any state, regardless of tax rates.