Best State to Form LLC — Start Your Business in a Strategic Location this 2021
Forming a limited liability company (LLC) to run your business can be beneficial for separate legal liability, protection of your property, and privacy. However, most business owners are confused about the best state to form LLC.
Choosing the wrong state can mean paying expensive filing fees and taxes while losing out on tax benefits. This article guides you on the best states to form LLC.
What are LLCs?
An LLC (limited liability company) is a business structure that offers the personal liability protection of a corporation combined with the pass-through taxation of a partnership or sole proprietorship.
LLCs differ from sole proprietorships and general partnerships because it can offer helpful asset protection if your business is sued.
LLCs also differ from corporations as it is not subjected to double taxation. Many take advantage of this model because it’s relatively easy to form and maintain.
Best States to Form LLC
There are better states to form LLC than others because of the regulations and tax rules that make it more favorable for businesses.
You may be tempted to start an LLC in your home state. However, you must consider the corporate income taxes and state income taxes your business may be required to pay if setting up an LLC in your home state. If your home state has high tax rates, it may be best to form your LLC in another.
Learning more about the rules for different states for starting your small business will not only help you maximize the advantages for your small business while minimizing your taxes. In any case, some online research is helpful to assist you in making the right choice — whether you want to start an LLC in your home state or not.
Here are the best states for forming an LLC:
Delaware is the most popular state for forming an LLC. Most big businesses file in Delaware even without having a physical headquarters formed in the state.
This is because Delaware is a business-friendly state among the many states in the country. For example, it doesn’t require filing out-of-state personal income tax. This translates into huge tax and fee savings for business owners and board members who register their limited liability company in Delaware but conduct very little or no business at all in the state. More so, Delaware offers very low initial filing fees and franchise taxes are quite low for LLCs.
Another good reason to form your LLC in Delaware over the other states is the Chancery Court. This handles only business matters. This means that business disputes or cases are handled much faster in Delaware than in other regions.
The Chancery Court is also unique because unlike the judges in the general court, judges in the Chancery Court are knowledgeable and experienced in business law and relevant procedures.
Finally, this state offers relatively fast filing times for LLCs. This is a big advantage for those who want to file and set up their business as quickly as possible. So if you’re ready to set up your LLC in this state, check out my list of the top-performing registered agents in Delaware.
Nevada is also one of the best states to start an LLC in the United States. The state has its advantages for filing LLCs and pro-business reputation.
Some of the advantages of forming your LLC in Nevada is that the state doesn’t tax inheritance, capital gains , or corporate income though it has relatively high incorporation fees and costs. Nevada offers a 6.85% sales tax.
Nevada has no franchise taxes and doesn’t require operating agreements or annual meetings to stay compliant with the state’s law. That said, you may be required to have this agreement especially if it’s not a single-member LLC.
One of the advantages of Nevada is it doesn’t require any information-sharing agreement with the Internal Revenue Service (IRS). And with less IRS disclosure Nevada LLC entrepreneurs and investors need to make, they can remain anonymous in public filings.
Like Delaware, forming an LLC in Nevada entails fast processing times to expedite the LLC formation procedure. If you need legal assistance, you can always hire an attorney.
Though Wyoming is not as popular as the two states above in terms of LLC formation, the state is gradually gaining ground as it has no individual income taxes, zero corporate tax, and low sales tax. Wyoming also doesn’t have business income and franchise taxes. Compared to many states, Wyoming has significantly low fees and additional costs for operating a business.
Wyoming offers more privacy to LLC owners than Nevada with its “lifetime proxy,” which enables Wyoming LLC owners to privately express his/her vote through a selected person who holds the shares/stock.
South Dakota is also a friendly area to form your LLC. South Dakota offers low property tax rates, zero tax rates, low sales tax, and filing fees.
Alaska offers a zero sales tax and personal income tax but a 9.4% corporate tax rate.
Starting a business in Florida, you’ll get 5.5% corporate tax rate, zero personal income tax rate, and 1.02% property tax rate.
Montana offers a 6.75% corporate tax rate, 1 to 6.9% personal income tax rate (depending on income), 0.87% property tax rate, and zero percent sales tax.
Why the State Matters When Filing for an LLC
The state you choose to start an LLC has major tax implications for your business and can affect the annual report fees and other additional fees you have to pay per year to keep your business running.
For instance, the essence of incorporation is to limit your legal liability, enabling you to depend on your local court system should your business be involved in a lawsuit. However, not all states offer this as some states could make it expensive and you might need an attorney.
Nevertheless, many states are very business-friendly. If you file and start an LLC in Nevada, Wyoming, and Delaware, these states are more likely to protect business owners that incorporate locally. Some states also offer business-friendly rules and knowledgeable courts — advantages that make them good choices for business formation. Other regions have higher average corporate tax rates and individual income tax for corporations.
Domestic LLC vs Foreign LLC
The domestic LLC or foreign LLC differs depending on the state business owners register for incorporation. A domestic LLC is an LLC formed in the location where one lives and operates their business while a foreign one is when one forms an LLC in one state and operates the business in another state.
For example, a business that is formed in California and carries out its annual operations in California is operating as a domestic LLC, whereas a firm that is registered in Iowa and carrying out operations in California is operating a foreign LLC in the state.
Entrepreneurs that register as a foreign LLC are subjected to the laws of both states. You may need to consult an attorney to fully understand everything.
However, businesses that file as a foreign LLC may benefit from tax laws and other laws specific to the region they’re starting their business in. These LLCs also need to appoint a registered agent for receiving all state documents.
Filing for an LLC Other Than Your Home State
If you choose to start an LLC outside your home state while continuing to operate your business in your home state, you will have to register and pay filing fees as a foreign LLC. You also still have to pay taxes in your home state. For example, you live in North Carolina, but you want to form your company in Iowa.
Aside from having to register your LLC in another state, you would also have to comply with local and state laws, annual report fees, state income tax, business income tax return, and personal income taxes both in your home state and the foreign state while incurring additional costs, file complexities, and paperwork of complying with the mandate of another state. This includes the appointment of a registered agent to receive important documents for you.
If you don’t want to form your LLC in your home state, you may have to pay taxes, which include individual income tax, sales tax, and state income tax, in both states. Again, you can consult an attorney for guidance.
If your home state requires income taxes or has a “physical presence” rule, you will have to pay state income tax on the profit from your business. States without a physical presence rule include New Hampshire, Alaska, Oregon, Montana, and Delaware. Some of the worst states for forming an LLC include New York, Iowa and Maryland — so if you live here, consider choosing another state.
Best States to Start an LLC for an Internet Business
One of the first real decisions you have to make as an internet business owner is choosing which state to file your LLC, regardless of where you reside.
If you’re an online business owner, you may find that it’s best to form an LLC in your home state rather than forming an LLC outside it.
Why is this? Well, forming an LLC in your home state for your internet business will be convenient and familiar. That said, filing your LLC in your home state may not be the cheapest choice. The average rates of filing fees, annual fees, and taxes vary differently in each state, which means you can save a lot should you decide to register in a different state.
Some of the top choices for internet business-friendly states to form a limited liability company (LLC) are Delaware, Wyoming, and Nevada.
Delaware does not charge out-of-state income taxes, which is favorable for online LLCs who are doing minimal business transactions in the state itself. Plus, Delaware has seen a surge in business activities as well, with 60% of Fortune 500 companies being incorporated here.
An LLC in Wyoming is a great option for business owners as well, with it having the most protective charging order law to ensure the safety of your LLC assets from personal liabilities regardless of whether you’re a single member or not.
Similar to Delaware, Nevada doesn’t have registration fees if you will form your LLC in the state. Nevada does not charge LLCs for state income, corporate, or franchise taxes.
Frequently Asked Questions
What is the best state to form a LLC?
The best state to form an LLC is Delaware. It has a business-friendly environment and the state also has what is called the “Court of Chancery,” which consists of experienced judges in business matters who hear only corporate law cases.
If you want a region that offers maximum privacy, choose either Wyoming or Nevada. These states have several powerful privacy benefits which make them attractive states for business incorporation.
Nevada also has some significant benefits for protecting business assets held in the LLC. That means when businesses with Nevada LLCs are sued, there are legal provisions such that these business properties are protected from seizure. However, you should always consider the applicable annual fees for forming an LLC.
Can you form an LLC in another state?
Yes, you can form an LLC in another state. This is referred to as a foreign LLC. You will need to do your due diligence to find out if it makes sense for you to do so.
Is Texas a good state to form an LLC?
Yes, Texas is a good location to form an LLC. It has affordable fees if you want to start a business. In the long-run, the least-expensive state to start a business in terms of incorporation fees is New Mexico followed by Texas.
This state charges $300 for filing with no additional fees in future years although the annual filing of reports is compulsory. However, it’s not advisable to form your LLC in Texas if you own any personal property or real estate structure in this state.
Does it matter what state you file your LLC in?
Yes, the state you file your LLC in matters. Your choice would determine the business environment, legal environment, fee payments, and tax regulations such as the corporate income tax, personal income tax, franchise tax and state taxes.
The state you choose to incorporate your business structure in will influence the tax regulations, fee payments, EIN and bank account acquisition, and business environment you operate in. There may also be changes if you’re a non-US resident who wants to file an LLC and conduct business in the state where you live or otherwise.
In any case, there are best and worst states for filing LLCs. Do your research on multiple states before you start your LLC in the state you choose.