Which State is the Best for Forming Your LLC?

For most small business owners, it's best to file LLC paperwork in the state where you live and conduct your business. However, there may be circumstances where forming your limited liability company (LLC) elsewhere can...

For most small business owners, it's best to file LLC paperwork in the state where you live and conduct your business. However, there may be circumstances where forming your limited liability company (LLC) elsewhere can be beneficial. This article will explore the factors to consider when choosing a location for your LLC and compare the features and benefits of states that are often regarded as especially LLC-friendly.

Most small business owners benefit from forming an LLC in their home state

Most small business owners benefit from forming an LLC in their home state, such as this mechanic checking the oil on a car engine.

Key Takeaways

  • Forming an LLC in your home state offers numerous advantages, but other states may be more suitable for smaller businesses.
  • Consider the potential benefits and drawbacks of forming an LLC in Delaware, Nevada, or Wyoming before making a decision.
  • Non-citizens and non-residents can form LLCs anywhere, but it's essential to research specific regulations and government fees relevant to your industry.

A woman types on her laptop while taking notes in her home office

A woman types on her laptop while taking notes in her home office. Forming an LLC in one's home state offers numerous advantages, but other states may be more suitable for smaller businesses.

Costs and Fees Associated with Forming an LLC

The cost of forming an LLC varies by state, with government fees ranging from $35 to $500. Additionally, there may be additional fees for name reservation, license application, and annual maintenance.

For example, in Nevada, the government filing fees for forming an LLC include a $75 filing fee, a $150 annual list filing fee, a $200 business license fee, and a $350 annual list and business license renewal fee. If a Nevada registered agent is required, expect to pay between $100 and $300 annually.

Annual fees for LLCs also vary by state, generally ranging from $35 to $500. It's essential to research the specific costs and fees associated with forming an LLC in your chosen state to ensure you are aware of all necessary expenses.

To sum up, the costs and fees associated with establishing an LLC can significantly differ based on the state in which you choose to set up your business. Be sure to thoroughly research the specific costs and fees in each state before making a decision to ensure that you are prepared for all necessary expenses.

Legal and Tax Advice for LLC Formation

When determining the best state for your LLC, consulting with legal and tax professionals is imperative. They can provide guidance on state-specific requirements, tax implications, and potential pros and cons of establishing an LLC in a particular state.

Legal professionals can help you navigate the complex landscape of state regulations and requirements, ensuring that your LLC is properly formed and compliant with all necessary laws. Additionally, tax professionals can provide valuable advice on the tax implications of forming an LLC in a specific state, helping you maximize your tax benefits and minimize your liabilities.

In addition to consulting with professionals, it's essential to conduct thorough research on your own to fully understand the unique requirements and benefits of forming an LLC in your chosen state. This includes researching state-specific regulations, tax rates, and potential advantages or disadvantages of forming an LLC in each state.

In summary, obtaining legal and tax advice, as well as taking steps to obtain business licenses, is a crucial step in the process of LLC formation. By consulting with professionals and conducting your own research, you can ensure that you make the best decision for your business and its future success.

A mason jar of $100 bills sits on a counter

A mason jar of $100 bills sits on a counter. Tax professionals can provide valuable advice on the tax implications of forming an LLC in a specific state.

Franchise Taxes

Franchise taxes are state business taxes levied for the privilege of existing and doing business in the state. Thirteen states and the District of Columbia have franchise taxes.

Franchise taxes are typically a flat fee or based on a percentage of the company's revenue or net worth. They may be owed regardless of whether the business makes a profit. For example, California has an $800 minimum franchise tax for all LLCs registered with the state, even if they aren't doing any business. Franchise taxes can vary widely by state, and the tax rates for LLCs may be different than the rates for other types of businesses. The best way to understand potential franchise tax obligations is to get advice from a business accountant in the state.

Annual Filing Fees

In most states, both domestic and foreign LLCs registered with the state must file an annual report. The report is a simple form designed to keep the state's records regarding the LLC up to date. Many states also require LLCs to pay a fee or annual tax when the report is filed.

Annual fees are something to be aware of if you're considering forming an LLC outside your home state. For example, if you form your LLC in Nevada, you'll pay $350 annually, and in Delaware, you'll pay $300. Wyoming charges $60 for businesses with less than $300,000 of revenue, and the fee increases with revenue. You'll also pay annual state filing fees in other states where you've registered as a foreign LLC.

Business Income Taxes

For federal tax purposes, a single-member LLC is automatically taxed like a sole proprietorship, and a multiple-member LLC is automatically taxed like a partnership. Some limited liability companies can elect to be taxed as a C corporation or an S corporation. In all of these scenarios, LLCs don't pay tax at the corporate level—business profits pass through to the members' personal tax returns, and the members pay personal income tax on them. An LLC is only subject to corporate income tax if it has filed a form with the IRS electing to be taxed as a C corporation.

Because LLC owners pay personal income taxes on business income, there may be tax savings if you establish an LLC in a state with no personal state income tax. However, unless you relocate to that state, you may still owe taxes in the state where you reside and any states where you do business. Talk to an experienced accountant to understand your income tax obligations.

A man works on a tire in his bicycle shop

A man works on a tire in his bicycle shop, where he is a single-member owner. For federal tax purposes, a single-member LLC is automatically taxed like a sole proprietorship, and a multiple-member LLC is automatically taxed like a partnership.

What is the Best State to Start an LLC in?

All 50 states allow business owners to form an LLC, meaning you could technically file your LLC anywhere in the U.S. But if you have a small business that only operates in one state, your home state is usually the least expensive and least complicated option. Forming a limited liability company in your home state may also make it easier to access government offices and take advantage of grants, incentives, or opportunities for in-state businesses.

You may have seen ads claiming that a particular state is best for LLC formation, but it's important to understand that forming an out-of-state limited liability company adds a layer of complexity to your business. You will probably have to keep up with maintenance and tax requirements in both the state where you formed your LLC and the state where you're actually doing business, including:

  • State filings: If your business is located in one state but you form your LLC in a different state, you're probably required to register as a “foreign LLC" in the state where your business operates.
  • Registered agents: You must have a registered agent with a business address in the state where you're forming your LLC. You'll also need an agent in any state where you're registered as a foreign LLC.
  • Annual reporting requirements: You must file required annual reports and pay any applicable fees in both the state where you formed your LLC and any states where you're registered as a foreign LLC.
  • Taxes: You may have to pay taxes in all states where your LLC is registered.

For small businesses that only operate in one state, the additional fees and hassle of filing and maintaining an LLC in another state probably outweigh any advantages that state offers. And if you have a licensed professional service business, like a law firm or dentist's office, you may be required to form your LLC in the state where you're licensed.

However, other limited liability companies might want to weigh the pros and cons of several states. These include businesses that have locations in more than one state, online businesses with no fixed location, and businesses that operate in an industry whose laws are more favorable in one state than another.

A tax professional talks to a business owner about paying income taxes

A tax professional talks to a business owner about paying income taxes. You will probably have to keep up with maintenance and tax requirements in both the state where you formed your LLC and the state where you're actually doing business.

Forming an LLC in Your Home State

Forming an LLC in your home state is relatively straightforward. Here are the steps:

  1. Choose a business name that is available for use in your state.
  2. Appoint a registered agent.
  3. File articles of organization with the state and pay the associated filing fee.
  4. Prepare an LLC operating agreement.

Once your LLC has been formed, you can get an IRS employer identification number and open a business bank account. You may also need to obtain business licenses from your state and local government. In many states, business licenses are issued by local governments or county clerks.

Forming an LLC Outside Your Home State

The procedure for forming an LLC outside your home state is similar to the filing process for an in-state LLC. You'll file articles of organization with the appropriate office in the state government and pay a filing fee. Once your LLC is formed, you can file a foreign LLC registration in the state(s) where your business operates. Remember, you'll need to appoint an individual registered agent or hire a registered agent service in every state where your LLC is registered.

Starting an LLC in Wyoming

When you form an LLC in Wyoming, there is no business income tax, personal income tax, or franchise tax to pay. Wyoming is also known for its business-friendly climate, personal liability protection, and privacy protection for LLC owners.

Wyoming was the first state to allow the LLC business structure and has a well-developed set of legal precedents. It has a chancery court dedicated to business disputes, and court dockets are typically not as crowded as in other states.

Wyoming is also known for its laws that allow LLC owners to remain anonymous. However, that protection can be undone if the LLC is required to register as a foreign entity in a state that does require owners to be listed in legal or tax filings.

It costs $100 to file articles of organization to form an LLC in Wyoming, and annual reporting fees are $60 for companies with less than $300,000 in assets.

Filing Your LLC in Delaware

Delaware has a reputation for being business-friendly and is home to many Fortune 500 companies. Investors often prefer Delaware corporations.

To form an LLC in Delaware, file a Certification of Formation of a Limited Liability Company with the Secretary of State and pay a required filing fee of $90. Delaware does not require LLCs to file an annual report, but you will need to pay a $300 franchise tax each year.

Forming Your Limited Liability Company in Nevada

Nevada is also considered a business-friendly state and offers advantages such as no personal income tax, no corporate income tax, and strong privacy protection. Nevada LLC owners can remain anonymous.

To form an LLC in Nevada, file the necessary paperwork and pay a $75 filing fee. Additional fees include a $150 annual list filing fee, a $200 business license fee, and a $350 annual list and business license renewal fee. You may also need to hire a registered agent.

Foreign vs. Domestic LLCs

Forming an LLC in a different state from your home state can offer some advantages, such as tax benefits and reduced regulatory burdens. However, these advantages should be balanced against the potential costs, fees, and compliance requirements associated with establishing a foreign LLC.

A domestic LLC is formed within the state of the owner's residence, whereas a foreign LLC is formed outside of the owner's home state and requires registration in the home state. Forming a foreign LLC can provide increased market penetration for foreign entities, but it may also involve higher filing fees and additional registration requirements.

Furthermore, forming a foreign LLC may lead to additional taxes and fees in the state where the LLC is formed. It's crucial to carefully consider these potential costs and weigh them against the potential advantages of forming a foreign LLC before making a decision.

In summary, while forming a foreign LLC can offer some benefits, it's essential to carefully consider the potential costs, business expenses, fees, and compliance requirements associated with this decision. Weigh the advantages and disadvantages of forming a foreign LLC against those of a domestic LLC to make the best decision for your business.

Non-Citizen and Non-Resident LLC Formation

Non-citizens and non-residents can form LLCs in any state, including business-friendly states like Nevada, Delaware, Wyoming, and New Hampshire. These states offer favorable tax rates and privacy protections.

Individuals, corporations, trusts, partnerships, and non-citizens can all be LLC owners in the United States. It's crucial to research the specific requirements and benefits for non-citizens and non-residents in each state before making a decision.

In summary, non-citizens and non-residents have the freedom to establish LLCs in any state and might find states particularly advantageous due to their favorable tax rates and privacy protections for personal and business assets. These include Nevada, Delaware, Wyoming, and New Hampshire. Be sure to research the specific requirements and benefits for non-citizens and non-residents in each state before making a decision.

So Which State Should You File Your LLC in?

There is no one-size-fits-all answer to the best state for forming an LLC. It depends on various factors, including your industry, business operations, and personal preferences. Forming an LLC in your home state is the most advantageous option for most businesses, while states like Delaware, Nevada, and Wyoming offer additional benefits for certain industries and situations.

Before making a decision, it's essential to consult with legal and tax professionals, conduct thorough research, and carefully weigh the advantages and disadvantages of each option. By taking the time to understand the unique requirements and benefits of forming an LLC in your chosen state, you can set your business up for long-term success and growth.

A woman talks on the phone and has a cup of coffee

A woman talks on the phone and has a cup of coffee as she speaks to a tax professional about where she should set up her business.

FAQs

What state is best to set up an LLC?

There's no simple answer to the best state to file your LLC legal documents. For most small businesses, it's best to form an LLC in the state where your business is located. If you don't have a fixed location or are outside the U.S., consider Nevada, Delaware, Wyoming, or New Mexico as your LLC's home. Always seek legal and tax advice before making a final decision.

Which state is best for an LLC for a non-resident?

The best state to form an LLC for a non-resident depends on your specific business needs and circumstances. However, Wyoming, Delaware, and New Mexico are commonly recommended for non-resident LLC owners. Each state offers different advantages, such as privacy protections, low startup costs, and tax benefits. Consult legal and tax professionals for guidance.

What is the best state to file a business in?

The best state for filing a business entity depends on factors such as the type of business, its location, and your plans for the future. Delaware is often preferred for corporations due to its business-friendly reputation. However, for local businesses, it may be best to set up a legal entity in your home state to simplify paperwork and reduce costs. Consult a small business accountant and a lawyer for guidance.

What state is most common for LLCs?

The states with the largest populations tend to have a high number of LLCs. Additionally, Delaware is known for having a disproportionate number of LLCs due to its business-friendly reputation. However, it's important to consider the specific needs of your business when choosing a state for your LLC formation.

Do I need to set up an LLC in each state where I do business?

No, you only need to form one LLC. If your LLC conducts business in additional states, you may be required to register as a foreign LLC in those states. You must comply with the filing requirements, pay any necessary fees, and maintain any required licenses in each state where you're registered as a foreign LLC.

Which states in the U.S. are tax-free for an LLC?

No states are entirely tax-free, but the amount and type of taxes vary by state. Some states have no personal income tax or corporate income tax, while others impose franchise taxes or gross receipts taxes. It's essential to consider both state and federal tax obligations when forming an LLC. Consult a tax professional for personalized advice.

Which state is quickest to file an LLC?

Processing times for filing an LLC vary by state, but most states now offer electronic filing options, which are generally faster than paper filings. Processing times can change depending on the workload in state offices, so it's best to check the specific processing times on the website of the agency in charge of business filings or contact them directly.

What are the benefits of an LLC business structure?

The LLC business structure provides personal liability protection for owners, flexible tax options, and simplified recordkeeping compared to corporations. LLC owners are not personally liable for the business's debts and obligations, and they can choose how their LLC is taxed. Additionally, LLCs offer some protection to your business name and have fewer management requirements than corporations. Consult legal and tax professionals to understand how an LLC structure would benefit your specific business.

A business owner reads an email from a client and takes notes

A business owner reads an email from a client and takes notes. A limited liability corporation provides strong personal liability protection for owners.

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