Are you looking for the best state for LLC formation? We’ve got you covered.
Most entrepreneurs choose to form a Limited Liability Company (LLC) in the state they live in because it is easy. As a resident, you probably already have a physical address and can be the Registered Agent for your LLC in the state.
However, forming your LLC in a different state than your home state can sometimes be advantageous. That’s because each state has different rules and regulations for forming a Limited Liability Company.
Some states offer more financial advantages to LLCs than other states while some states are more flexible about how you manage and run your LLC. By carefully vetting your options for the best state to form an LLC in the United States, you can save money on taxes, annual fees, and reporting requirements.
Before we talk about the best state for LLC formation, let’s discuss the factors you should consider to evaluate the pros and cons of forming an LLC in any state.
Factors to Consider When Choosing the Best State for LLC Formation
When choosing the best state to start an LLC for your online business, consider the following points:
Type of LLC – Domestic LLC and Foreign LLC
A state can categorize your business as either a domestic or foreign LLC. This depends on where you form or conduct your business.
If you conduct your business and register it in one state, it automatically becomes a domestic LLC in that state. If you conduct business in other states outside your domestic state, you have to register it there as a foreign LLC.
It gets complicated if you have a home state and decide to form your business elsewhere instead.
For instance, you live in California where the registration fee is high. So you decide to form an LLC in Nevada and take advantage of the tax subsidies.
In such an instance, your business will be recognized as a domestic LLC in Nevada. However, since you reside in California, you most likely meet the qualification criteria for conducting business in your home state.
There’s a wide range of activities that fall under these qualifications and this may include something as simple as placing phone calls.
What does this mean?
It means that you’ll have to register your business in California as a foreign LLC. This makes you subject to their high registration fee and annual renewal fee as well–which means double paperwork and payments.
You’ll also have to find and pay a registered agent in Nevada since you don’t physically live there.
Also, LLCs are taxed where they conduct business. So you’d have to pay taxes in your home state as well.
This makes it impractical to live in one state and form your business in another.
However, some select cases where it would be practical to form an LLC in a state outside your home state are:
- You want to remain anonymous. For that, you can form your LLC in Wyoming or Nevada.
- You’re a real estate investor and all your property is located in that state. It would be ideal to form a real estate LLC in that state because all business will also be conducted in that state.
- You do not live in the US but own a business in the United States.
Formation Fees
When forming an LLC you need a filing fee, which is a one-time payment you make to your state’s Secretary of State office.
It’s advisable to check out the state fee for filing for an LLC before formation. Some states have filing fees as low as $50 with $0 renewal fees. These states include Arizona, Mississippi, Missouri, and New Mexico.
As mentioned, this is just a one-time fee and will have no impact on your bottom line in the long term. It may not be as significant to consider, but it’s worth noting the cheapest and best states for LLC formation.
Annual Filing Fees
Some states require annual reporting fees for LLC renewal. These fees are also presented to the Secretary of State’s office.
Why should you consider annual filing fees when choosing the best state for LLC formation?
One, it’s a recurrent fee that differs by state. As such, you’re likely to save annually if you register in some states compared to others.
States such as Wyoming and South Dakota charge $52 and $50, respectively. Others, such as Nevada, charge $300 while states like Ohio and Alabama have zero charges.
Also, if you plan to form an LLC in a different state than your home state, consider the cost of hiring a Registered Agent and using their physical address for your business affairs.
If you do most of your business in your home state, and you register your LLC in another state, you’ll also need to register your LLC as a foreign LLC in your home state. Besides the tedious paperwork, this will double the cost of state fees and annual reporting fees.
Income and Franchise Taxes
How much income taxes will you need to pay? Check out the corporate tax rate, sales tax rate, personal income tax rate, property taxes, and other tax obligations for LLCs in the state. Some states allow companies to save a lot on state income taxes while others do the opposite.
For instance, there are states that do not charge corporate income tax. These include Ohio, South Dakota, Texas, Washington, Nevada, and Wyoming. However, Washington, Ohio, and Texas levy taxes on a company’s gross revenue.
South Dakota, Nevada, and Wyoming are the most tax-friendly states, as they do not charge personal income tax either. This makes them some of the best states for LLC formation, especially for businesses that are located there.
Conversely, California LLCs must pay an $800 annual franchise tax even if they’re not conducting business, which makes the state a not-so-good choice to form an LLC.
As an online business owner who is just starting a company, forming your LLC in California is certainly not a wise decision. You may spend more money than you make.
The State’s Legal Systems
This is a significant consideration, especially for established businesses that risk getting into lawsuits. The state’s legal system matters.
For instance, in Delaware, there’s a separate court that solves lawsuits related to business: the Delaware Court of Chancery. This is a business-focused court, therefore your business litigation will more likely be expedited as compared to courts in other states.
Also, in the Court of Chancery, cases are determined by judges as opposed to juries. Most businesses prefer that their disputes be resolved by judges with corporate knowledge, making this a tremendous advantage.
With a history that dates back over 200 years, this court provides innumerable case law precedents for its judges on acceptable business practices.
The Best States for LLC Formation (and Why Company Owners Choose Them)
The process of forming an LLC can be daunting, with all the paperwork involved, fees you’ll need to file, and varying rules by state. Therefore, it’s always advisable to seek help from professional LLC formation service providers to take you through the filing process.
Once you’ve determined the best state for LLC formation that suits your online business, you can fill out this simple application.
Let’s take a look at a few states that offer advantages to LLC owners and can be the best state to form an LLC for your online business.
1. Your Home State: Overall the Best State for LLC Formation
Your home state is the best state for LLC formation in the following instances.
- If you have a home or physical address in your state.
- If you conduct a majority or all of your business in the state.
Forming an LLC in your home state can help you save money on its onset and on ongoing expenses. As a resident, you yourself can be the Registered Agent for your LLC.
Some states may have subsidized tax laws or business-friendly regulations, but it’s almost always best to form an LLC in your home state. Here’s why.
To form an LLC in a state other than your home state, you’ll need to register your out-of-state LLC as a foreign LLC in your home state if you want to do business in your home state, which means:
- You’ll need to set up two LLCs (an out-of-state LLC and a home state LLC).
- You’ll need to pay state filing fees and annual fees for both LLCs.
- You’ll need to pay for a Registered Agent in the other state to register your out-of-state LLC using their physical address.
Clearly, the best state for LLC formation is the state where you reside. If you want to find the best state for LLC formation in terms of tax benefits or other criteria, check out the list below.
2. Delaware: Best State to Form an LLC for Legal Protection
Delaware has the most business-friendly jurisdiction. This is why over 66% of Fortune 500 companies and 1,000,000 other business entities have formed their businesses there.
Here are the reasons why Delaware is a business-friendly state.
Delaware Chancery Court
As earlier mentioned, Delaware has a Chancery Court that only covers cases that involve business matters. This means that any business disputes related to Delaware LLCs will be handled faster than they would have been in other states.
The judges also have expertise in corporate law and have more precedents to set the pace for most cases.
Tax Benefits
Another advantage that makes Delaware the best state for LLC formation is that the state doesn’t tax out-of-state income. If you offer your online business services to clients outside of Delaware, you can save a lot of money on state income tax.
Shareholders that don’t live in Delaware are not required to pay taxes on shares in that state. Delaware also charges low franchise taxes.
Fast Filing Process
If you’re wondering how long it takes to form an LLC, the time varies from 2 to 6 weeks. This is faster than the time it takes for forming an LLC in several other states.
It’s fast, easy, and cost-effective to form your LLC in Delaware as the state offers fast LLC application processing and low filing fees. You can leverage our state and federal filing services to form your LLC in a hassle-free way. Just fill out our LLC application and we’ll take care of the rest for you.
No Physical Presence Rule
Want to learn the best part about forming an LLC in Delaware? Delaware doesn’t have a physical presence rule, which means you will not have to pay a Registered Agent to use their physical address.
Privacy Protection
It’s one of the few states that lets you omit your personal information allowing you to register your company anonymously. This is clearly the best state for LLC formation for people who want to stay anonymous.
Residency Is Not Required
Your shareholders, officers, and directors do not need to reside in Delaware state. Also, in Delaware, you’re allowed to have one person act as the director, officer, and shareholder. This is especially helpful for small businesses.
Investors Prefer Delaware
If you’re seeking investors, most venture capitalists and angel investors prefer companies incorporated in Delaware. This is especially so if your company plans on going public in the future.
One downside to forming an LLC in Delaware is that they have no flat franchise fees.
3. Nevada: Best State to Form an LLC for Privacy Protection
Nevada rivals Delaware closely as one of the best states for LLC formation. Why? Privacy protection.
If privacy is your top concern when forming an LLC, your search is over. Nevada does not have an information-sharing agreement with the Internal Revenue Service (IRS). Also, if you form your LLC in Nevada, you can easily remain anonymous in public filings and protect your privacy.
Here are a few other advantages of forming your LLC in Nevada:
- No business income tax, capital gains tax, or inheritance tax
- No franchise taxes (only nominal business license and annual fees)
- Doesn’t require an LLC operating agreement submission
- No annual meetings of LLC members or operating agreements
- You can form a single person LLC
- They have strong corporate veil laws that protect individuals from company liability.
Unlike Delaware, Nevada does not charge personal income, franchise, or corporate income taxes.
Nevada is the best state for LLC formation if you want to protect your privacy and set up your business quickly as it offers fast application processing. You can further expedite the processing time by forming an LLC in Nevada with us.
There are, however, some cons to incorporating a business in Nevada and these include:
- They charge annual business license and filing fees
- Gross earnings over $4million may attract taxes
- Your list of directors and officers is available publicly
4. Wyoming: Best State to Form an LLC for Cost Saving
Wyoming continues to be the gold standard of business tax-friendliness as it ranks 1st for both corporate tax rate and individual income tax rate. It is the best state to form your LLC if you’re looking for low tax rates.
The LLC case laws in Wyoming are extensive, being the first state to adopt LLC statutes in 1977. This means that their LLC rules and regulations are more well-established compared to other states.
Wyoming also has a “lifetime proxy,” which allows you to privately express your vote through a selected member. This means that you get even more anonymity than you would get by forming an LLC in Nevada.
Other benefits of forming an LLC in Wyoming include.
- No business income tax, no franchise tax, and minimal reporting obligations for LLCs.
- No minimum capital contributions
- LLC members do not need to reside in Wyoming or the United States
One downside to forming an LLC in Wyoming is the high administrative costs.
5. Alaska: Best State for Favorable Loan Programs
Alaska offers several loan programs for LLCs incorporated there. This makes it the best state for LLC formation in terms of easily securing business loans. For small businesses, this could mean a significant financial boost.
Here are some of the loan programs offered.
- Rural Development Initiative Fund: This loan is payable in 25 years. Your business needs to be located in a community area with a population of 5000 people or fewer to qualify. The maximum amount you can borrow is $150,000 for a single-person LLC and $300,000 for businesses with two or more LLC owners.
- Micro-Loan Loan Program for Women Entrepreneurs: The maximum amount you can borrow for this loan is $10,000. This initiative provides financial help to women-owned small businesses in Alaska.
- Small Business Economic Development: This lending program was established specifically to help Alaskan businesses to start or expand. The total loan amount cannot exceed $300,000.
The only downside is that to qualify for these loans, you’d need a physical address in the state.
Another advantage of forming an LLC in Alaska is that they offer tax credits to businesses depending on the industry you’re operating in. Some industries that qualify include education, new area development, and veteran employment.
However, these credits are also only available to businesses operating in Alaska.
What if My Business is 100% Online?
Even if your business purely operates online, you run it from a specific location, for instance, from home. For this reason, your business will still be subject to corporate laws, and corporate and personal income tax laws.
In which state? This could cause some doubts, especially if your customers are spread out over different states.
Where you run your business online, it’s best to form your LLC in your home state. Even if you have customers in different locations, your primary location would be your home location from where you operate your business.
In short, your customer’s location doesn’t determine where you conduct business. Your location does. Therefore, having customers in other states doesn’t mean you have to form foreign LLCs in these states.
With that, you can start your own business online, without worrying about this little detail.
Tips For Choosing the Best State for LLC Formation
Here are a few tips to consider before choosing the best state for LLC formation.
Overlook One-Time and Short-Term Fees
When starting out, some states may seem appealing as they levy lower filing and annual renewal fees, considering that some state fees may be significantly higher.
If you live in a state that charges high fees, this could be discouraging. However, such fees should not form a solid basis for your decision. Here’s why.
These one-time fees have minimal to no effect on your bottom line in the long term. Also, if you live in a state that charges higher fees, you’d only end up incurring more incorporating an LLC in a state with lower charges. This is because you’d still have to pay your home state fees, regardless.
You Shouldn’t Always Move To Start a Business
As discussed, some states have business-friendly regulations like low incorporation fees and subsidized taxes that every business would want to benefit from. Businesses that are located there benefit the most from these advantages.
This may make you want to relocate. However, it’s not always a wise decision to move because of a business. Here’s why.
There are many other factors that come into play for a business to succeed. Things like finding a market for your products and dealing with competition. Therefore, it’s not a guarantee that your business will succeed because of favorable regulations or because you’re saving on tax.
So, if you don’t have all these factors figured out, then moving may not be worth it. However, if you’re familiar with the new state, have a market for your products there, and know how to navigate its business world, then moving would be a good decision.
Understand Your State’s Compliance Regulations
After picking the best state to form your LLC, you need to understand its regulations. Your business needs to remain in good standing, and part of that requires due diligence.
Confirming your state’s LLC formation compliance regulations is important in keeping your business operational. If you’re expanding your business to new territories, it’s important to investigate that state thoroughly.
Examples of these regulations include the need to form a foreign LLC and do annual reporting. Failure to comply with such rules can cause:
- Your business to lose its good standing
- Your operations to be seized momentarily
- Your business to attract financial penalties
Frequently Asked Questions
1. Which state is the best for LLC?
The best state for LLC formation for a small business owner is usually their home state. Other than your home state, the best state for LLC formation that can offer financial, taxation, and management benefits to your online business are:
- Delaware
- Nevada
- Wyoming
- Alaska
2. Does it matter what state you form your LLC in?
Yes, it matters. The state you form your LLC in will govern the corporate income tax, sales tax, and individual income tax that you will need to pay. Along with taxes, the state you choose will also impact the formation and ongoing costs of your online Limited Liability Company.
3. Can you form an LLC in a different state?
Yes, you can form an LLC in a different state than the one you live in. You will need to hire a Registered Agent to use their physical address for your LLC filings. However, states like Delaware don’t have a physical address rule.
4. Why shouldn’t you form an LLC in Wyoming?
You shouldn’t form an LLC in Wyoming if it is not your home state, and you do most of your online business in your home state. That’s because forming an LLC in Wyoming will double your cost as you will have to meet filing and annual requirements and fees in both states.
5. Which state has no business tax?
States like Nevada and Wyoming have no business tax requirements. Delaware doesn’t tax out-of-state business income.
6. What are the factors to consider in choosing the best state for LLC formation?
Before choosing the best state for LLC formation, consider.
- Your business operations
- Formation fees
- Annual filing fees
- Income and franchise tax
- The state’s legal system
7. What state is the cheapest to form an Limited Liability Company (LLC)?
Forming an LLC in some states costs as low as $50 in filing fees with no recurrent annual renewal fees. These include:
- Arizona
- Mississippi
- Missouri
- New Mexico
8. What taxes do LLCs pay?
LLCs themselves don’t pay taxes, but their members do. LLC members pay income tax on their personal income. However, if you choose to classify your LLC as a Corporation, then your business will be subject to corporate income taxes.
Also, if your LLC sells taxable goods, you’ll need to remit sales tax to your state.
Are You Ready to Form an LLC for Your Online Business?
When you start an online business, it is an excellent decision to choose an LLC as your business structure. It is easier to form than Corporation and offers liability protection. You can either form an LLC in your home state or in states like Delaware, Nevada, and Wyoming.
These states offer small business owners additional advantages to build, manage, and grow their companies more efficiently and save money on business and individual income taxes.
Do you need help forming an LLC in the United States the right way? Fill out our simplified LLC application and our business formation experts will complete all the paperwork for you.