After deciding to form a limited liability company (LLC), it’s common to wonder which state is best for your business. While in most cases filing in your home state is the obvious choice, this isn’t always true.
ThisBest State to Form an LLCguide aims to help simplify this decision-making process by exploring the pros and cons of the most popular states for LLCs and breaking down the different factors involved.
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Domestic LLCs vs. Foreign LLCs
A domestic LLC is a company formed and registered in the same state in which it conducts business. By contrast, a foreign LLC that was organized in one state but that is doing business outside its state of formation.
Classifying your business as a domestic or foreign LLC will depend on two factors:
- Where you formed the business
- Where the business operates
If you form and operate your business exclusively in one state, that state will automatically consider it a domestic LLC. However, if you choose to do business beyond your state of formation, you’ll be required to register your business as a foreign LLC in each additional state where your business operates.
In general, forming your LLC outside your home state doesn’t make sense because, as a business owner, you’d then have to pay two registration fees and face annual reporting fees in two states.
Instead, you should think about how you plan to grow your business when filing your formation documents, and then choose a state that’ll offer the most advantages for your long-term goals.
How to Choose Which State to Form an LLC
In the vast majority of cases, forming your LLC in the state in which you currently live (also known as your “home state”) will be the best course of action. There are a number of reasons for this but, to put it simply, this is most likely to be the cheapest and most convenient place to start your business.
However, there are notable exceptions to this rule where you’ll need to consider other states, including for:
- Real Estate Investment:In this case, it’s usually better to form your LLC in the state where the property is located. This is because the business activities, like renting out or selling the property, will happen there, so it can simplify legal and tax issues to form your LLC there. This approach can save time and money, avoiding extra fees and paperwork you would otherwise face.
- Non-US Residents:Entrepreneurs looking to form their own business based in the US naturally won’t have a “home state” as they don’t reside within the country. This means they will be free to choose the state that best fits their individual needs.
- Operations Based in Another State:If your business will be run in its entirety from a completely different state to the one you’re currently residing in, it will likely be more favorable to organize it in the state in which it will be operating. It’s important to be aware that if you foresee yourself doing work from your business in the state you plan to live in, the general rule will apply.
If none of these exceptions apply to you, you’ll most likely be better off forming your LLC in your home state. However, if they do apply, we’ve discussed some of the most popular states for business formation in the next section for you to consider.
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Forming an LLC in Delaware, Nevada, or Wyoming
States like Delaware, Nevada, and Wyoming have a reputation for providing an LLC-friendly environment to new business owners.
Let’s review the specific advantages associated with forming an LLC in each of these three states.
Delaware
Delaware is the most popular state in which to file an LLC because it has a strong reputation as a business-friendly environment and offers a fast filing process with increased protection for owners.
TheDelaware LLC filing feeis just $90, which is on the low end, although the $300 annual report fee is considerably more than other Nevada or Wyoming.
Delaware uses a separate court called the Chancery Court to handle business matters; this court features judges with experience in business affairs, which helps to expedite the cases it hears.
The Chancery Court focuses solely on business cases, meaning it can resolve business-related cases much quicker than courts that hear cases in all categories. Plus, Chancery Court judges have much more experience in business hearings.
Forming aDelaware LLCdoesn’t require the business’s shareholders, directors, or officers to be residents of the state. Furthermore, a Delaware LLC can name one person in all of these roles. Delaware also is one of the only states that allows you to exclude your personal identity from the formation documents.
Pros of Forming an LLC in Delaware:
- Quick and simple formation process
- Low filing fees and franchise taxes
- No corporate income taxes (for foreign LLCs that elect corporate tax status)
- Increased privacy for your business
- Flexible business structure
- Specialized business legal system (Chancery Court)
Cons of Forming an LLC in Delaware:
- Dual-registration required for out-of-state LLCs
- Two registered agents required (one for each state)
- Multiple legal representatives required because most lawyers hold a license in only one state
- No flat franchise taxes
If you live outside Delaware and want to form an LLC there, it could ultimately cost more than starting an LLC in your home state. Aside from having to maintain two LLCs, your administrative costs also may be higher. An accountant in your home state may not be familiar with Delaware structures, so you’d likely have to retain two accountants as well.
Nevada
Nevada is another state that draws a lot of attention from business owners who want to avoid paying high taxes. In particular, this is because Nevada doesn’t impose taxes on personal income, corporate income, or franchise income — which is understandably attractive for many business owners.
Nevada does, however, require business owners to pay annual license fees and annual filing fees, which only add to the already high minimumLLC cost in Nevada($425).
In terms of privacy, Nevada is arguably second to none. It’s one of the only states that allow for complete anonymity with public filings — allowing you to keep your ownership of your LLC completely anonymous.
Furthermore, forming aNevada LLCdoesn’t make your business subject to an information-sharing agreement with the Internal Revenue Service (IRS). This is because this state doesn’t have a state income taxes department, so there’s no information to share with the IRS.
Pros of Forming an LLC in Nevada:
- No state personal income or corporate taxes
- No franchise taxes
- LLC owners can remain anonymous
- No information-sharing agreement with IRS
- No operating agreements or annual meetings required
Cons of Forming an LLC in Nevada:
- Annual business license fees
- Annual filing fees
- Gross earnings of more than $4 million may be subject to taxes
It’s important to remember that creating an LLC in Nevada isn’t always ideal — especially if you live in another state. You’ll still have to create a foreign LLC in your home state and maintain two registered agents (one for each LLC).
Wyoming
Wyoming is a particularly friendly state when it comes to businesses. Often regarded as the best state in which to form an LLC, Wyoming has no personal income tax or corporate income tax, plus a low gross receipts tax — all of which makes operating an LLC there particularly advantageous.
Wyoming also has very minimal reporting obligations and limited fees surrounding LLCs — which brings the totalLLC cost in Wyomingto $102 at a minimum.
Forming aWyoming LLCprovides one key distinction when compared to other states: it includes a lifetime proxy. With a lifetime proxy, you can appoint another person to represent your shares or stock in a company on your behalf — which allows business owners in Wyoming to benefit from complete anonymity.
Pros of Forming an LLC in Wyoming:
- No franchise taxes
- No corporate or personal income taxes
- Low sales tax rates
- Minimal reporting requirements for LLC owners
- Lifetime proxy (for owner anonymity)
Cons of Forming an LLC in Wyoming:
- LLC dissolution triggered automatically if a member dies or files for bankruptcy
- High administrative costs
- Asset protection isn’t guaranteed for lawsuits filed outside Wyoming
LLC formation varies between states, with some offering LLC owners certain significant advantages when compared to others. While these three states provide the most business friendly laws, that doesn’t mean you should automatically form an LLC in one of them.
If you live in one of the best states in which to form an LLC, that’s great. But if you don’t, you’ll still have to register a foreign LLC in your home state. While you may get tax breaks in one state, you’ll still have to pay taxes in your home state. Plus, maintaining two LLCs comes with its fair share of headaches like extra fees, multiple accountants, multiple lawyers, and multiple registered agents.
It’s also a good idea to consult with your accountant and attorney before deciding where andhow to start an LLC.
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Best State to Form an LLC FAQ
Which state has the lowest taxes for an LLC?
Some of the best low-tax options include Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Another added benefit is that you won’t have to pay state income taxes at a business or personal level if you live in one of these.
For more information on this topic, see our guide on the Best State to Form an LLC.
How do I start an LLC?
To form an LLC you’ll typically be required to follow the same general steps. These include selecting an acceptable and available name, appointing a registered agent, and filing your Articles of Organization with the Secretary of State.
Once done, your LLC will be formed and you can begin benefiting from pass through taxation and limited liability protection of your personal assets.
Which state is best for LLC formation as a non-resident?
As a non-resident, there are many good states in which to form a business.
While Delaware is preferred by a number of business owners due to the ultimate privacy it offers,Kentuckyis also popular, and Nevada tax savings since you don’t need to pay corporate income taxes or personal state income tax plus minimal annual reporting requirements (e.g., franchise tax) are attractive.
Which state should I form my LLC in?
In most cases, it’s recommended to form your LLC in your “home state” as it’s most often the easiest and cheapest way to get your LLC off the ground and pay income taxes, though there are a few exceptions to this rule.
You can read more about the process of getting started in ourHow to Start an LLCguide.
