You get lots of advice (solicited and unsolicited) when starting a business, including what the best state to form an LLC in is. After all, some states are more friendly to business than others. Usually, though, the best state to form an LLC in is your home state and the place where you’ll be conducting business. We’ll explain why.
Although states like Delaware attract corporations with their business-friendly laws and tax advantages, those perks often don’t extend to an LLC. In fact, trying to establish an LLC in one state while doing business in another can be more expensive and a bigger paperwork hassle in the long run.
A limited liability company (LLC) is a kind of business entity combining the personal liability protection of a corporation with the flexibility and tax benefits of a sole proprietorship. It’s become a popular choice for entrepreneurs who want to start a business but not risk losing their personal assets if the business is sued or goes into debt.
Prior to the LLC, the only way to protect your personal assets as a business owner was to form a corporation. But corporations require more formalities and paperwork and must contend with “double taxation,” in which profits are taxed at the business level and again when they’re distributed to shareholders. LLCs by default have “pass-through taxation,” in which profits avoid being taxed at the business level and are only taxed at the level of the individual LLC owners, who are called “members.”
When you form an LLC in the state where you live and plan to do business, it’s called a domestic LLC. A domestic LLC is mostly confined to doing business within its state of origin. It usually can’t, for example, open another office or other venue in another state. To do that, the company would need to register as a “foreign” LLC.
The “foreign” in a foreign LLC isn’t referring to another country, but rather to any LLC that was formed in a state other than the one it’s doing business in. For example, if you started an LLC for your restaurant in New Jersey and wanted to open another restaurant in New York, you’d need to register as a foreign LLC in New York by getting a foreign qualification.
A foreign qualification refers to the process you use to register your company to legally do business in another state. The process varies by state, but it usually involves completing a Certificate of Authority (which is paperwork similar to Articles of Organization) in the new state and paying a fee, usually one that’s equivalent to or more expensive than the one you pay to establish an LLC in your home state.
You’ll usually also have to get a Certificate of Good Standing or its equivalent from your home state to verify that your business is in compliance in its state of origin.
You may have heard how some states are much more attractive than others to businesses. For example, Delaware has attracted more than half of all Fortune 500 companies. But most of those are large corporations, and things like low corporate tax rates won’t apply to most LLCs (unless they choose to be taxed as a C corporation).
Let’s examine the pros and cons of starting an LLC in your home state versus another state, and which states may benefit your business the most.
Most experts will tell you that, with an exception or two, the best state to start an LLC in is the state where you live now and plan to conduct business. Let’s debunk some of the reasons for starting an LLC in another state.
States like Wyoming, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Alaska have no personal state income taxes. If you’re living in one of those states and starting an LLC, it’s especially nice because not only will you not pay state income taxes at the business level, but you’ll also avoid them on your individual tax return. If you don’t already live in one of these states, you might think it’s wise to start your LLC there and avoid those state taxes.
But remember that you don’t pay taxes based on where your customers live; you pay them based on where you conduct business. So, if you live in California and plan to operate your business there, but you start your LLC in Texas, you’re still going to have to pay California state income taxes because you made the money in California.
But, you say, what if I’m running an online business and I have customers from around the globe? Again, you can’t circumvent paying taxes this way. You’ll pay state income taxes based on where your business is operating, not necessarily where it was formed or where your customers are located.
An area of law that’s still evolving around this is how online businesses pay sales taxes, and to whom. If you’ve established what’s called a sales tax nexus in a state, you’ll be responsible for paying sales tax to that state.
If you’re establishing your LLC in another state but still planning to conduct business in your home state, you’ll have to register as a foreign LLC in your home state. That’s essentially doubling your paperwork.
Say you live in Washington and want to operate your business there, but you decide to form your LLC in Nevada to take advantage of the friendlier business climate. First, you’d need to complete Nevada LLC Articles of Organization for an LLC and any other associated paperwork. Then, to do business in your home state, you’d be required to complete a Washington Foreign Registration Statement to conduct business there.
But that’s not all. You will need to appoint and maintain a registered agent in both states, and a registered agent must have a physical street address in each state. If you need to use a registered agent service for this purpose, that’ll be an extra ongoing cost for you. You’d also have to maintain other compliance requirements, such as filing an annual report for both states.
Of course, the more states your LLC is registered in, the more compliance requirements it will have. And that means more opportunities for forgetting or making errors that could cause the state to fine you or penalize you in some other way, maybe even dissolving your business.
Not only will being registered in multiple states mean more paperwork, but it’ll also mean more fees. States charge a fee for filing your LLC paperwork, and they also charge a fee to LLCs for registering as a foreign LLC. These fees can range anywhere from around $50 to $500.
In most cases, your ongoing expenses will also be more. Most states charge a fee (again, the cost range is wide) for filing an annual or biennial report. You’ll have to pay such a fee in both the state you first registered in as well as the state you registered in as a foreign LLC. Plus, there may be other ongoing fees in the states you’re registered in, such as a general business license fee.
When you hear a state boast about its low corporate tax rate, remember that you’re not starting a corporation. As mentioned above, an LLC has pass-through taxation by default, which means that it wouldn’t pay corporate taxes if the state taxes the LLC the same way the federal government does (which most states do). So, if you’re looking at state income taxes as a deciding factor in where you start your LLC, you’ll likely be more interested in the state’s personal income tax rate than its corporate tax rate.
The corporate tax rate can be a factor if you choose to have your LLC taxed as a corporation, which is an option for many LLCs. You can apply for your LLC to be taxed as a C corporation (the default form of a corporation) or an S corporation.
An S corporation also has pass-through taxation, but it may be able to save some LLC members on self-employment taxes. A C corporation does have double taxation and would pay corporate taxes. Larger LLCs sometimes find that, once all the numbers are crunched, they can actually lower their overall tax burden with the tax deductions available to C corporations. If that’s the case with your LLC, the state’s corporate tax rate will be a bigger factor in your decision.
Because of the nature of real estate, it does make sense in most cases to form your LLC in the state where the real estate is. After all, whether you’re selling, buying, renting, etc., you’re going to be making money from the real estate itself, and so that’s where you’d be conducting business.
There also may be cases where an LLC member living in one state does absolutely all of their LLC’s business in another state, in which case it could make sense not to form the LLC in the state where they reside. Even so, they’d have to take special care to not conduct any business operations in their home state.
In all of these scenarios, it’s best to consult a business attorney with some experience in this field.
With all the above being said, let’s discuss some states that are especially attractive to businesses in general. However, our vote is usually going to be for forming an LLC in the state where you live and plan to do business.
Of course, if you live in any of the following states, that’s probably the best place to start your LLC. But if you don’t, consider the points we made above, despite whatever measures other states have taken to attract your business.
Delaware is often hyped as the most business-friendly state in the nation, one with laws favoring business owners and more privacy protections for those owners. But even Delaware’s own website says that there are a lot of myths around the state’s friendliness to business. Let’s take a realistic look at the benefits of forming an LLC in Delaware.
Delaware’s Court of Chancery is a centuries-old non-jury court that’s known for catering to businesses. The lack of a jury generally means that faster decisions are made. According to the Court of Chancery’s website, “The Delaware Court of Chancery is widely recognized as the nation’s preeminent forum for the determination of disputes involving the internal affairs of the thousands upon thousands of Delaware corporations and other business entities through which a vast amount of the world’s commercial affairs is conducted. Its unique competence in and exposure to issues of business law are unmatched.”
That all sounds good if you’re a Delaware business doing business in Delaware. But in order for the Court of Chancery to hear your case, it must be brought in Delaware. If you only formed your business in Delaware and aren’t doing business there, lawsuits brought against you are unlikely to be tried in the Court of Chancery.
Four states — Delaware, Wyoming, Nevada, and New Mexico — offer “anonymous LLCs,” which are intended to keep members’ names and personal information out of the public eye. This added privacy protection is appealing to many entrepreneurs, but it’s important to be aware of its limitations.
Remember, you can’t hide from the IRS or other tax authorities. The IRS and the Delaware Division of Revenue collect information about a company’s owners, directors, officers, and other responsible parties in several ways, including tax returns, applications for tax ID numbers, and financial account holding reports.
In fact, Delaware’s website claims, “Delaware is not a secrecy haven, any more than any other state or the United States itself. Indeed, Delaware has done more than most states to ensure proper transparency.”
Consider, too, that when you register as a foreign LLC in another state, you’ll likely have to disclose the names and other information about your members.
Delaware does attract large corporations, and it’s true that more than half of all Fortune 500 companies have been formed there. But as we said earlier, those companies are corporations, not LLCs. Corporate tax breaks don’t help you if you’re not a corporation.
Something else to consider is Delaware’s $300 annual tax, which all domestic and foreign LLCs, limited partnerships, and general partnerships must pay every year.
Nevada has neither personal nor corporate state income taxes. It’s also one of the four states that allow anonymous LLCs, so there’s greater privacy protection for LLC members than in most states.
However, the same reasons for not forming in Delaware mostly apply to Nevada, too. If you’re not doing business in Nevada, you won’t be able to take advantage of their lack of taxes. As for privacy, the same limitations apply.
Another thing to consider is the cost of forming a Nevada LLC. You’ll pay $75 for the Articles of Organization, but there’s also the “Initial/Annual List of Managers or Managing Members and State Business License Application.” The list carries a $150 fee, and the Nevada State Business License is $200 more. Altogether, you’ll pay $436 in fees to start your Nevada LLC.
You’ll also need to think about the ongoing fees. Nevada’s business license must be renewed annually at $200 for LLCs. Plus, the annual list is $150 every year for LLCs. So, you’ll be paying $350 every year for your Nevada LLC.
If you hate taxes, you’re going to love Wyoming. The state has no personal, corporate, or franchise taxes. As mentioned, it’s also one of the four states where you can form an anonymous LLC. Wyoming filing fees are also modest at $102 for Wyoming Articles of Organization.
Again, though, there are limitations to LLC privacy, and you pay taxes where you make money. If you’re living and doing business in Wyoming, that’s great. But if you only formed your LLC in Wyoming but are transacting business elsewhere, you won’t see much tax savings.
New Mexico does have personal state income tax as well as a gross receipts tax on LLCs, but New Mexicos’s filing fee of just $50 is one of the lowest in the country. Another very unusual benefit New Mexico has is its lack of an annual report requirement, which not only means less paperwork, but also no annual filing fee. And, it allows for anonymous LLCs.
Despite these perks, though, if you’re not planning to do business in New Mexico, forming an LLC in New Mexico usually won’t benefit you much. Even if you paid no filing fees in New Mexico, you’ll still have to pay the filing fees for whatever state you’re doing business in.
Starting a business could be the fulfillment of a lifelong dream, but the paperwork and red tape can make it intimidating. When you’re ready to start your LLC, come see us. Starting at $0 plus state fees, we can help you form an LLC in all 50 states and the District of Columbia.
We can walk you through forming an LLC to make sure it’s done quickly and correctly the first time. Plus, we have a host of other services to help you run and grow your business, everything from registered agent services to our ZenBusiness Money app, which helps you organize your finances. Contact us today and become your own boss.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
In most cases, the best state to form an LLC is the state where you live and plan to do business. Other states may have more favorable taxes, but you ultimately pay taxes where you do business, not necessarily where you formed the LLC.
Yes. You’re not required to live in the state where you’re forming your LLC. If you’ve already started an LLC and want to expand to another state, though, you’ll need to register as a foreign LLC there.
Again, it’s usually best to create your LLC in the place where you intend to operate the business. You’ll be taxed where you make the money.
The best reason to form your LLC in Delaware is that you plan on doing most of all of your business there. Delaware is a very business-friendly state with laws that favor entrepreneurs, but, as we discussed above, those benefits may not outweigh the hassle and expense of starting an LLC there when you plan to do most of your business in another state.
Start an LLC in Your State
When it comes to compliance, costs, and other factors, these are popular states for forming an LLC.
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