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.
LLC differs from sole proprietorships and general partnerships because it can protect your privacy and personal property if your business is sued.
LLC also differs from corporations as it is not subjected to double taxation and it is 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 consider setting up 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 the state where you live. Choosing to start your LLC within your home state may not be favorable if you live in a state with high tax rates.
Learning more about the rules for different states to start your small business will not only help you maximize the benefits for your small business while minimizing your taxes. Here are the best states to form LLC:
Delaware is the most popular state for forming an LLC. Most big businesses are incorporated in Delaware even without having a physical headquarters in the state.
This is because Delaware is one of the most business-friendly locations in the country. For instance, Delaware doesn’t require out-of-state personal income tax. This translates into huge tax savings for a business owner who registers their business in Delaware but does 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.
Another benefit of forming your business entity in Delaware over the other states is the Chancery Court. This court 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 laws, matters, and procedures.
Finally, this state offers a relatively fast processing time. This is a big advantage for those who want to 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 form LLC in the US. The state has its advantages for LLCs and pro-business reputation.
Some of the benefits of starting your business 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 0.77 percent property tax rate and a 6.85 percent sales tax rate.
Nevada has no franchise taxes and doesn’t require operating agreements or annual meetings to stay compliant with the laws of the state. The state also values privacy as it doesn’t require any information-sharing agreement with the Internal Revenue Service (IRS). This means that a Nevada LLC business owner has less disclosure to make, so they can remain anonymous in public filings.
Like Delaware, Nevada also offers fast processing times to expedite the business formation procedure.
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 rate, and low sales tax rate. Wyoming also doesn’t have business income and franchise taxes.
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 state to incorporate your business. South Dakota offers low property tax rates, zero corporate tax rate, low sales tax rate, and filing fees.
Alaska offers a zero sales tax and individual income tax rate but a 9.4 percent corporate tax rate.
Florida offers a 5.5 percent corporate tax rate, zero individual income tax rate, 1.02 percent property tax rate, and a 6 percent sales tax rate.
Montana offers a 6.75 percent corporate tax rate, 1 to 6.9 percent individual income tax rate (depending on income), 0.87 percent property tax rate, and zero percent sales tax rate.
Why the State Matters When Filing for an LLC
The state you choose to incorporate your business has major tax implications for your business and can affect the yearly expenses of running your business and legal liability.
For instance, the essence of incorporation is to limit your 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 for you as an individual if you have to go to court.
Nevertheless, some states are very business-friendly such as Delaware, Wyoming and Nevada, which are more likely to protect business owners that incorporate locally and their property. Some states also offer enhanced privacy, business-friendly rules, and knowledgeable courts, which make them good choices for incorporation. Other regions have higher corporate tax rates and individual income tax rate which are not favorable for entrepreneurs.
Domestic LLC vs Foreign LLC
The domestic LLC or foreign LLC differs depending on the state business owners register in 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 registered in California and carries out its 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.
Foreign LLCs are subjected to the laws of both states. However, businesses with foreign LLCs may benefit from tax laws and other laws specific to the region they incorporate their business. These LLCs also need to appoint a registered agent who will be responsible for receiving all state documents.
Filing for an LLC Other Than Your Home State
If you choose to do your LLC filing 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 would also have to comply with both local and state laws, fees, state income tax, business income tax, and personal income taxes while incurring the added costs, 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.
You may have to pay taxes, which include individual income tax, sales tax, and state income tax, in the state where you earned it.
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.
Best States to Form an LLC for an Internet Business
One of the first and vital decisions you have to make as an internet business owner is choosing which state to incorporate your LLC, regardless of where you reside.
Online business owners may find their home state the best state to form an LLC for an internet business due to convenience and familiarity, but filing your LLC in your home state may not be the cheapest option. The rates of fees and taxes vary differently in each state, which means you can save a significant amount of money should you decide to register in a different state.
Some of the top choices for internet business-friendly states to form 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. Wyoming is a great option as well, with it having the most protective charging order laws to ensure the safety of your LLC assets from personal liabilities regardless of whether you’re a sole owner or not.
Similar to Delaware, Nevada doesn’t have registration fees for businesses that intend to form their 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 property 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.
Texas charges $300 for filing with no additional fees in future years although annual filing of reports is compulsory. However, it’s not advisable to form your LLC in Texas if you own personal property or real estate in Texas.
Does it matter what state you file your LLC in?
Yes, the state you file your LLC in matters. The state you choose would determine the business environment, legal environment, and tax regulations such as the corporate tax rate, personal income tax, franchise tax and state taxes.
The state you choose to incorporate your business in will influence the tax regulations and business environment you operate in. Do your research on the regulations of the different states before you get started with your business in the state and start your LLC.