January 14, 2022

Best State to Form an LLC

Written by: Mary Gerardine

    If you plan to form a limited liability company (LLC) business in multiple states or currently want to relocate, understanding which states are the most LLC-friendly could prove helpful.

    Note that your home state is almost always the best place to form your LLC. This means that businesses should register first in the state in which they formed. The exceptions to this rule are real estate companies and foreign-managed businesses outside of the United States.

    The biggest factors that can impact LLCs on a state-by-state basis include formation fees, annual fees, and state income tax rates.

    This article explores the differences between domestic LLCs and foreign LLCs, including the best states in which to form an LLC.

     

     

    Domestic LLCs vs. Foreign LLCs

    A domestic LLC is a company formed and registered in the same state where it conducts business. A foreign LLC is a company 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.

    If you choose to do business beyond your state of formation, you must register your business as a foreign LLC in each additional state where you conduct business activities.

    Forming your LLC outside your home state doesn’t make good business sense because, as a business owner, you’d then have to pay two registration fees and face annual reporting fees in two states.

    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.

     

     

    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.

    It’s important to note that “filing” differs from “registering.” Filing refers to the process of forming a business whereas registering is an additional process businesses go through to operate in additional states. A domestic LLC only needs to file in its home state while a foreign LLC will file in one state and then register in others (including its actual home state).

    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.

    The filing fee is just $90 for an LLC, 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. The Chancery Court features judges with experience in business affairs, which helps to expedite the cases it hears.

    The Chancery Court focuses solely on business cases. This means 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 a Delaware LLC doesn’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. That’s because Nevada doesn’t impose taxes on personal income, corporate income, or franchise income.

    Nevada does, however, require business owners to pay annual license fees and annual filing fees. Nevada’s filing fee is $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. In short, your ownership of your LLC can remain anonymous in any public registration filing.

    Furthermore, forming a Nevada LLC doesn’t make your business subject to an information-sharing agreement with the Internal Revenue Service (IRS). Because this state doesn’t have an income tax department, 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

     

    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 sales tax. This makes operating an LLC particularly advantageous there.

    Wyoming also has very minimal reporting obligations and limited fees surrounding LLCs. The filing fee is $102.

    Forming a Wyoming LLC provides 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. This means that business owners in Wyoming can 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 by state with some states offering LLC owners certain advantages when compared to others.

    While these three states provide the most LLC-friendly environments, 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 and how to start an LLC.

     

     

    Frequently Asked Questions

    In what state should I start an LLC?

    You can choose to form your company in any state where you do business. In most circumstances, your home state will be your best option.

     

    What is the cheapest state in which to form an LLC?

    The cheapest state in which to form your LLC is always the state where you do business. Across the nation, forming an LLC in Kentucky provides the cheapest option based on the state’s $40 LLC filing fee.

     

    Can I live in a different state than my LLC?

    Yes, you have flexibility when choosing where to establish your LLC.




    Information on this page has been gathered by a multitude of sources and was most recently updated on January 2022.

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