Choosing the best state to form an LLC is a complex process that needs to be carefully researched.
In this article, I will discuss the criteria to consider when selecting a state for an LLC and provide resources to help you make an informed decision.
With the laws surrounding LLCs that can differ significantly from state to state, it's essential to take your time and research thoroughly before making a decision.
Best States To Start An LLC
The simple rule of thumb is that, for most people, the best state to form an LLC is their home state.
However, with a few exceptions to the rule (which I'll get to shortly), let's first look at foreign states that are the most popular for LLC formation.
Forming An LLC In Delaware
Delaware is famous for business registrations due to its General Corporation Law and Court of Chancery. When forming a Delaware LLC, there are no taxes on profits made outside the state.
There is also no personal income tax on out-of-state residents who own an LLC in Delaware and no requirement for local businesses to register with the Secretary of State.
There's even no need to pay annual fees or report earnings.
Additionally, you'll get access to a court system that is well-versed in corporate law and has a reputation for being business-friendly. Plus, you can form your LLC entirely online with minimal paperwork.
The biggest drawback of forming an LLC in Delaware is that it does not offer the same protection from personal liability as corporations do. The penalties associated with owning an LLC are still on the shoulders of its owners — unless they form a corporation and transfer ownership over to that entity.
Another potential downside is that anonymity isn't guaranteed – your name will be listed on public documents like formation certificates, filing forms, and tax returns if applicable. Finally, since Delaware isn't always geographically close to your business operations or customers, it may be difficult for you to establish credibility or legitimacy if they don't recognize your address as local.
Forming An LLC In Wyoming
Wyoming has also proven to be one of the best states for entrepreneurs seeking to form an LLC. Let's take a look at why that is.
One of the key advantages of forming an LLC in Wyoming is that the state imposes no personal or corporate income tax. Additionally, there is no franchise tax, which can be substantial cost savings when it comes time to file your taxes each year.
Wyoming also offers enhanced privacy protection for its LLCs compared to other states. This protection includes allowing members to appoint another person as their proxy to vote on matters requiring consent from all members. This added layer of privacy can help protect business owners from potential legal issues and provide peace of mind when making crucial decisions regarding their company.
Finally, Wyoming offers several other legal benefits that make it an excellent state for businesses seeking an LLC structure. These include low formation costs (which can be as low as $100), accessible online filing options, and limited liability protection for shareholders and partners. All these things make Wyoming one of the best states to form an LLC if you're looking for low taxes and privacy protection.
Forming An LLC In New Mexico
One of the most significant advantages of forming an LLC in New Mexico is the meager filing fees. In fact, at only $50 for a basic filing package, New Mexico offers some of the lowest filing fees in the US – saving business owners time and money.
If you opt for a more comprehensive package that includes extra services such as expedited processing or certified copies of documents, you can expect to pay slightly more. However, even with these extras included, New Mexico still boasts some of the lowest LLC filing fees.
Many states require businesses to submit annual reports or pay yearly taxes to remain active and compliant with local laws and regulations.
Business owners can save time by not worrying about submitting paperwork yearly or paying additional taxes beyond those required by their home state or federal government agencies. However, this is optional when forming an LLC in New Mexico.
For business owners who want to keep their finances separate from their company's finances or those who want to add protection for their personal information online, New Mexico offers enhanced privacy protections for individuals who form an LLC.
With these protections in place, business owners can rest assured knowing that their personal information won't be exposed online or shared with third parties without permission.
Forming An LLC In Alaska
Alaska is an excellent option for those looking to form an LLC due to its lack of state income or sales tax, low local taxes, potential tax credits, loan programs, and inexpensive state fees.
The best part about forming an LLC in Alaska is that there is no state income or sales tax. You can keep more of your profits and revenue instead of paying out large sums to the government each year. Depending on how much money you make annually, this could be a significant advantage for you and your business.
While cities in Alaska can collect a local sales tax from businesses operating within their boundaries, these taxes are generally relatively low compared to other states. This fact makes it easier for companies to profit without worrying about being bogged down by high taxes that could eat away their overall earnings.
Depending on your new business's industry, you might also be eligible for certain tax credits. Most of these require that you do business within the state for them to apply; however, they can provide additional savings if you qualify.
Alaska provides many loan programs that benefit businesses based in the Last Frontier State; however, most are only applicable if you operate with a physical presence in Alaska. If you meet those conditions, though, some great loan options are available with low-interest rates and generous repayment terms, so look into them when setting up shop in Alaska.
Forming An LLC In South Dakota
South Dakota is an attractive state for businesses to form an LLC. From its 0% corporate tax rate to its lack of personal property taxes, the Mount Rushmore state has plenty of tax advantages.
The biggest one is that South Dakota does not have state income taxes. On top of that, any profits made by a business formed in the state are also exempt from state income taxes.
LLCs taxed as corporations can also take advantage of a 0% corporate tax rate in South Dakota. No matter how much your business makes, you won't be paying corporate taxes. In addition, if your company has more than one owner (i.e., a multi-member LLC), you can also benefit from the pass-through taxation system.
This system allows each owner to pay taxes on their share of profits at their rate instead of paying taxes as a corporation at one higher rate.
South Dakota does not have any business inventory taxes either. This lack of taxes is excellent news for businesses that carry large amounts of inventory or need to order materials regularly for production purposes. Not paying inventory taxes will help keep your costs low and make it easier for you to stay profitable as your business grows and expands.
Other Considerations When Considering Which State Is The Best To Start An LLC
Here are the exceptions to consider when forming a foreign LLC.
You Operate Solely In Another State
If you live in one state but operate your business solely in another, consider forming your LLC in the latter. This is especially true if your business's operations are concentrated there and you need a physical presence or employees working in your home state.
The reason is that if you form an LLC in a state where you don't do business, you will likely have to register as a foreign entity in the other state and pay fees associated with doing so—not ideal for those looking for cost savings.
Real Estate Investing
Another instance when it might make sense to form an LLC beyond your home state is if the primary purpose of your LLC is real estate investing. While each case will vary depending on the situation's specifics, many states have specific laws that govern how real estate investments are structured and taxed.
These laws could be more favorable than those found in your home state. It's worth researching what options are available across different states before committing to one over another.
Non-U.S Residents Without A Home State
Finally, if you're a non-U.S. resident without a permanent residence within the United States, then forming an LLC abroad may be better suited than developing one domestically. Again, this will depend on individual circumstances.
Many non-U.S residents find that forming their entities abroad offers them more tax savings and other financial benefits than they would receive by forming their LLC domestically.
The Basics Of Forming An LLC In Another State
If you're looking to form an LLC in another state, there are several things to consider.
Understanding the differences between a domestic LLC and a foreign LLC and the costs and complexities associated with starting an LLC in another state is essential.
Let's start with some definitions.
A domestic LLC happens when you form an LLC in the state where you currently reside.
All the formalities associated with starting the business—such as creating and filing articles of organization—are completed within that state. On the other hand, if you are looking to form an LLC outside of your home state, it must be registered as a foreign LLC in your home state.
In some cases, starting an LLC in another state might require you to form two separate entities - one in the formation state and another in your home state.
This process can quickly become costly and complicated if different rules or regulations govern each entity. For example, if you are forming an LLC in California but live in New York, then both states must be considered when filing the appropriate paperwork.
Additionally, depending on how much income your new business generates from each state, you may have to pay taxes on both sides of the equation—which can add up quickly.
What To Expect When Forming An LLC
If you're considering forming an LLC, you may have many questions:
Understanding the legal requirements for forming an LLC can be daunting, so let's explore some questions in more detail.
Before you can form your LLC, you must pay the state a filing fee. Depending on where you live, this fee can range anywhere from $50 to $500. Make sure to research the filing fees in your state before setting up your LLC so that you know exactly how much money you need to budget for.
Another critical requirement when forming an LLC is drafting an Operating Agreement. This document explains how your business will be run and managed.
It also includes details such as who is in charge, how profits are distributed among members, and more. While not all states require this document, drafting one is always the best practice, even if it isn't required by law.
During the filing process, you will also need to appoint a registered agent—a person or entity that accepts legal documents on behalf of your company in case of any lawsuits or tax issues that may arise. It's important to research potential registered agents before making your decision so that they are reliable and able to fulfill their responsibilities properly.
Once everything has been filed with the state, all that is left is waiting until it is officially recognized as a legal entity; this usually takes 3-10 business days but can be expedited for an additional fee if necessary.
During this time, make sure all your paperwork is in order and double-check with the state regularly for updates on your application status.
Staying Compliant With An LLC
If you are a business owner and have formed an LLC, it is essential to know the rules and regulations that come with it. Every state has different laws governing how LLCs must operate, requiring a foreign LLC to be registered if it transacts business in their state. The consequences for not reporting can include hefty fines, penalties, interest, and court costs.
Each state has its own set of rules for enforcing the law for foreign LLCs who do business within its borders. Some states have higher fines than others; some might impose a few hundred dollars per year, while others may require thousands of dollars per year depending on the severity or frequency of noncompliance with their registration requirements.
Many people mistakenly believe they will save money by forming an LLC in another state. Still, taxes are paid where money is made - so if your LLC is based in Nevada but doing business in your home state, you'll still need to pay taxes in your home state. It is essential to research your particular state's policies as they vary significantly from one place to another.
What Does 'Doing Business' Mean For An LLC?
One of the most important decisions you will make when forming an LLC when forming an LLC is where to start it. The legal definition of "doing business" is where you run and operate your business, not where your customers are.
That means that if you use your company in one state but have customers or clients in other states, you don't need to register your LLC as a Foreign LLC in those states.
Said differently, just because you have customers or clients in a few states doesn't mean you must register your LLC as a Foreign LLC in each of those states. Generally speaking, if your only contact with a particular condition is through sales activities (i.e., providing goods or services), then registering as a Foreign entity isn't necessary.
However, if any aspect of your company's operations occurs within another state (such as having employees work in another state), then registering as a Foreign entity may be required by law.
Forming an LLC is a great way to protect your assets and limit financial liability.
With a home state LLC, it is essential to ensure you comply with the laws and regulations set forth by that state.
For foreign LLCs, knowing, understanding, and abiding by the different registration requirements for each state is vital.
Failure to adhere to these can result in penalties and fines, so ensure you stay on top of these requirements.
In addition, when it comes to specific costs, here are a few articles that might help you: