For most small business owners, it's best to file LLC paperwork in the state where you live and conduct your business. If your business isn't tethered to just one state or has specific legal or privacy concerns, you may benefit from forming your limited liability company elsewhere.
This guide will explain what to consider when choosing a location for your LLC and compare the features and benefits of states that are often regarded as especially LLC-friendly.
Key takeaways
- Forming an LLC in one's home state offers numerous advantages, but other states may be more suitable for smaller businesses.
- Consider the potential benefits and drawbacks of forming an LLC in Delaware, Nevada, or Wyoming before making a decision.
- Non-citizens and non-residents can form LLCs anywhere. Research specific regulations relevant to your industry as well as government fees associated with formation before deciding where to establish your business.
Costs and fees associated with forming an LLC
The cost of forming an LLC varies by state, with government fees ranging from $35 to $500. In addition to these filing fees, there may be additional fees for name reservation, license application, and annual maintenance.
For example, the government filing fees for forming an LLC in Nevada include:
- $75 filing fee
- $150 annual list filing fee
- $200 business license fee
- $350 annual list and business license renewal fee
If a Nevada registered agent is required, expect to pay between $100 and $300 annually.
Annual fees for LLCs also vary by state and generally range from $35 to $500. It's essential to research the specific costs and fees associated with forming an LLC in your chosen state to ensure that you are aware of all necessary expenses.
To sum up, the costs and fees associated with establishing an LLC can significantly differ based on the state in which you choose to set up your business. Be sure to thoroughly research the specific costs and fees in each state before making a decision to ensure that you are prepared for all necessary expenses.
Legal and tax advice for LLC formation
When determining the best state for your LLC, consulting with legal and tax professionals is imperative. They can provide guidance on state-specific requirements, tax implications, and potential pros and cons of establishing an LLC in a particular state.
Legal professionals can help you navigate the complex landscape of state regulations and requirements, ensuring that your LLC is properly formed and compliant with all necessary laws. Additionally, tax professionals can provide valuable advice on the tax implications of forming an LLC in a specific state, helping you maximize your tax benefits and minimize your liabilities.
In addition to consulting with professionals, it's essential to conduct thorough research on your own to fully understand the unique requirements and benefits of forming an LLC in your chosen state. This includes researching state-specific regulations, tax rates, and potential advantages or disadvantages of forming an LLC in each state.
In summary, obtaining legal and tax advice, as well as taking steps to obtain business licenses, is a crucial step in the process of LLC formation. By consulting with professionals and conducting your own research, you can ensure that you make the best decision for your business and its future success.
Franchise taxes
Franchise taxes are state business taxes levied for the privilege of existing and doing business in the state. Thirteen states and the District of Columbia have franchise taxes.
Franchise taxes are typically a flat fee or based on a percentage of the company's revenue or net worth. They may be owed regardless of whether the business makes a profit. California, for example, has an $800 minimum franchise tax for all LLCs registered with the state, even if they aren't doing any business. Franchise taxes can vary widely by state, and the tax rates for LLCs may be different than the rates for other types of businesses. The best way to understand potential franchise tax obligations is to get advice from a business accountant in the state.
Annual filing fees
In most states, both domestic and foreign LLCs registered with the state must file an annual report. The report is a simple form designed to keep the state's records regarding the LLC up to date. Many states also require LLCs to pay a fee or annual tax when the report is filed.
Annual fees are something to be aware of if you're considering forming an LLC outside your home state. For example, if you form your LLC in Nevada, you'll pay $350 annually; in Delaware, you'll pay $300. Wyoming charges $60 for businesses with less than $300,000 of revenue, and the fee increases with revenue. You'll also pay annual state filing fees in other states where you've registered as a foreign LLC.
Business income taxes
For federal tax purposes, a single-member LLC is automatically taxed like a sole proprietorship, and a multiple-member LLC is automatically taxed like a partnership. Some limited liability companies can elect to be taxed as a c corporation or an S corp. In all of these scenarios, LLCs don't pay tax at the corporate level—business profits pass through to the members' personal tax returns, and the members pay personal income tax on them. An LLC is only subject to corporate income tax if it has filed a form with the IRS electing to be taxed as a C corp.
Because LLC owners pay personal income taxes on business income, there may be tax savings if you establish an LLC in a state with no personal state income tax. However, unless you relocate to that state, you may still owe taxes in the state where you reside and any states where you do business. Talk to an experienced accountant to understand your income tax obligations.
What is the best state to start an LLC in?
All 50 states allow business owners to form an LLC, meaning you could technically file your LLC anywhere in the U.S. But if you have a small business that only operates in one state, your home state is usually the least expensive and least complicated option. Forming a limited liability company in your home state may also make it easier to access government offices and take advantage of grants, incentives, or opportunities for in-state businesses.
You may have seen ads claiming that a particular state is best for LLC formation, but it's important to understand that forming an out-of-state limited liability company adds a layer of complexity to your business. You will probably have to keep up with maintenance and tax requirements in both the state where you formed your LLC and the state where you're actually doing business, including:
- State filings. If your business is located in one state, but you form your LLC in a different state, you're probably required to register as a “foreign LLC" in the state where your business operates. For example, if you have a brick-and-mortar business in Kansas but form an LLC in Nevada, you'll probably have to register as a foreign LLC in Kansas.
- Registered agents. You must have a registered agent with a business address in the state where you're forming your LLC. A state resident can act as your agent, but if you don't know someone who can take on this role, you'll have to hire a registered agent. You will also need an agent in any state where you're registered as a foreign LLC. In the example above, you would need agents in both Nevada and Kansas.
- Annual reporting requirements. You must file required annual reports and pay any applicable fees in both the state where you formed your LLC and any states where you're registered as a foreign LLC.
- Taxes. You may have to pay taxes in all states where your LLC is registered. State tax laws vary, so it's best to consult an accountant to understand taxes and tax reporting requirements in your state and any states you're considering for LLC formation.
For small businesses that only operate in one state, the additional fees and hassle of filing and maintaining an LLC in another state probably outweigh any advantages that state offers. And if you have a licensed professional service business, like a law firm or dentist's office, you may be required to form your LLC in the state where you're licensed.
However, other limited liability companies might want to weigh the pros and cons of several states. These include businesses that have locations in more than one state, online businesses with no fixed location, and businesses that operate in an industry whose laws are more favorable in one state than another.
Forming an LLC in your home state
Forming an LLC in your home state is relatively straightforward. Here are the steps:
- Choose a business name that is available for use in your state. This means the business name is not being used by another business registered with the state.
- Appoint a registered agent. A registered agent is a person or company that has agreed to accept legal documents, such as lawsuits, on your company's behalf. In most states, you can act as your own registered agent as long as you're a state resident with a physical business address.
- File articles of organization with the state. The articles of organization include basic information about your business, but the exact format varies from state to state. You'll pay a state filing fee when you file the articles. Filing fees vary by state.
- Prepare an LLC operating agreement. An LLC operating agreement defines the rights and responsibilities of the LLC members and describes your limited liability company's operating and business structure. Leveraging an LLC operating agreement template can give you a headstart in shaping your document with essential details such as ownership distribution, decision-making processes, and operational guidelines. However, to align with your precise business needs and compliance, it's best to take attorneys’ advice.
Once your LLC has been formed, you can get an IRS employer identification number from the federal government and open a business bank account. You may also need to obtain business licenses from your state and local government. In many states, business licenses are issued by local governments or county clerks. Some states have a statewide license. You may also need industry-specific licenses from federal, state, or local agencies.
Forming an LLC outside your home state
The procedure for forming an LLC outside your home state is similar to the filing process for an in-state LLC. You'll file an articles of organization form with the appropriate office in the state government and pay a filing fee. Once your LLC is formed, you can file a foreign LLC registration in the state(s) where your business operates. Remember, you'll need to appoint an individual registered agent or hire a registered agent service in every state where your LLC is registered.
Starting an LLC in Wyoming
When you form an LLC in Wyoming, there is no business income tax, personal income tax, or franchise tax to pay. Wyoming is also known for its business-friendly climate, personal liability protection, and privacy protection for LLC owners.
Wyoming was the first state to allow the LLC business structure, and as a result, it has a well-developed set of legal precedents. It has a chancery court dedicated to business disputes, and because it's the least populous state in the country, court dockets are typically not as crowded as in some other states, says Ryan Wright, a partner in the Wright Law Firm in Cheyenne. "Generally speaking, if there's a legal problem, I've seen people litigate it here, and it gets done quicker."
"For a lot of areas, Wyoming tries to be on the forefront in business," Wright says. For example, "It was one of the first states to pass blockchain and token laws, so it can be advantageous for a technology company to form a business here."
Wyoming is also known for its laws that allow LLC owners to remain anonymous. LLC owners don't have to be listed in formation paperwork, nor do they pay state income tax, making it sometimes difficult to determine who owns a Wyoming LLC. However, that protection can be undone if the LLC is required to register as a foreign entity in a state that does require owners to be listed in legal or tax filings.
It costs $100 to file articles of organization to form an LLC in Wyoming. Wyoming LLCs must file an annual report and pay a yearly fee based on the value of assets located and employed in the state. Annual reporting fees are $60 for companies with less than $300,000 in assets.
Filing your LLC in Delaware
Like Wyoming, Delaware has a reputation for being business-friendly. Delaware is home to 66.8% of Fortune 500 companies and 93% of companies that went public in 2021, according to statistics published by its Division of Corporations. Investors may view a company formed in Delaware as more credible than an LLC formed in another state.
Delaware does not tax out-of-state income, so if the majority of your business is conducted elsewhere, it won't be taxed by the state. Delaware also doesn't have a sales tax. However, Delaware imposes a $300 annual franchise tax on LLCs.
Because of its long and robust corporate history, Delaware also has an especially well-developed body of business law. Its Chancery Court hears only business cases, typically resolving them more quickly than in other states where they're thrown on the docket with all other types of cases. The judges are experienced in business matters as well, whereas judges in other states may have little or no background in business law.
To form an LLC in Delaware, file a Certification of Formation of a Limited Liability Company with the Secretary of State and pay a required filing fee of $90. Delaware does not require LLCs to file an annual report, but you will need to pay the $300 franchise tax each year.
Forming your limited liability company in Nevada
Nevada is another state to consider for the formation of your LLC. Nevada has a strong reputation as a business-friendly state, and forming your LLC there may give it added credibility. There is no tax in Nevada on business income, capital gains, or inheritances, which makes it appealing to business owners. There is also no franchise tax or personal income tax, although there are fees for business licenses and annual filing fees.
Like Wyoming and Delaware, Nevada allows LLC owners to remain anonymous. And because it does not have personal or corporate income tax, Nevada does not have an information-sharing agreement with the Internal Revenue Service, helping protect LLC owners' privacy. Nevada has a separate court for business matters, similar to Chancery Court in Delaware. And the processing times for a Nevada LLC filing are relatively fast.
If you form an LLC in Nevada, the state has an online tool to help LLC owners collaborate to negotiate and draft a digital operating agreement. An operating agreement defines the rights and obligations of the owners (known as members). It establishes the framework for operating the business and helps to avoid member disputes later.
It costs $75 to file an LLC in Nevada, plus $150 to file an annual list and $200 for a business license. You'll then pay $350 per year to file the annual list and renew your business license. In addition, you can expect to pay around $100-$300 per year if you need to hire a Nevada registered agent.
Foreign vs. domestic LLCs
Forming an LLC in a different state from your home state can offer some advantages, such as tax benefits and reduced regulatory burdens. However, these advantages should be balanced against the potential costs, fees, and compliance requirements that are associated with establishing a foreign LLC.
A domestic LLC is formed within the state of the owner's residence, whereas a foreign LLC is formed outside of the owner's home state and requires registration in the home state. Forming a foreign LLC can provide increased market penetration for foreign entities, but it may also involve higher filing fees and additional registration requirements.
Furthermore, forming a foreign LLC may lead to additional taxes and fees in the state where the LLC is formed. It's crucial to carefully consider these potential costs and weigh them against the potential advantages of forming a foreign LLC before making a decision.
In summary, while forming a foreign LLC can offer some benefits, it's essential to carefully consider the potential costs, business expenses, fees, and compliance requirements associated with this decision. Weigh the advantages and disadvantages of forming a foreign LLC against those of a domestic LLC to make the best decision for your business.
Non-citizen and non-resident LLC formation
Non-citizens and non-residents can form LLCs in any state, including business-friendly states like:
- Nevada
- Delaware
- Wyoming
- New Hampshire
These states offer favorable tax rates and privacy protections. Wyoming is often recommended for non-citizens and non-residents due to its privacy protections and lack of tax.
Individuals, corporations, trusts, partnerships, and non-citizens are all eligible to be LLC owners in the United States. Forming an LLC in a state with advantageous business regulations can provide attractive tax rates and other benefits for non-citizens.
The process of forming an LLC outside your home state involves filing articles of organization form with the appropriate office in the state government and paying the associated filing fee. To maintain LLC status with the state, you must file an annual report and ensure that all necessary business licenses are up-to-date.
In summary, non-citizens and non-residents have the freedom to establish LLCs in any state and might find states particularly advantageous due to their favorable tax rates and privacy protections for personal and business assets. These include:
- Nevada
- Delaware
- Wyoming
- New Hampshire
Be sure to carefully research the specific requirements and benefits for non-citizens and non-residents in each state before making a decision.
So which state should you file your LLC in?
“There's no one-size-fits-all answer," Wright says. “It really comes down to what kind of business they're operating, what their long-term plans are, do they plan to sell it or make it a large company, or do they want to make it a small company."
For example, a business focused on cutting-edge technology might benefit from forming in a state that has passed laws related to that technology. Those in a highly regulated or controversial industry might benefit from a state with industry-friendly laws. Each state has its own tax regulations that may impact different businesses in different ways.
Deciding where to file your LLC can be more complicated if you conduct business in more than one state or if you're an internet business with no fixed home base at all. You may need to register the business in all states where you conduct business, usually meaning any state where you have a physical location, employees, or revenue.
Before you file LLC paperwork, talk to a business accountant about the tax consequences of forming an LLC. Also, consult a business lawyer who can help you sort out legal issues, like which states you're required to register in and whether one state is more advantageous than another for your business. And a lawyer can make sure you have an operating agreement and a solid legal foundation for your new enterprise. Paying for professional advice upfront can save you from expensive mistakes later.
Summary
In conclusion, the best state to form an LLC depends on various factors, including your industry, business operations, and personal preferences. Forming an LLC in your home state is the most advantageous option for most businesses, while business-friendly states like Delaware, Nevada, and Wyoming offer additional benefits for certain industries and situations.
Before making a decision, it's essential to consult with legal and tax professionals, conduct thorough research, and carefully weigh the advantages and disadvantages of each option. By taking the time to understand the unique requirements and benefits of forming an LLC in your chosen state, you can set your business up for long-term success and growth.
FAQs
What state is best to set up an LLC?
There's no simple answer to the best state to file your LLC legal documents. For most small businesses, the simplest and least expensive approach is to form an LLC in the state where your business is located. This minimizes state fees and compliance requirements and allows you to take advantage of any incentives or programs available to in-state businesses.
And if you don't have a fixed location or are outside the U.S., consider Nevada, Delaware, Wyoming, or New Mexico as your LLC's home. These four states actively court LLC formations and have business-friendly laws and/or privacy protections that may appeal to you. Always seek legal and tax advice before making a final decision.
Which state is best for an LLC for a non-resident?
The best state to form an LLC for a non-resident depends on your specific business needs and circumstances. However, a few states are commonly recommended for non-resident LLC owners
Wyoming
Wyoming is considered a good choice because of its privacy protections and relatively low startup and maintenance costs.
Delaware
Investors prefer Delaware corporations. A foreign business eyeing outside funding could form a Delaware LLC now and convert to a corporation later. Delaware LLCs also have strong credibility, although Delaware does impose a $300 annual franchise tax.
New Mexico
Like Wyoming, New Mexico allows LLC owners to remain anonymous. New Mexico also has no annual fees, no franchise taxes, and no annual reporting requirements.
States that may be less optimal for foreign owners include California and New York. New York has a cumbersome LLC formation process that includes publishing notices in two newspapers, and California levies a minimum $800 franchise tax on all LLCs.
What is the best state to file a business in?
The best state for your business entity filing will depend on the type of business you're in, its location, and your plans for the future. For example, if you're a startup business looking to attract venture capital and go public, it might be a smart business move to form a corporation in Delaware because investors often prefer Delaware corporations. But if you're a local plumber, it may be best to set up a legal entity in your home state to keep costs down and paperwork simple.
Annual fees, franchise taxes, sales tax compliance, personal and corporate income taxes, owner privacy, registered agent service fees, and state laws should all be factors in your decision. If you're not sure what state or type of business entity is best for your business, talk to a small business accountant and a lawyer.
What state is most common for LLCs?
Although statistics are hard to come by, it's no surprise that the states with the largest populations tend to be where most LLCs are filed.
A state with a large number of LLCs is Delaware. Although it ranks 46th in population, Delaware had a disproportionate number of LLCs, thanks to the state's business-friendly reputation.
But if you're planning to form an LLC, don't just focus on picking a popular state. All states allow the LLC business structure, giving you the freedom to pick the best state to start an LLC and that's best for your business.
Do I need to set up an LLC in each state where I do business?
No, you only need to set up one LLC. Your LLC will be considered a domestic LLC in the state where you file formation documents. If your LLC is conducting business in additional states, you may be required to register your LLC as a foreign LLC in those states. You do not need additional operating agreements if you do business as a separate entity in multiple states.
The process for registering as a foreign LLC is similar to the process for forming an LLC. Usually, you'll appoint an in-state registered agent, file a form, pay a fee, and submit a certificate of good standing from your LLC's home state. You'll be responsible for any required annual reports, annual fees, and taxes in all states where you have registered a foreign LLC.
Which states in the U.S. are tax-free for an LLC?
No states are totally tax-free, but the amount and type of taxes you'll pay will depend on the state. In thirteen states and the District of Columbia, the LLC itself must pay a franchise tax for the privilege of operating in the state. The amount of the tax and the way it's calculated vary from one state to another. In addition to paying franchise tax, seven states impose a gross receipts tax on certain businesses operating within the state.
Some states don't have a personal income tax, so you may save money by forming and operating your LLC in one of those states. Other states don't have a corporate income tax, but this is seldom a benefit to LLCs because LLCs usually have pass-through taxation. Corporate income tax only applies if the LLC elects to be taxed as a C corp.
Five states don't have a statewide sales tax. In states with sales tax, the taxes are collected from customers on certain sales transactions and then paid to the state. They don't cost the business anything, but they are an administrative chore.
While some states may have low or no state tax applicable to LLCs, all LLCs are subject to federal taxes. LLCs with employees must pay payroll taxes. LLC owners' incomes are subject to Social Security, Medicare, and federal personal income taxes. A tax professional can advise you on the tax consequences of forming an LLC.
Which state is quickest to file an LLC?
Most states now allow e-filing of LLC formation documents. Electronically filed documents are usually processed more quickly than paper filings. In only a few states, electronically filed LLC documents are processed on the same day. Most states can usually process filings in about 10 business days or less, but expedited processing of electronic and/or paper filings may be available for an additional fee.
Processing times can change depending on the workload in state offices. The best way to find out the processing times in the state(s) you are considering is to search the website of the agency in charge of business filings or contact the agency directly.
What are the benefits of an LLC business structure?
Most states now allow e-filing of LLC formation documents. Electronically filed documents are usually processed more quickly than paper filings. In only a few states, electronically filed LLC documents are processed on the same day. Most states can usually process filings in about 10 business days or less, but expedited processing of electronic and/or paper filings may be available for an additional fee.
Processing times can change depending on the workload in state offices. The best way to find out the processing times in the state(s) you are considering is to search the website of the agency in charge of business filings or contact the agency directly.
What are the benefits of an LLC business structure?
From a legal standpoint, one of the main reasons to form an LLC is that a limited liability corporation provides strong personal liability protection for owners. LLC members are not personally liable for the business's debts and obligations, nor are they liable for other members' misdeeds. This means their personal assets are not at risk in a lawsuit against the business. Owners of a sole proprietorship or general partnership are fully liable for the business, and they can also be held liable for the actions of their business partners.
LLCs can also offer tax flexibility not available to any other legal entity. Most LLCs are taxed as though they are sole proprietorships or partnerships, and if you already operate one of these business types, your tax status won't change when you file your LLC. Some owners of profitable LLCs benefit from electing S corp taxation because they can pay corporate income taxes, save on self-employment taxes, and can maximize retirement savings.
An LLC also offers some protection to your business name because no other business entity in the state can have the same business name. For stronger, nationwide business name protection, you can apply for a trademark from the U.S. Patent and Trademark Office.
Compared to corporations, LLCs offer the same level of limited liability protection as for owners' personal assets, but they have fewer recordkeeping requirements and a less rigid management structure. This makes the LLC business model ideal for many small businesses. However, the "membership interests" in an LLC aren't as easy to transfer from one person to another as corporate shares are. Partly for this reason, businesses that plan to seek outside investment might consider forming a corporation instead. Talk to legal and tax professionals to understand how these general principles would affect your business specifically.
'%20/%3e%3c/svg%3e)
'%3e%3cpath%20fill-rule='evenodd'%20clip-rule='evenodd'%20d='M9.31239%2025.5316H13.0679V14.1032H9.31239V25.5316ZM11.1913%208.46875C9.93945%208.46875%209%209.25086%209%2010.505C9%2011.5995%209.78211%2012.5389%2011.1913%2012.5389C12.6005%2012.5389%2013.3826%2011.5995%2013.3826%2010.505C13.3826%209.4082%2012.6005%208.46875%2011.1913%208.46875ZM27%2018.9577V25.5316H23.2445V19.4275C23.2445%2017.8609%2022.6174%2016.7664%2021.3679%2016.7664C20.2711%2016.7664%2019.644%2017.5463%2019.3316%2018.1756C19.1743%2018.488%2019.1743%2018.8004%2019.1743%2019.1128V25.5316H15.4165V13.9458H19.1743V15.5123C19.644%2014.7302%2020.5835%2013.6357%2022.6174%2013.6357C25.1234%2013.7908%2027%2015.3573%2027%2018.9577Z'%20fill='white'/%3e%3c/g%3e%3cdefs%3e%3cclipPath%20id='clip0_952_9489'%3e%3crect%20width='18'%20height='18'%20fill='white'%20transform='translate(9%208)'/%3e%3c/clipPath%3e%3c/defs%3e%3c/svg%3e)
