Best State to Form an LLC (Myths Debunked)
Most of the time, you will probably choose the state you live in to form your LLC, but this is not always the case. There are some businesses, such as real estate-focused businesses, where it may be advantageous to form an LLC in another state.
Also, many people believe the states with the lowest tax rates are the best states to form an LLC, but this is generally not true. So, let’s debunk the myths you have heard about which state is the best for your LLC formation and show you which states are really best.
- Jump to TOP-11 Best States for LLC Formation
- What Is a Limited Liability Company?
- What Is a Domestic LLC?
- Domestic LLC or Foreign LLC: Which Are You?
- Myth #1: The Best State Is That With the Lowest Taxes
- Delaware, Wyoming, and Nevada Are Not Necessarily the Best States to Form an LLC In
- The Best State to Form an Internet-Focused LLC
- The Best State to Form a Consulting-Focused LLC
- The Best State to Form a Transportation-Focused LLC
- The Best State to Form a Real Estate-Focused LLC
- The 11 Best States to Form an LLC (In General)
- Start an LLC Today. These Are the TOP-2 Our Most Recommended LLC Formation Services:
What Is a Limited Liability Company?
A limited liability company combines the benefits of pass-through taxation offered by sole-proprietorships and partnerships with the limited liability offered by corporations.
This means profit is taxed as personal income when it is transferred to the owners. The owners of an LLC are only personally liable to the extent of their investment in the company as long as fraud or crime does not take place.
What Is a Domestic LLC?
Each state has its own laws for LLCs, and the laws are different for in-state and out-of-state LLCs. A domestic LLC is a company that does business in the state in which it was formed and registered. Whereas, foreign LLCs do business outside of the states they are formed in.
Domestic LLC or Foreign LLC: Which Are You?
A state determines whether an LLC is a domestic LLC or a foreign LLC based on the state your LLC is formed in and does business in. If you are doing significant business in another state, you’ll need to make sure to register your business in both states. Be sure to check the laws of the states you are doing business in for the specific guidelines on what is considered significant. Any time that you register your business outside of the state it was formed in, it will be considered a foreign LLC.
Myth #1: The Best State Is That With the Lowest Taxes
Although people forming an LLC commonly think it’s best to form it in the state with the lowest taxes, this isn’t always the case. Certainly, most people that live in states where the cost of doing business is high would prefer to lower their costs. But, locating your LLC in a low tax state does not always lower your overall costs.
If you choose to register your business in a state other than your home state, you need to carefully consider what you will gain. If most of your money is earned in your own state, you will probably have to report and pay taxes on the income in your state. This is true even if your LLC was formed and registered in another state.
Therefore, the low taxes in another state may not help you much. You will also have additional registration and annual reporting fees by operating in two states, which may not be worthwhile if your LLC mainly does business in your own state.
Also, states make a lot of money from business taxes. So, they make it difficult to avoid them. Therefore, you may find that the state with the lowest taxes is not necessarily the best. Your home state just might be the best choice.
Delaware, Wyoming, and Nevada Are Not Necessarily the Best States to Form an LLC In
Even though a person’s home state is often the best state to form an LLC in, many people still try to save money by forming their LLC in another state. Nevada, Wyoming, and Delaware are three of the top choices. But, these states are not the best choices for those whose businesses operate primarily in other states. We will explain what these states have to offer and why they are not the best choice for LLCs that primarily operate in a different state.
For some LLCs, Nevada has some useful benefits, such as excellent privacy protection. Nevada allows LLC owners to remain anonymous by not requiring them to list their names when they form their business. Also, companies do not have to list their assets with the state, thus providing further privacy.
Nevada also has no state taxes, franchise taxes, corporate income taxes, or personal income taxes.
Wyoming is another popular location for forming an LLC. This state has low tax rates with a 4% sales tax, no franchise tax, and no corporate or personal income taxes. It also charges only $50 a year for an annual report. Additionally, the state does not require LLC owners to make their names public.
Delaware is very business-friendly. LLC owners can remain anonymous in this state. Only four states allow this, and owners that don’t want to be associated with the operations of their business appreciate this.
Delaware also has a special court system for corporate legal disputes. This system is called the Delaware Court of Chancery. The judges in these courts decide cases without a jury, which tends to make them more business-friendly.
So Why Are They Not the Best?
These states certainly have a lot to offer businesses. Unfortunately, these benefits are generally not very useful to those businesses operating outside of the state. Any business operating inside these states has to register as a foreign LLC. A business that registers as a foreign LLC in these states is generally unable to take full advantage of the tax and privacy benefits the state offers domestic LLCs.
The LLC will not receive the tax benefits on out of state income. Also, if the LLC is registered in other states, they most likely will have to list their names as owners of the LLC in those states. Also, there will probably be registration fees, annual report fees, and registered agent fees in every state in which your LLC is registered.
The Best State to Form an Internet-Focused LLC
Business owners sometimes wonder how being an online business affects their state registration. It actually does not affect the registration of your business. If your business is operated entirely online, then it is only necessary to register in the state in which you are based. You will pay personal income tax in this state.
This is true regardless of where the payments for the goods or services come from. Therefore, there is no real benefit to forming your LLC in another state.
The Best State to Form a Consulting-Focused LLC
If your consulting business is operated entirely online, then the registration and tax rules will be the same as for other online businesses. However, if you conduct any business in person in states outside of your home state, you must register your LLC in the state.
It still makes sense to form your LLC in your home state. In most cases, you will be steadily doing business in your own state over time. Whereas the other states you do business in may change.
The Best State to Form a Transportation-Focused LLC
For a transportation-focused LLC, it can be a particularly good idea to form your LLC in your home state. Doing this can make the application and approval process for acquiring DOT numbers for your business easier. Additionally, forming your LLC in another state will increase your registration and maintenance fees. So, although as a transportation company operating in several states, it may be tempting to form your LLC in another state, your home state is likely the best choice.
The Best State to Form a Real Estate-Focused LLC
If you own a real estate-focused LLC, it’s best to form an LLC in the state or states where you own property. You will keep your costs lower by only forming your LLC in the states where you do real estate business. This will confine your formation and maintenance fees to those states.
The 11 Best States to Form an LLC (In General)
So, assuming you have no home state or are willing to move and can choose any state equally, let’s see the 11 best states to form an LLC in. However, take note that these recommendations only take the general business environment into account. All other factors are not considered. Finally, the quoted tax rates may change at any time. So, before you settle on a state, check to make sure the tax rate is still accurate.
Wyoming is an excellent state in which to form an LLC. The state does not have a corporate or personal income tax, and the annual franchise tax is only $50. The sales tax in Wyoming is 4.0%, which is lower than in many states. These tax laws make the state ideal for operating an LLC in along with the low state fees for LLCs and few reporting requirements.
Alaska is also a very good state in which to form an LLC. It has an individual tax rate of zero and a corporate tax rate of 9.4%. But, the greatest benefit of forming an LLC in Alaska is the protection Alaska provides against charging orders. The final judgment against a company, once it is found liable, is called a charging order. In Alaska, even if a creditor obtains a charging order against an LLC formed in Alaska, the creditor can’t access the assets or income of the LLC.
3. South Dakota
South Dakota is high on this list for a reason, taxes, or more specifically, the lack of them. South Dakota, like Wyoming and Nevada, has no personal income or corporate income tax. Also, the state charges a reasonable $150 initial filing fee and a $50 annual filing fee.
Florida is a popular choice for many business owners these days, and it’s easy to see why. Florida has no personal income tax and a fairly low corporate tax rate of 5.50%. Luckily with an LLC, personal income tax is generally the rate you will be concerned with. Also, your business will be centered in a thriving economy, and filing fees are mediocre at $125 initially and $138.75 for the annual report, so nothing to brag about but also not a large burden.
Just like Wyoming, Nevada has no corporate income or personal income tax requirements. This will clearly save most LLC owners quite a large sum of money, which is why it’s on our list. However, the initial formation and annual report fees are extremely high in this state at $425 and $350, respectively. Regardless we believe the low taxes most LLC owners will face are likely to make up for this quite nicely.
Montana has an average personal income and corporate tax rate but no franchise tax. This already leaves it at least a little above average for forming an LLC, but there is more.
If your LLC intends to purchase and use vehicles, then Montana is particularly special. Montana does not charge a personal property tax, sales tax, or ad valorem tax on vehicle purchases.
Finally, Montana is not quite as generous on privacy for LLC owners as a few states such as Nevada, but they do offer protection. Owners need only release the names of the registered agent and business as well as the address of the agent and primary business location. Those seeking more information would require a subpoena.
7. New Hampshire
New Hampshire is a strong state to form an LLC in unlike what their corporate tax rate would suggest. Luckily for an LLC, this is more than made up for with no personal income tax. Additionally, a Certificate of Formation will only set you back $100, and most impressively, submission of a required annual report only costs $1.
Delaware is known as a corporation friendly state, but it is also a great state to form an LLC in for two reasons. It is one of only four states to allow anonymity for LLC owners, which is especially great if you do not wish to be publicly associated with the business.
The second reason is Delaware’s Court of Chancery. This special court system specializes in business law and hears cases without juries. This has given it a reputation as particularly business-friendly. This will provide your LLC an additional degree of protection in case of a lawsuit.
On the surface, not all of Oregon’s numbers look great, but the state has a low sales tax, property tax, and no franchise tax at all. This makes Oregon a great state to form an LLC in if you intend to locate a physical store. These financial factors will save you a considerable sum of money, but Oregon also offers LLCs strong protection against creditors.
10. New Mexico
If you are a private individual looking to start an LLC, you probably aren’t comfortable with sharing your name and address on public databases for everyone to see. But, by filing in New Mexico, you don’t have to worry.
New Mexico does not record the information of LLC members on the initial filing. This means that for an LLC in New Mexico, a member’s information will never be listed in the state’s database at all.
New Mexico LLCs do not have to file annual reports, so not only do you not have to worry about giving your information to a database, but you also do not have to pay annual filing fees. Finally, it has a low initial filing fee of only $50.
The perk of filing your LLC in Texas is avoiding complex and burdensome management documentation. Generally, limited liability companies are required to create a considerable quantity of legal documentation to follow state requirements and retain their limited liability status.
But, Texas does not require most of this burdensome documentation, so you can skip spending time completing paperwork such as minutes for required meetings or paying managers to complete documentation for you. Instead, you can focus on building your business, not your paper trail.
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So, to close, we have addressed how it is rarely advantageous to form an LLC out of your home state.
This will likely result in paying filing fees for multiple states and still require paying taxes in your home state. The exception to this is real estate companies. However, if you are looking to move, we have provided you with the 11 best states to form an LLC in.
We hope this article helped you to to decide in which state you should form your LLC. If not — feel free to contact us and give us your suggestions and ask questions should you have some.