Best State to Form an LLC in 2023 (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?
- How To Choose the Best State To Form an LLC In?
- Forming an LLC in Your Home State
- Myth #1: “The Best State Is 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 while conducting business. 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.
Thanks to their limited personal liability and straightforward tax structure, LLCs are one of the most sought-after business entities in America today. With a Limited Liability Corporation (LLC), you can enjoy legal protection for your personal assets as well as pass-through taxation via an entirely separate entity – two key benefits that have made this form of business so popular. The IRS even confirms this! So if you’re looking for ways to secure both individual and corporate interests, setting up an LLC is definitely worth considering.
LLCs offer businesses a number of benefits:
LLCs, similar to corporations, grant the members of the company a defensive shield from creditors and legal action taken against it. This means their individual assets are safeguarded from any consequences incurred by the business.
For tax purposes, LLCs are seen as either a sole proprietorship (for single-member) or a partnership (for multi-member). This means that the business income generated from the LLC is passed through to its members who will pay taxes on their personal returns. As an advantage of this pass-through structure, all profits and losses can be reported directly to each member’s individual return which offers great flexibility for how you want to manage your taxes.
Although there is the option of electing to be taxed as an S-corp or C-corp, not all LLCs may qualify for S-corp status. On the other hand, those that are qualified and choose to become a C-Corp will be considered separate taxable entities, thus being responsible for their own corporate income taxes.
Unlike corporations, forming an LLC is a straightforward process that does not require complicated procedures. Depending on the state in which you are filing for an LLC, there may be annual reporting requirements; however these obligations are much less stringent than corporate filings. Establishing an LLC can be done by yourself or with the help of an experienced business attorney and/or service provider if desired.
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 and does business. 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 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.
When you create an LLC in your domestic state, it is known as a ‘domestic LLC’. Conversely, when forming an LLC somewhere other than your home state and registering the business with that same state – regardless of whether or not the company is owned by non-US residents outside of US borders – this type of organization would be considered a ‘foreign LLC’. This simply implies that such businesses are doing work beyond their home jurisdiction.
Why is this important?
If you’re interested in building an LLC in a different state, then it could be required to register two separate companies- one that exists in the original formation area and another for your hometown. For instance, if you live in Indiana but want to create an LLC based out of Wisconsin, as part of this process you’d also need to formally establish yourself as a foreign company within your home state. This means that there will be double the requirements involved with setting up both entities – twice the paperwork and fees!
With two LLCs, you need to pay double the state filing fees and registered agents in both states. Don’t forget about adding on annual reporting fees as well! Not only will having two LLCs double your costs, but it can also add a lot of unnecessary stress too.
How To Choose the Best State To Form an LLC In?
As you begin this life-altering journey of forming an LLC, it is crucial to select the correct state from the onset. You’ve done your research and understand that this entity type is ideal for your new business, so now let’s explore how to choose the optimal location. Here’s a golden rule:
- Start your LLC where you are:
To put it simply, your home state is the ideal place to create an LLC. Despite what you may think or have heard, forming an LLC at home typically provides the most straightforward and budget-friendly route to get started. We’ll discuss more on this topic later as we review which states are best for establishing an LLC.
- Exceptions to this rule of thumb:
Although this rule of thumb generally applies, there are some exceptions. Here’s a list of those exceptions:
- You live in one state but operate your business solely in another:
It may be more beneficial to form your LLC in the state of business operations; however, if you are working on your company while even briefly in your original home state, it is customary to follow that rule and file accordingly.
- Your LLC’s business is investing in real estate:
If you decide to set up an LLC, it’s advantageous for the company to be registered in the same state where it will purchase and manage real estate investments. This way your LLC can benefit from tax advantages when renting or selling properties located there. Therefore, create your business entity in the jurisdiction that houses your investment property of choice.
- You’re a non-U.S. resident:
As an international resident, the home state rule doesn’t apply to you. Consequently, this might entail attracting nonresident taxes; it is strongly recommended that you seek advice local sales tax and from a tax specialist prior to forming your LLC.
If you are unsure of whether any of the conditions fit your circumstance, it is best to seek advice from a knowledgeable business attorney who can guide you towards making an informed decision.
Forming an LLC in Your Home State
Are certain states more ideal than others to form an LLC? Absolutely. Nevertheless, for most people, the best choice is to set up their LLC in their home state. There’s a common misconception that Nevada is always the optimal place to open a business because there are no corporate income taxes; however, this isn’t necessarily accurate especially if you don’t live in Nevada (which we will discuss further shortly).
Ultimately, it’s not worth establishing a foreign LLC if you must still pay taxes in your home state – and bear the added cost of sustaining two separate businesses. So, why bother?
Forget the idea that you can form your LLC in a no-tax state, elect corporate taxation and avoid paying any state income tax or taxes in your home state. While this notion may sound appealing, it’s largely deceptive and will only end up costing more money for most people. Your home state is almost always going to be the best place to establish an LLC; attempting to save cash by registering elsewhere isn’t likely going to work out in either the short or long run.
Myth #1: “The Best State Is 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 businesses. 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 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.
Now let’s dive into some specific business cases and see which states are the best for each business type.
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.
Earlier, we discussed that forming your LLC in the state of residence is usually most beneficial for businesses; however, this isn’t necessarily true when it comes to real estate LLCs. If you’re looking to invest in property within your own state though, then registering your business operates an LLC there makes perfect sense.
If you plan on investing in real estate located out of state llc or in another state, it is imperative that you form your LLC there. When engaging with activities such as rental income, buying and selling or wholesaling of properties for monetary gains from these investments – all this qualifies as “doing business” within the state. Thus if one were to purchase property out-of-state but use an LLC formed their home state, they would encounter a similar issue that was pointed out earlier.
You will need to register your Domestic LLC in both states: your home state and the one where you are buying a property. This means extra fees for filing, hiring a Registered Agent, paying annual costs in both locations – plus dealing with managing two separate LLCs which can be cumbersome and stressful.
In conclusion, it is most beneficial to create your LLC in the same state where you will be property since that is where your business activities are taking.
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 state sales tax amount in Wyoming is 4.0%, which is lower than in many states. These tax laws make the state ideal for operating an LLC along with the low state fees for LLCs and few reporting requirements.
Best for: Low taxes, privacy
If you’re an entrepreneur living outside of Wyoming, it’s worth considering whether the advantages outweigh any potential drawbacks when forming a Limited Liability Company. You’ll still need to register as a foreign LLC in your home state and remain subject to taxation, so you won’t be able to avoid it completely. Weighing up both sides will help ensure that the right decision is made for your business needs!
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.
Forming an LLC in Alaska provides a multitude of financial benefits, such as:
- No state income taxes or sales taxes,
- Reduced local tax rates and
- Modest filing fees.
- Additionally, numerous incentives are available for businesses wanting to establish roots in this vibrant region –
- Including generous tax credits and loan opportunities.
For Alaskan businesses, forming an LLC in Alaska is a great option. However, if you live outside of the state and have a business that operates remotely from within it, this may not be the most reasonable solution for your circumstances.
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.
When it comes to forming a Limited Liability Company (LLC), South Dakota is a hidden gem amongst the 50 states. Not only is it affordable, with low fees and no franchise taxes, but it also offers a unique level of privacy for business owners. South Dakota is the only state that allows for “Series LLCs”, which enables multiple LLCs to be formed under one parent LLC, providing an extra layer of asset protection. Additionally, the state has a business-friendly environment and a rapidly growing economy, making it an ideal location for entrepreneurs looking to start or expand their businesses. With all of these advantages, it’s no wonder why South Dakota has become one of the best states to form an LLC.
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.
When it comes to forming a limited liability company (LLC), there are countless factors to consider – but one state that should definitely be on your radar is Florida. Despite being known for its sunny beaches and bustling theme parks, Florida has a lot more to offer for entrepreneurs and small business owners alike. For starters, the state boasts a relatively low tax burden and plenty of resources for new businesses, including access to venture capital investments and a thriving network of incubators and accelerators. Additionally, Florida’s business-friendly laws and regulations make it easy to set up and maintain an LLC, with relatively low fees and a streamlined registration process. So whether you’re looking to start a new venture, expand your existing business, or simply take advantage of Florida’s many economic opportunities, forming an LLC in the Sunshine State could be a smart move.
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.
Best for: Low taxes, privacy
Registering is a breeze, and you’ll find it requires fewer steps than in many other states.
As you can see, establishing an LLC in Nevada might not be the best option if you are based elsewhere. You will need to build a foreign LLC in your state of residence and retain two registered agents for both entities.
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.
New Hampshire may be small in size, but it packs a punch when it comes to offering entrepreneurs an advantageous state to form a Limited Liability Company (LLC). Consistently ranked as one of the best states to do business in, New Hampshire welcomes entrepreneurs with open arms. With no state income or sales tax, the Granite State offers a highly favorable business environment complete with low start-up costs, a highly educated workforce, and an impressive quality of life. With easy access to major metropolitan cities like Boston and New York, and a thriving entrepreneurial community, it’s no wonder why entrepreneurs and small business owners alike are flocking to New Hampshire to form their LLCs.
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 with an additional degree of protection in case of a lawsuit.
Best for: Delaware is an immensely business-friendly state, with the added benefit of preserving privacy. It doesn’t mandate that shareholders, directors, or officers should be citizens; one individual can assume all three roles as well. Moreover, it’s unique in allowing you to keep your personal identity withheld from formation documents.
Although it may seem like a good idea to form an LLC in Delaware if you don’t live there, consider that the cost of setting up and maintaining two separate LLCs can be expensive. You will also have to pay for two accountants since your hometown accountant most likely won’t have experience dealing with Delaware structures. All these extra costs could make creating an LLC at home much more affordable overall.
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.
If you’re thinking of starting a business, it’s essential to choose the right location. And when it comes to forming an LLC, one of the best states for entrepreneurs is Oregon. There are many reasons for this. For starters, the state has a thriving economy with a high growth rate, which means there are plenty of opportunities for businesses to grow and succeed. Additionally, Oregon has a pro-business environment, with low taxes and a supportive government that encourages entrepreneurship. Moreover, the state is known for its highly educated workforce, which makes it easier for businesses to attract and retain top talent. All these factors combined make Oregon an ideal location for anyone looking to start an LLC.
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 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.
When forming an LLC, it’s essential to be aware that the process is not uniform from state to state. This guide will provide insight into why some states offer advantages for LLC owners compared to others. However, being mindful of certain tax benefits in one state does not mean you are obligated or should form your business there – don’t forget taxes still need to be paid in your home state too! Additionally, multiple LLCs come with extra costs such as accountants and lawyers fees and more than one registered agent.
When considering forming an LLC in a state other than your own, the advantages should be carefully weighed against any potential disadvantages before making a final decision. To ensure that you are taking the best approach for you and your company, it is highly recommended to speak with both a qualified accountant and attorney prior to moving forward.
Can I live in a different state than my LLC?
Absolutely! You can create an LLC in a state different from the one you reside in and still conduct business there. However, if that is the case, make sure to register as a foreign LLC so that everything remains legal.
Does my LLC need a registered agent in each state it’s doing business in?
Absolutely, each state in which your LLC functions requires a registered agent (or statutory agent).
Do I need a business license to operate my business?
The need for a business license to operate legally in your state lies upon the particulars of where you are operating and the sector that you’re working within. For instance, some states mandate all businesses to have one while others necessitate licensing only for certain industries. Ultimately, it depends on the specifics of your situation!
Which state is the cheapest to open an LLC?
Although Montana is known to be the most economical state for opening an LLC, you should only pursue that option if your permanent residence or business operations are in Montana. Otherwise, forming a domestic LLC in this state will require filing another foreign LLC registration where you reside or conduct business activities. This would imply extra expenses such as yearly fees and potentially two separate Registered Agents – all of which could quickly add up. Find out the top-3 cheapest states in the USA here.