- How does LLC formation differ from state to state?
- Why does it matter what state you choose?
- What is the best state for LLC formation for me?
Q: What is the best state to set up a LLC?
A: Delaware is often considered the most LLC-friendly state because it has a well-established legal framework and a reputation for business-friendly laws. Nevada is a popular choice for LLC formation due to its low taxes and lack of corporate income tax. However, it’s important to
weigh all factors before deciding. The best state for LLC formation is the one that best suits the needs of your business. Read on to learn more.
Fifty different states equate to fifty different sets of laws on forming LLCs. It’s a lot of research – we know! It also doesn’t help when every website offers its own opinion on what the best state for LLC formation is.
But don’t fear – you’re in the right place. We’re about to cut right down to the truth.
- LLC formation varies considerably by state, but contrary to popular belief, a foreign LLC isn’t always the best option
- Making the correct decision is paramount because unnecessary fees could quickly force your business underwater
- The easiest way to determine the best state for LLC formation is by first determining what you want your LLC to accomplish. This allows you to figure out which state meets your individual needs
Many small business owners and eager entrepreneurs are under the impression that the only place to register an LLC is in their home state, but that isn’t always the case. There are several different kinds of LLCs, but for now, we’ll just look at the broadest two categories: Domestic LLCs and Foreign LLCs. Domestic LLCs are formed in your home state, while Foreign LLCs are created outside of your home state.
Both Foreign and Domestic LLCs offer the same essential liability protection and tax benefits. There are indeed a few states that stand out as the best states for LLC formation – with clear benefits in regards to privacy, taxes, asset protection, and online businesses. But the reality is that forming a Domestic LLC is often cheaper and more accessible than going out of state.
The question remains: what is the best state for LLC formation? The answer depends on your industry, the cost of renting a business address in each state, the number of employees you intend on hiring, and most importantly, your overall vision for the success of your business!
As you can probably tell, selecting the best state for an LLC is a nuanced process. Let’s break down all of this information and make it a bit more palatable:
- How does LLC formation differ from state to state?
- Why does it matter what state you choose?
- What is the best state for LLC formation for me?
- How can AVO help me on my small business journey?
How does LLC formation differ by state?
So you have decided to start a small business. You have a brilliant idea, and you’re ready to take advantage of this opportunity with a solid financial foundation in place. You’re ready to hit the ground running – but there’s just one problem.
After a bit of internet research, you find that every single state is telling you the same thing: That they are the absolute best option for LLC formation. So how is each state different, and how can you be sure that you’re making the right choice?
To begin, we will go ahead and take a look at three states that regularly appear in the top five in articles about the best state for LLC formation. As we assess Wyoming, Nevada, and Delaware, we will begin to understand how different each state’s rules and regulations are.
Wyoming
- No state corporate income tax, no franchise tax, nor any tax on corporate shares
- Low annual fees, increased privacy for shareholders, and low fees for initial filling
- No capital requirements can hold meetings anywhere, and a continuation procedure that allows for the adoption of other out-of-state corporations.
As you can tell, Wyoming has a seemingly low barrier to entry; low fees paired with minimal capital requirements make it a good state to form an LLC. That being said, many laws and regulations in Wyoming are explicitly designed for major corporations – so your small “mom and pop business” might not benefit from Wyoming’s system in the same way as a larger corporation with thousands and thousands of employees.
Remember – we’re not just trying to find the cheapest state to operate an LLC (it’s Kentucky for the record). Instead, we are focused on determining how to find the best state for LLC formation, and sometimes the “best” state isn’t just about low costs. At the end of the day, Wyoming is a solid choice, specifically if you’re looking for the best state for LLC online business operations.
Nevada
- Similar to Wyoming, the taxes here are minimal. There is no state income tax, and the LLC itself doesn’t file a federal report at all
- As of this year, the initial incorporation fees and annual renewal fees in Nevada are among the highest in the nation
- Additionally, there are no capital requirements, and Nevada, like Wyoming, doesn’t gather corporate income tax information for the IRS
Nevada is listed among the best states for LLC formation quite often – namely because of the privacy afforded to shareholders and numerous tax benefits. Despite this, Nevada has some of the most expensive incorporation fees, and its overall benefits aren’t nearly as lucrative as more and more people flock to the state to incorporate.
Once you have registered your LLC, you will be responsible for renewing it every year. If Nevada feels like the right state for you, make sure you’re willing to pay the renewal fee every year. You should also make sure your business isn’t in danger of becoming automated in a year or two. This all means that Nevada might be the best state to form an LLC for online business (or an LLC for that matter).
Delaware
- Widely considered to be the most LLC-friendly state, this doesn’t mean that Delaware is the best state for all LLCs
- Tax benefits available only to LLCs in the state, as well as lax reporting guidelines
- Delaware is also home to the Court of Chancery, which deals with all matters relating to equity
As mentioned above, Delaware is often called the most LLC-friendly state – due largely to its liability protection and tax benefits. Many are also fans of the speed with which the Court of Chancery can solve disputes. Exclusive only to Delaware, Tennessee, and Mississippi, the Court of Chancery is composed of judges with extensive knowledge of corporate case law.
By forgoing juries and using judges with prior business knowledge, the Delaware Court of Chancery moves quickly. Many looking for the best state for LLC formation consider this speed and efficacy as a type of “second insurance” for their incorporation.
These three states show us that there are many differences to consider when searching for the best state for LLC formation. The best state for online business LLCs might not be the same as the best state for privacy LLCs.
Which state is better for LLC formation is largely subjective. Some states have clear advantages, but remember that the choice depends on your unique priorities.
See how Virginia is ranked for overall business success!
Why does the state you choose matter?
The state in which you decide to form your LLC matters because you need to incorporate somewhere that gives your business the benefits it needs to thrive. And while you are only allowed to incorporate in one state, you will be paying two-state fees every year if you decide on a Foreign LLC. This makes it even more essential to make the correct choice.
For example, let’s say you’ve started a small business – perhaps a hardware store with many online customers. Things are going well and you decide to form an LLC to protect yourself from any professional liabilities. You’ve done some research and eventually decide to use either Nevada or Texas to form an LLC.
Your hardware store is making a profit, but barely. It’s a new business, and you want to invest all of your profits back into the company to fuel growth… So which state do you choose?
Ignoring any nuances in the business model for the sake of argument, the best state would be Texas due to the ability to break your LLC down into smaller series for asset protection. Nevada also has good asset protection as well – but unfortunately, that protection won’t help much if the assets aren’t located in Nevada.
Occasionally, choosing a Domestic LLC will serve your business better than incorporating it in a different state. If you’ve decided on a Foreign LLC but still operate primarily in your home state, you’ll be forced to incorporate that Foreign LLC in your home state. This means you’re now paying those annual fees twice.
If your LLC is more of a work in progress – something that you’ve been dreaming of for decades — it’s probably best to simply form a Domestic LLC. A Domestic LLC still affords you the barrier of protection that comes with an LLC, but you save yourself from the numerous state fees and fines associated with improperly incorporating or operating in a state with no license.
Overall, the state in which you decide to form your LLC matters because each state has different laws and tax benefits. Picking the incorrect state – or incorrectly forming your LLC – could be detrimental to the lifespan of your business.
As in most aspects of business, the most important thing you can do to protect yourself is conduct plenty of research. LLCs are beneficial for anyone who wants to run a small business, and even digital nomads should do what they can to form an LLC. There is no business too small, no idea too silly for an LLC.
Read more about how to incorporate as a digital nomad here!
Choosing the best state for your LLC
Now that you understand the differences between the states and why choosing the right state matters, it’s now time to decide on the best state for LLC formation.
Let’s take a look at what matters most to small business owners and go from there. First, we need to examine the best state for LLC formation in each of the following areas:
- Asset Protection
- Privacy
- Tax Benefits
- Online Businesses
Privacy
Strangely enough, the US Constitution never once guarantees the Right to Privacy to American citizens. Fortunately, forming an LLC gives you rights and protections that aren’t available to everyday private citizens.
There are a few different states that are renowned for allowing you to start an Anonymous LLC so that you can avoid any negative press associated with your business. These states include Delaware, New Mexico, Wyoming, and Nevada, and they allow you to form an LLC without having to list your information publicly.
Surprisingly enough, New Mexico doesn’t even require disclosure of your identity to the government, and it is the only state to offer this benefit. The others require disclosure but allow you to retain your privacy from the general public.
Outside of New Mexico, Wyoming has typically been considered the best state for LLC privacy. Paired with the tax benefits in the state, Wyoming is an excellent choice for any person seeking absolute anonymity for their small business.
Asset Protection
Protecting your assets is one of the key reasons many individuals find themselves looking for an LLC in the first place. Discovering the best state for LLC asset protection is the first step in ensuring that your assets are never attacked by creditors.
The word asset is sometimes defined vaguely as “an item of value owned”. Under this broad umbrella, there are several different categories of assets – all of which require different methods of protection.
Unfortunately, we don’t have the space or the time to dive into the various asset types or types of claims that these assets might face, so we will instead simply look at the best state for asset protection in general.
Nevada is often referred to as the best state for LLC asset protection – mostly due to the tax benefits exclusive to the state that protect numerous assets from taxation.
Read more about asset protection here!
Tax Benefits
If you’re trying to figure out which state offers the lowest tax rates on your LLC’s profits, rest assured that this is one of the “best” problems you can face. If your company is making enough money for a few percentage points to matter, you’re doing something right.
Wyoming is once again at the top of the list as the best state for LLC taxes. The 0% corporate tax rate and a 0% individual tax rate paired with a low sales tax rate of 4% make Wyoming very difficult to beat.
There are some other states with solid tax breaks as well, but overall, Wyoming is by far the best state for LLC taxes.
Read more about incorporating in the top three states.
Online Businesses
COVID-19 accelerated online businesses four to six years according to an Adobe report published in Forbes, meaning more people are taking their careers online than ever before. Due to the variety of online businesses and the fact that it is now possible to start small businesses from the comfort of your own home with little to no capital invested, it’s difficult to pin down the best state for all online business LLC formation.
Read more: Get a Virtual Address for LLC in 3 Easy Steps
An online rare bookseller that deals with a few dozen products a year won’t require the same kind of protections and benefits that an online subscription photo editing app will need. These kinds of distinctions aside, Delaware is often lauded as the best state for online business LLCs.
Delaware works well for online businesses for the same reasons it works well for other LLCs: The tax benefits, the Delaware Court of Chancery, and the low formation and annual fees make it an attractive location for anyone hoping for their business to succeed.
Overall, the legal climate in Delaware is very inviting to small businesses. There isn’t a high barrier to entry, and the Delaware Division of Corporations keeps the website easy to read and informative.
That being said, it is essential to remember that all businesses are different, and if you aren’t going to be working or making money in Delaware, you would usually be better off simply getting a Domestic LLC in your home state.
Forming a Domestic LLC for your online business will provide you with asset protection and tax benefits, and if your income is coming from that same state, there’s no reason not to do this. If you go through the trouble of forming a foreign LLC and then use that LLC to operate only in your state, you are technically breaking the law.
There are many different regulations and laws that govern whether or not your LLC is operating lawfully, and being non-compliant can result in severe fines. That is why it is paramount that you research the state for your LLC formation carefully.
Being found non-compliant is easier than you’d expect, and the financial burden associated with paying the fines and fees required to become compliant again isn’t as easy. Be smart, and research carefully.
Conclusion
As online businesses continue to boom, it’s easier than ever to establish an LLC in any state that you like – even from the comfort of your own home. That being said, all of these states have very different legal processes, sanctions, benefits, and dangers. By doing careful research into these tax and protection laws, you can find the perfect state to form your LLC and guide your business towards success.
Further Reading
- The Best States for Business Taxes
- Which States Require Commercial Addresses?
- Get A Virtual Address for LLC in 3 Easy Steps
- Should I Use My Home Address for My Business?
Alliance Virtual Offices offers many services that can help you with operating your own small business and registering an LLC. With our Virtual Office, you can obtain a physical address in the state where you’re hoping to form an LLC.
Both of our Virtual Office options provide business owners with a recognized business address and the ability to send and receive mail. Give us a shout to see if there’s any way we can help you get started on your venture today!
