When you start a business, you are responsible for choosing a business structure. One structure you can select is a limited liability company, or LLC.
Unlike some other business structures, you can form an LLC in any state, regardless of your physical business presence. With so many states to choose from, it can be difficult to determine where to establish an LLC.
So, what’s the best state to start an LLC?
Recap of LLCs
As you might already know, there are many types of business structures you can choose from as a business owner. The structure you select impacts your taxes and liabilities.
As a popular business structure, LLCs are flexible and combine elements of sole proprietorships or partnerships and corporations.
The owners of LLCs are considered members. LLCs can either be:
- Single-member
- Multi-member
Owners of an LLC have financial and legal protection similar to corporations without double taxation. Plus, owners are not responsible for business debts. If the business owes money and can’t pay, only their business assets are at risk.
LLCs use pass-through-taxation. Pass-through taxation means the business itself does not pay taxes. Instead, owners must report business income and pay taxes on their personal tax returns.
However, LLCs can elect to be treated and taxed as corporations.
Best state to start an LLC
When you look into starting an LLC, you might think you can only create an LLC in the state you live or do business in. However, you can actually form an LLC in any state, regardless of where you’re based. A foreign LLC is an LLC that is formed in one state but wants to carry out business in another state.
Each state has different laws for LLCs. Some states are more strict, while others are more lenient. And, states might offer financial advantages and other perks for LLC formation.
Before you select a state to start an LLC in, be sure to consider all of your options.
Now that you’ve brushed up on what an LLC is, it’s time to find out the best state to start an LLC in. Take a look at the top five states to form an LLC:
- Delaware
- Nevada
- Wyoming
- Alaska
- South Dakota
Delaware
Delaware takes one of the top spots as the best state to form LLC. More than 50% of all U.S. publicly-traded companies and roughly 63% of Fortune 500 companies are incorporated in Delaware.
Delaware has a reputation for being a business-friendly state and has a simplified filing process to help you get your LLC quickly up and running.
Two major perks of creating an LLC in Delaware are the low fees and taxes. Delaware does not tax out-of-state income for foreign LLCs.
To entice businesses, Delaware also has low filing fees and franchise taxes.
Delaware also has a separate court, called Chancery Court, that only hears business cases. This allows cases involving businesses to be resolved faster. Not to mention, the judges are experienced in business-related cases.
Advantages of Delaware:
- Business-friendly
- Streamlined filing process
- Low filing fees
- Low franchise taxes
- No corporate income taxes for foreign LLCs taxed as corporations
- Court of Chancery for businesses
- Lots of business experience
Go to Delaware’s website to get more information about creating an LLC in the state.
Nevada
One major perk of becoming an LLC in Nevada is the lack of taxes you have to pay. Nevada does not have corporate income, personal income, or franchise taxes. However, business owners must pay annual filing and business license fees.
If you’re seeking some privacy, Nevada may be the state for your LLC. Nevada allows anonymity in public filings. This means the state offers confidentiality to LLCs, permitting them to remain anonymous in public registration filings. Additionally, the state does not participate in information-sharing with the IRS.
Nevada does not require LLCs to create an operating agreement or hold annual meetings, making it easier for you to run your business in the state.
Advantages of Nevada:
- No corporate or personal income taxes
- No franchise taxes
- Anonymity in public filings
- No information-sharing agreements with the IRS
- No requirements for operating agreement or annual meetings
Learn more about setting up an LLC in Nevada by visiting the state’s website.
Wyoming
Wyoming strives to be as business-friendly as possible. Reporting obligations for business owners are minimal. Like Nevada, there are no corporate income, personal income, or franchise taxes in Wyoming.
Unlike other states, Wyoming offers a lifetime proxy. A lifetime proxy means you can appoint someone else to represent your stock or shares on your behalf. With a proxy, owners can remain completely anonymous.
In addition to no corporate or individual income taxes, Wyoming also has a low sales tax rate.
Advantages of Wyoming:
- Minimal reporting obligations
- No corporate or personal income taxes
- No franchise taxes
- Lifetime proxy option
- Low sales tax rate
Ready to start an LLC in Wyoming? Visit Wyoming’s website for more details.
Alaska
As a business owner, you might have never thought about establishing your LLC in Alaska. But, the state has many perks when it comes to different taxes.
Alaska is a state that has no state income tax or sales tax. However, keep in mind that cities or localities in Alaska are allowed to collect their own rate for city or local sales tax.
Advantages of Alaska:
- No state income tax
- No state sales tax
- Low tax rates in general
Interested in starting your LLC in Alaska? Go to Alaska’s website for additional information.
South Dakota
South Dakota also has some advantages when it comes to different taxes.
Like Alaska, South Dakota does not have state income tax. Along with no state income tax, South Dakota also has a 0% corporate tax rate, making it a great place to start an LLC that is taxed as a corporation.
Advantages of South Dakota:
- No state income tax
- No corporate tax rate (for LLCs treated as a corporation)
Looking to start an LLC in South Dakota? Check out South Dakota’s website.
Another contender: Your home state
There’s no place like home, right? When considering places to start your LLC, consider your home state.
There’s a major convenience factor when it comes to your home state. Chances are, you’re already familiar with the state laws and know who to contact for information. Not to mention, all of the government offices are easily accessible.
If you start an LLC in your home state, you don’t have to worry about registering as a foreign LLC with another state.
If your business is physically located in the state where you live and conduct most of your business, consider registering your business as an LLC in your home state.
Before making any decisions, weigh the pros and cons of establishing your LLC in your home state. Sure, it can be convenient. However, forming an LLC in another state can help you save money on fees and taxes.
Worst states to start an LLC
You’ve read about the best. Now it’s time to take a look at the worst. Take a look at the top five worst states to start an LLC in below:
- New Jersey
- California
- New York
- Connecticut
- Minnesota
These states are not the most ideal states to start an LLC. Most of the above states have disadvantages like:
- High sales tax rates
- Startup fees for LLCs
- High state taxes
- More competition
- Additional reporting obligations
Keep in mind that you can still succeed as an LLC in these states. It might just take additional time and money to do so.
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This article is updated from its original publication date of September 17, 2019.
This is not intended as legal advice; for more information, please click here.
