Best states to form your LLC

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 if you have 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 compares the features and benefits of states that are often regarded as especially LLC-friendly.

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.

When you form an LLC in the state where your business operates, you only have one set of legal and tax requirements to worry about and only one annual reporting fee. 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.

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.

Wyoming has relatively low filing fees for both formation and annual maintenance. 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 either, 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.

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.

The following sections discuss three financial factors to consider when deciding where to form your LLC.

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 multimember LLC is automatically taxed like a partnership. Some limited liability companies can elect to be taxed as 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.

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 in. 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.

If you operate in more than one state, compare the features and costs of LLCs in each state to determine which would be best for you. 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 46^th 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 state 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 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, seven states impose a gross receipts tax on certain businesses operating within the state.

Some states don't have 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 a few states, electronically filed LLC documents are processed 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 it 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 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 liability protection 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.