Best States for Forming an LLC

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LLC Overview

What Is an LLC?

An LLC is a type of business entity established by state governments. Its owners are called members, and they may be individuals, corporations, foreign entities or even other LLCs. There is no limit to the number of owners for a specific LLC, but most businesses tend to be single-member LLCs with just one owner. Some types of businesses, like banks and insurance companies, cannot be LLCs.

There are two types of LLCs:

• Domestic LLCs: A domestic LLC is registered in its home state.
• Foreign LLCs: A foreign LLC is registered in a state other than where the owner lives.

Regulations, such as fees and annual reporting requirements, vary by state. There may also be different requirements for domestic versus foreign LLCs.

How To Form an LLC

When starting an LLC, you can do it yourself or hire a business attorney to handle it for you. Either way, the process to set up an LLC remains the same.

• Choose a company name. This name must not be in use within your state. If it is not available, you will need to select another one. Each state provides a convenient search tool you can use to check existing company names within the state.
• Appoint a registered agent. A registered agent is the party responsible for receiving legal documents and notices on behalf of the company. Most states allow members to serve as their own registered agents as long as they are residents of the state with a physical business address.
• File the Articles of Organization with the state. This document is also known as a Certificate of Organization or Certificate of Formation. It includes a brief overview of your business details and can vary based on state requirements.
• Create an LLC operating agreement. An operating agreement outlines the company’s business structure and terms of operation. It also establishes the rights, duties and responsibilities of each member of your LLC.
• File a Beneficial Ownership Information (BOI) Report. All LLCs must file a BOI Report with the Financial Crimes Enforcement Network. You can file online for free, or you can use a service like FileForms or LegalZoom. New LLCs must file within 90 days of formation, while existing LLCs formed before January 1, 2024, must file by January 1, 2025. Failure to do so could result in a civil penalty of up to $500 or criminal penalties that include up to a $10,000 fine and up to two years in jail.
• File for business licenses. These look different in each state, but your state and local governments can provide further details. Certain industries may require additional licenses.
• Pay your fees. A fee will be required to register your LLC, although the exact cost to start an LLC varies by state.
• Open a business account. If you fail to separate your business income from your personal finances, your personal assets could become vulnerable. For greater protection, sign up for a new business checking account with a bank that has experience working with LLCs.

After formation is complete, all registered LLCs will receive an IRS employer identification number (EIN) from the IRS.

How To Choose the Best State To Form an LLC

When determining the best state to start an LLC, these key considerations can help save time and money down the road.

Liability Protection

The best part about an LLC is the protection it provides for a member’s personal assets. However, the exact protections can change by state, with some states offering more legal security than others. Be sure to review the terms for your state and consult a business attorney if you need help so you can be sure you receive the best protection for your business.

Taxes

Some states offer greater tax benefits than other high-tax states like California and Vermont. However, their tax advantages may be based on where you make sales and not where your business was formed. With this set-up, you could miss out on some vital tax breaks if the bulk of your business is done in another state.

Fees

When you are starting a new business, every penny counts. Each state has different LLC fees that it assesses, with states like Arizona and New Mexico ranking as more affordable than other states like Massachusetts. In addition to filing fees, there may also be costs for your EIN and a registered agent fee.

Privacy

If you value privacy, some states are better than others. States like Delaware, Nevada and Wyoming are known as anonymous LLC states, which means that you can create an LLC without disclosing personal information about the company members on state filings. This prevents the identity of members from being disclosed to the general public.

1. Best State To Form an LLC: Your Home State

Your home state is often the best place to form an LLC. To qualify, you must conduct business, collect money and have member meetings in the same state in which you live. This generally makes your home state the easiest state in which to form an LLC, as well as the most cost effective, because there are fewer requirements and penalties when everything is processed within a single state. If you create an LLC in a state other than your home state, you may be subject to additional requirements and costs. This is especially the case if you form multiple LLCs, although you will not be taxed twice unless you operate your business in multiple states.

If you need help forming an LLC in your home state, a licensed tax or business attorney can help. This local professional is well-versed in your state’s laws and can meet with you one-on-one to help when you need to create and file documents.

2. Best State To Form an LLC for Growing Businesses: Delaware

After your home state, Delaware is the best state to form an LLC. Its General Corporation Law is revered nationally for its flexibility, making it especially popular with corporations. Almost 67% of all Fortune 500 companies are incorporated in Delaware, and it is also home to 93% of companies that have gone public.

Delaware’s Court of Chancery has played a pivotal role in the creation of the Limited Liability Company Act and today’s corporation law. LLCs are able to benefit greatly from this expertise–the Chancery Court hears business cases exclusively, so cases tend to move much more swiftly here than in other states.

Delaware is also lauded for its favorable LLC tax benefits. It is a state with no sales tax, which could save your business a fortune each year. If you do the majority of your business out of state, Delaware is also favorable because it does not tax out-of-state income.

This is also one of the best LLC states for privacy. Delaware is one of four states that protects LLC members by privatizing their personal information. (Nevada, Wyoming and New Mexico are the only other states that offer this protection.)

If you want to create an LLC in Delaware, you must complete a Certification of Formation of a Limited Liability Company and pay a $110 filing fee. This form is filed with the Secretary of State and requires an annual $300 franchise tax.

No annual reports are required, saving countless hours each year.

Best States To Start an LLC: Other Alternatives

Best State To Form an LLC for Privacy: Nevada

Nevada has a very favorable taxation system for business owners. There is no personal income tax, nor are there any taxes assessed on business income or capital gains. If you operate a franchise, there is the added benefit of no franchise taxes.

There is, however, a gross receipts tax, and you will pay fees for your business license, along with the applicable filing fees.

Nevada is known for its privacy protections for LLC members. It is considered an anonymous state because it will privatize your LLC registration, shielding that information from public view. You will still need to file a list of your members and managers every year, and Nevada imposes higher filing fees than some states. However, its approach to taxes makes it worth it. Because there is no personal or corporate income tax, Nevada does not need to share information with the IRS, adding another layer of protection to member privacy.

Like Delaware’s Chancery Court, Nevada offers a specific court dedicated to business matters. This means that cases get processed quickly because they do not have to compete with other types of cases. Filing times are also speedy, so LLCs are often formed much faster than in other states plagued by backlogs. Getting started is simple, too; Nevada offers an online tool to help with the formation of your digital operating agreement.

The filing fee for a Nevada LLC is $75 for the articles of organization and $150 for your member list. There is also a $200 business license fee. After your first year, the annual fee is $150 for the Annual List and $200 for your business registration.

Best State To Form an LLC for Easiest Renewal: New Mexico

There are many reasons why you should form an LLC in New Mexico: Fees are low, and requirements are more lax than in other states. Privacy protections are an added benefit; New Mexico does not require that you disclose your members or managers so you can maintain the privacy of your management.

To create your LLC, you must file the articles of organization online with New Mexico’s Secretary of State and pay a $50 fee. It typically takes just one to three days for processing. All LLCs must also obtain a New Mexico Business Tax Identification Number, which is available for free. No operating agreement is required, but one is recommended for added protection. There also is no annual report required, saving businesses from another fee to pay.

New Mexico requires that you appoint a registered agent for your LLC. The LLC cannot serve as its own registered agent, so you must appoint another domestic or foreign business with a physical address located within the state.

No general business license is required, although some industries may require a special license. Local business fees can run anywhere from $35 to $400, depending on whether your business has physical locations that also require fire and safety permits.

Best State To Form an LLC for Low Taxes: Wyoming

There are two major benefits to filing an LLC in Wyoming: Low taxes and privacy protection.

Wyoming assesses no income tax on personal or corporate earnings. Like Nevada, there are no franchise taxes either, making it also the best state to form an LLC for businesses with multiple locations. In fact, Wyoming received a number one ranking in the 2022 State Business Tax Climate Index by the Tax Foundation.

As a state with enhanced protections, Wyoming offers an easy way to keep your company’s member information private. Instead of filing your personal details, you can use a proxy who is assigned to handle certain matters on your behalf. The proxy’s information is made public while yours remains hidden. With no taxes to report, you also receive added privacy from the IRS.

Wyoming was home to the first LLC, so its government has a long history of serving this specific type of business entity. Its laws are well-developed, and it has a chancery court to expedite business hearings so cases are heard in a more timely manner than in other states.

Filing an LLC in Wyoming is affordable. The articles of organization cost $100 to file. An annual report is required, and the fee is based on your total assets, starting at $60 and increasing from there.

Why Start an LLC?

Although they have many benefits, the main reason for an LLC is to protect an owner’s personal liability for business affairs. Here, we take a closer look at the many advantages of an LLC for your business.

Reduced Liability: As the name implies, an LLC provides limited liability for its members. This means the owner’s personal assets are protected from collection and litigation if the business falls into debt or goes bankrupt.

Taxation: With an LLC, members can file LLC profits and losses on their own individual income tax returns. This eliminates corporate taxes, saving the company money.

• When tax time comes, there are three ways to treat an LLC. You can file the LLC as a corporation, partnership or disregarded entity that is a part of the member’s personal tax return. An LLC with one owner is considered a single-member LLC, but LLCs with at least two members are automatically classified as a partnership by the IRS unless the member makes a specific filing to treat it as a corporation instead. A business tax attorney can help you explore your options to find the best LLC classification for your company’s specific needs.

Ease of Use: LLCs are the easiest types of businesses to create and manage. Requirements are much more lax than with other business structures, as the LLC skips the need for a board of directors and regular shareholder meetings. There may be some basic filing requirements, but creating an LLC is a straightforward process that is much simpler than creating a corporation.

How Much Does Starting an LLC Cost by State?

We’ve broken down LLC online filing fees by state to help inform you which state is the best for you to form your LLC.

LLC Guides by State

• Colorado LLCs Guide
• Illinois LLCs Guide
• Maryland LLCs Guide
• Michigan LLCs Guide
• Missouri LLCs Guide
• North Carolina LLCs Guide
• Ohio LLCs Guide
• Pennsylvania LLCs Guide
• Tennessee LLCs Guide
• Virginia LLCs Guide
• Wisconsin LLCs Guide