Last Updated: February 2, 2023
Are you looking for the best states to start a business? When choosing the best state to form a limited liability company (LLC), you must consider such factors as tax regulations and workforce. This article addresses what an LLC is and the best state for LLC.
What Is a Limited Liability Company (LLC)?
A Limited Liability Company (LLC) is an unincorporated entity with a hybrid business structure (part corporation, part partnership, or sole proprietorship) that combines liability protection benefits of a corporation with unincorporated business tax benefits. This type of structure is best for entrepreneurs or if you’re planning to start a small business. Forming an LLC, however, has its advantages.
- Personal Asset Protection: With an LLC, you can set your personal belongings to the side if a lawsuit is filed against your company, meaning that the assets you own cannot be taken away by the courts.
- Pass-Through Taxation: LLCs avoid double taxation by pass-through taxation. A pass–through business, such as an LLC, pays no taxes. Instead, a registered agent pays the business’s taxes via a personal tax return.
A business can be formed as a single-member LLC or a multi-member LLC.
|NOTE: The IRS requires that each LLC owner (domestic or foreign) pay 90% of their total tax obligation through estimated taxes. Subsequently, we’ve compiled a list of top-pick business tax software to help you when calculating your taxes.|
Domestic vs Foreign LLC
Before choosing the best state to open LLC, you need to differentiate between a domestic and a foreign LLC. Whether a company classifies as domestic or foreign depends on two factors: where you formed the LLC and where it operates.
A company that has been created and operates in your home state is known as a domestic LLC. A foreign LLC is not a company created in another country but rather an out-of-state LLC. A company formed in one state but operates in a different state is also called a foreign LLC.
You must register a foreign LLC to stay in compliance with the laws and regulations of the specific state. A foreign LLC avoids paying fees and penalties that a local (domestic) company would need to pay.
When forming a foreign LLC, obtaining only an address in the state is not enough. You must have a physical presence in the state you’re conducting business in, maintain an office, and have a registered bank account.
Before starting your LLC, consider these steps before deciding which is the best state to start your business:
- Choose a unique business name;
- Provide a business address in the state you wish to create the LLC;
- Hire the right registered agent. You must have a registered agent to be in charge of receiving legal paperwork, tax notices, etc. on the company’s behalf;
- File an Articles of Organization document;
- Apply for an Employer Identification Number (EIN) with the IRS;
- Create an operating agreement.
|NOTE: Filing an LLC in your home state is perhaps your best option because you should already be aware of your state’s regulations.|
Best State for an LLC
There are various benefits to forming an LLC. But which is the best state to start a business?
Delaware remains the best state to incorporate due to its outstanding reputation of being the most business-friendly state. About 63% of businesses listed on the Fortune 500 are incorporated in Delaware. Additionally, you can incorporate and enjoy tax benefits in Delaware without physically living in the state.
Delaware is not only the best state for incorporating, but it’s also the cheapest state to incorporate. In 2021, Delaware was (still) ranked as one of the most affordable LLC states to do business in. But you should not choose your formation state solely because Delaware is the cheapest LLC state.
Another great benefit of incorporating in Delaware is that it does not tax out-of-state income (or foreign LLCs), making it the best state to form an LLC for an internet business.
For many, Nevada is the best state to incorporate LLC because it offers excellent benefits. For example, Nevada has no state taxes, no personal income taxes, and no corporate taxes. But its sales tax amounts to 6.85%. As a result, Nevada is the best state for single-member LLC, unlike states that prohibit a single-member LLC.
Another great benefit of establishing an LLC in the state is that the privacy of owners is cherished. Unlike other states, Nevada allows you to remain anonymous in public records.
In creating a limited liability company (LLC), investors take measures to protect themselves. Correspondingly, Nevada is the best state to form LLC for real estate purposes as it offers optimal asset protection. If you, as an investor, are hit with a lawsuit and end up in business debt, you immediately have legal protection—your personal assets are separated from the debt.
The entire filing fee to establish an LLC in Delaware is $425.00, while the annual report cost is $350.00.
As one of the top three business-friendly states, Wyoming remains one of the best states to incorporate your business. This state has a long history of providing economic incentives for start-ups and small businesses.
With one of the lowest one-time filing fees of $100.00 and an annual report cost of $50.00, Wyoming is deemed by some to be the cheapest LLC state in the US.
If you plan to launch an online business, you should consider creating an LLC in Wyoming, which is steadily gaining popularity as the best state to form LLC for online business. The state provides excellent benefits for those willing to start an online business, including no income or franchise taxes. But the best benefit Wyoming provides is its lifetime proxies, allowing individuals a private vote on company issues.
Florida serves as a business nest to such prominent companies as Burger King and Tupperware. So it’s natural for Florida to be classified as one of the best states to open a business. Even though there are many corporations in Florida, creating a Florida LLC may be the best option because you would enjoy the benefits of a corporation and at the same time protect your personal assets.
Florida is also a tax-friendly state—this is why it’s considered the best state to start a business for tax purposes. LLCs in Florida are exempt from paying income taxes. As a result, the state’s LLC filing fee amounts to $100.00, and its annual report cost is $138.75.
Some view Alaska to be the best state to start a business for tax purposes. The state has no state income or sales tax, but it does have a corporate tax of up to 9.4%. It’s also known as one of the friendliest states, allowing growth for small and large companies.
Considered by some as the best state for LLC, the state’s LLC filing fee is $20.00, with a maintenance cost of $100.00 for two years.
|Forming an LLC is an excellent option for small businesses.|
|As an owner of an LLC, you immediately have asset protection.|
|There are two types of LLCs: domestic and foreign.|
|Delaware, Nevada, and Wyoming are the best states to incorporate.|
|Wyoming and Delaware are ideal states to start an online business.|
|NOTE: When forming an LLC, you need to find an LLC service online that provides affordable features.|
LLC Cost by State
The table below presents the LLC cost by state.
|State LLC||LLC Filing Fee||Annual Fee|
|Alaska||$250.00||$100.00 (biennial fee)|
|NOTE: The average cost of an LLC filing fee in the US is $132.00.|
When forming a Limited Liability Company (LLC), you should find the state that best fits your specific criteria for doing business and understand its tax regulations. Hopefully, this article has hopefully helped you determine the best state for LLC and the benefits associated with each state listed.
Delaware is the best state for forming an LLC because of its reputation as the most business-friendly state and its policy of not taxing out-of-state (foreign) income.
You can form an LLC in any state that allows LLCs, regardless if you live there or not. But the best option is to create an LLC in your home state because you should already be familiar with the state’s regulations.
Yes. It’s acceptable for your LLC to be created in one state but do business in another. But you must register as a foreign LLC in the state you wish to relocate.
Delaware is deemed by some as the best state for LLC not only because it’s business-friendly and is one of the cheapest to incorporate an LLC but because it also provides a separate Court of Chancery (an equity court) that solely handles business cases.