Which is the Best State to Form an LLC?

What’s the best state to open an LLC in the states? A hot question for anyone who wants to start and successfully grow their business. And there are so many candidates out there. Besides, according to Doing Business 2021, the U.S. is rated 6th on the ease of starting and doing business, which is a clear indicator of a favorable business climate, attractive to foreign investors. 

However, it’s not all that simple. The USA is a federal county, and each state has its own policies on taxation, litigation, and other no less important areas for business. That’s why it’s essential to register an LLC in the state that best fits your business goals.

The U.S. ranks 3rd in the world by population (331.42M), as well as takes first place in nominal GDP. This is where almost all transatlantic corporations are based and this is where the richest people on Forbes’ list live. Thanks to its achievements in many areas of economy, science, and life, the USA is the only Superpower in the world.

The opportunities in the USA attract entrepreneurs of all levels, but all of them are faced with a question, answering which is crucial to building an effective business: what is the best USA state to form an LLC?

There are no absolutely tax-free territories in the USA because in addition to local taxes there are also federal ones, which are effective all over the country. For example, the state corporate tax is 21%. However, given the federal structure of the country, each state has its own taxation policy. And this point plays an important role in choosing a place to open a business. Local authorities can cancel some fiscal obligations but will introduce others to replenish the budget. Therefore, the search for the best U.S. state to open an LLC should begin with an in-depth analysis of the business conditions created in each of them and learning what legal form of business is more profitable there.

How Do You Choose the Best State to Form an LLC?

There are certain ranking sites that help entrepreneurs decide where it’s better to register an LLC in the USA. One of them is Tax Foundation. It publishes an annual mass of different surveys, including the Business Tax Climate Index. With its help, visitors can compare the tax system in force in different states and choose the most suitable.

However, if you don’t want to do the research on your own and have limited time or budget but still want to be sure your LLC is formed correctly, you can hire a reputable LLC service. Below are the top two options (in our opinion) that will handle all the legal paperwork for you. Check them out!

• ZenBusiness. This online formation company will allow you to get the best value-for-money out of itself. Thus, if that’s something you’re looking for in an LLC service, you should know that ZenBusiness’s rates are some of the lowest on the market. Their packages include all the most valuable basic features at an affordable price + they also offer a free registered agent service in all their packages (for 1 year). Read our full review to know why you should try their services. 

• IncFile. If you’re on a tight budget, looking for the cheapest LLC formation service, you can try IncFile. They will help you form an LLC for free (excluding state fees) and offer amazing customer support and some great supplementary/tracking features to choose from along the way. Apart from the lowest pricing rates, they also offer a one-year-free registered agent service, business tax consultations, assistance in EIN and Certificate of Good Standing application, etc. Read our full review to know more about IncFile. 

What’s an LLC?

Limited Liability Company (LLC) is a fairly young entity type, which has already become one of the most common forms of business among local and foreign founders. The main feature of such a company is the ability to take any convenient form, including a partnership, corporation, or sole proprietorship.

An LLC is a hybrid business structure that combines sole proprietorships and general partnerships (which have legal structure) with corporations (which have complex structures and require a lot of paperwork). Moreover, such a company has the flexibility and tax efficiency similar to a corporation and partnership combined. Any local and foreign individual (or entity) can form an LLC in various states of the country. 

All owners of an LLC, which may be at least 1 individual/legal entity, are called members or participants. However, not all types of businesses can register an LLC. Restrictions apply to financial institutions, insurance companies, government structures, and some other types of businesses.

You may wonder, what’s so beneficial in forming an LLC? The first thing that comes to mind is personal asset security. In case your LLC becomes involved in a lawsuit – you will not risk your own property (i.e. your house, vehicle, and bank accounts will be safe, which is not the case with sole proprietorships or general partnerships). Thus, in case any problems happen, the creditors will only pursue your business assets. 

Another benefit is that the formation process is easier when compared to a corporation. The same goes for ongoing maintenance. Finally, the tax structure of an LLC is flexible, which means that, by default, you only have to report income on your personal tax returns (instead of a separate corporate return). 

However, as your company grows, you can choose to be taxed as an “S corporation” (to reduce self-employment taxes) or a “C corporation.” The drawback is that with the “C corporation” status, your LLC will be subject to “double taxation.” This is when a corporation is taxed on its profits and then again on the dividends that shareholders receive as their personal earnings. 

Domestic or Foreign LLC. Which One Should You Form? 

Before you decide on the state for your future LLC, you should know whether you need to form a domestic or foreign LLC. The difference is that a domestic LLC is formed in the same state where you run your primary business. While a foreign LLC is, obviously, formed in some other state. Non-residents have no significant obstacles and restrictions. They can register a company in any state, depending on their business objectives. 

However, forming a foreign LLC without having a domestic one can be quite expensive. If you want to open a foreign LLC while still running a business in your home state, apart from completing the formation in your chosen state, you will also need to register the LLC in your home state. This means you will need to pay all the formation costs and compliance fees twice.

However, the temptation can be really strong, we understand that. As we all know that some states can be more LLC-friendly compared to others. However, we usually recommend forming businesses in their current state. But if you’re about to move somewhere else, below are the most (and least) favorable states to form an LLC.

Wyoming

Wyoming is one of the major states, located in the west. The main sectors of the economy are mining and tourism. The state has been one of the best places to do business for many years. It’s ranked #1 in the business climate by Tax Foundation. 

Statistically, 81.66% of startups opened here continue to operate after the first year of operation, indicating a favorable environment for starting and operating a business.

With that said, let’s take a look at why Wyoming is the best state in the U.S. to start an LLC:

• No local taxes – Wyoming is one of only two states with no corporate income or revenue taxes;
• Secure protection of personal assets – an LLC incorporated in Wyoming is liable for its obligations only with its assets. Personal assets of the owners are protected from lawsuits;
• High level of confidentiality – no personal data of managers and owners is shown in public registers. Plus, there are minimal reporting requirements – you only need to submit an annual report once a year;
• No citizenship requirements – you do not need to be a U.S. citizen to register an LLC in Wyoming;
• Unlimited duration and flexibility of disposition – an LLC is usually closed after the death of the sole owner. In Wyoming, on the other hand, a legal entity can exist until it’s liquidated. A share in LLC can be sold, donated, transferred, or bequeathed to other people;
• No limitations on the number of LLC owners;
• Flexibility in raising capital – an LLC in Wyoming has the right to issue loans, borrow funds, or sell its shares to raise capital. These options attract many investors who prefer to invest in an LLC because of the limited liability and ease of investing. Also, there is no minimum capital contribution in Wyoming;
• Low cost of company registration and administration – the registration fee is paid only 12 months after opening a legal entity and no business license is required;
• The ability to register a legal entity online.

Delaware

Delaware, although it occupies a small area (the second smallest in the country), is very attractive to foreign entrepreneurs. This is where more than 65% of Fortune 500 companies and more than half of U.S. public companies are registered (e.g. Facebook, Yelp, etc.). Though Delaware’s economy is largely dependent on chemical manufacturing, including pharmaceuticals, the biggest driving force, however, is still finance and insurance. 

Delaware’s main advantages are as follows:

• Generous Laws – incorporating an LLC or corporation in Delaware means that the business of a legal entity is subject to the laws of the state only, including disputes between owners and managers. In addition, a Delaware-registered company has access to an internationally recognized specialized business court (The Court of Chancery);
• Access to qualified corporate law attorneys – the Delaware Court of Chancery is home to some of the country’s best business lawyers. They provide the best personal asset protection from creditors in the world;
• Affordability – Delaware is one of the cheapest states to open an LLC: 14th in fees and 17th in registration fees. In fact, you can form an LLC for just $90 in Delaware, and they don’t charge taxes on out-of-state income. Plus, the state of Delaware permits S-corporations, which can be very advantageous from a tax perspective;
• High level of asset protection – Delaware’s laws and courts reliably protect the assets of business owners (both LLCs and corporations). It also has a “Business Judgment Rule,” which empowers top managers to make high-risk, high-reward decisions without fear of personal liability;
• Ease of incorporation – you can register a company in Delaware regardless of the territory of your business and enjoy all its benefits. You don’t even need to open an office and a bank account here. A registered agent will do all the work of administering your company in Delaware, i.e. send annual declarations and legal notices. Moreover, you can apply for and open a business in Delaware remotely via a special online form with no problems. To register, you only have to provide the name of your LLC, contact person information, names of company management, and the number of shares;
• Convenience – you can open an LLC and be its only member, write off any losses and actualize your gains;
• Speed of registration – in the office of the Delaware Division of Corporations, you can register a legal entity in just 30 minutes. The office works in 2 shifts to provide quality service to all applicants;
• High level of confidentiality – there’s no need to reveal the names of LLC owners.

Note that if an entity receives income from sources outside of Delaware, the profits are exempt from regional income tax but they do pay a franchise tax.

Effective taxes in Delaware for 2021:

Personal Income Tax – 6.6%;
Corporate Income tax – 8.7%;
Sales Tax – 0%;
Property Tax – 0.58%.

Delaware is best suited for publicly traded companies that sell shares on the stock market (e.g. Microsoft, Apple, IBM, Chase, Coca-Cola), or companies that have several investors or need to raise venture capital.

Low taxes, simplicity, and high speed of business registration, as well as high levels of personal asset protection, make Delaware one of the best states to register a company in the U.S. 

Nevada 

Nevada has long created the best conditions for setting up and running a business. It’s an increasingly popular choice for LLC formations – it has no business or income taxes. In Nevada, you as an entrepreneur will have a high level of privacy (just like in Wyoming), as the state allows LLC owners to maintain anonymity with any business filing. 

Nevada is famous for the fact that local legislators keep their eye on the ball, i.e. regularly improve the laws for businesses. This ensures that corporate and LLC owners can feel safe and operate without fear of false lawsuits, accusations, and other misunderstandings. The law is always on the side of the right. 

Nevada takes business stability and security very seriously. The state does not tolerate so-called “trash” lawsuits. Unfair or frivolous lawsuits will not be considered by Nevada state courts at all. Thus, in every contract, you can state that everything that happens under the Nevada law and sleep in peace.

Moreover, Nevada’s $75 LLC formation fee is fairly low, although their $150 annual report and $200 business license fee are slightly higher for annual expenses.

South Dakota 

There’s no business tax or individual income tax here, which can obviously keep your LLC expenses down. And while South Dakota’s $150 online formation fee ($165 via Paper) isn’t the cheapest on the market, their Annual Report fee is just $50.

Effective Taxes in South Dakota (acc. to Tax Foundation)

Сorporate Income Tax – 0% 
Sales Tax – 6.4%
Individual Income Tax – 0%
State and Local Tax Burden – 7.1% 

Wyoming, Delaware, and South Dakota take leading positions on our list, but there are many other LLC-friendly states ready to welcome you. Thus, you can form and maintain your LLC in Oregon, Kentucky, Florida, and Colorado at a reasonable cost. 

Conclusion

Choosing a particular state to establish an LLC depends on the specifics of your business and the goals you set for it. The more specific you are about your goals, the easier it will be for you to make an informed choice.

In case you are staffed with a full team of specialists, work remotely, don’t need investments, and your target market is in the US, then you can register an LLC in Delaware. However, if you need to present your plans, find investors, and experts to grow your business, there’s nothing for you to do there. 

Moreover, unless you live in one of the following states or have enough funds to maintain a huge company, you might want to avoid New Jersey, New York (the 2nd worst business climate in the nation), and California in the first place. Then you also have Vermont, Minnesota, and Ohio which are all sadly famous for their unfavorable corporate tax policies, high state sales taxes, property taxes, and individual income taxes.

In case your business starts generating more revenue, you can always re-register it in Delaware, Wyoming, South Dakota, or some other state. Thus, Washington D.C. with Seattle can be great for engineering projects, and Atlanta – for biomedical development. These are just estimates, which can have significant variations in specific cases.

Registering an LLC in the right state will open many doors for you, providing a great opportunity to localize and grow your business with reduced expenses. Once again, you could say that basically, the choice of state to set up an LLC will depend on your business goals, consumer market, your staff, and the stage of financing. A combination of these factors should determine your choice.