Starting an LLC is an exciting first or next step for your business, be it a sole proprietorship or a partnership. It provides numerous benefits, including liability protection and flexibility in taxation, but you need to ensure that you make the right decisions to make your life easier in the future as your business grows. So, take the time to research and choose a state that aligns with your business goals and objectives.
Today, we’ll guide you through the best states to start an LLC confidently, taking into consideration factors such as income tax rate, asset protection, franchise tax, and sales tax.
What State is the Best to Form an LLC?
Looking for a quick answer? The best state to form a Limited Liability Company (LLC) is nearly always your home state. This is because your company is doing business primarily in that state, whether it is a physical business or an online business.
There are two exceptions to this rule:
1) You are a non-US resident, in which case you can choose any state – we recommend Wyoming or Delaware
2) You have a real estate LLC, you can skip to this section, but essentially the “home state rule” doesn’t apply here.
Should I Form My LLC in Wyoming or Delaware?
You can read our Ultimate Guide on deciding between Wyoming vs. Delaware here but doola’s recommendation is:
- We recommend Delaware only if you have plans to convert your LLC into a C Corp (to raise venture capital from U.S. investors) in the future or if you want the “prestige” of saying your company is from Delaware. Some customers say this matters to them and if it does, it is your business, your choice!
- Otherwise, we recommend Wyoming. Why? Because Wyoming is the most popular state for non-residents who are in online businesses, e-commerce businesses, or entrepreneurs who want an easy and simple way to form and manage their companies. It’s the most popular state among doola customers for these reasons: Lower annual fees ($60 vs. $300 in Delaware) A low state filing fee ($100) The first state to ever create the LLC
Wyoming also has prestige and a friendly business environment, and has even been called “The Switzerland of the Rocky Mountains.”
What is a Domestic LLC vs. a Foreign LLC?
All LLCs are overseen at a state level. Any LLC that has been registered in a particular state and conducts business there is called a Domestic LLC. Any business that is formed within a state, but conducts business elsewhere is a Foreign LLC.
For example, if you live and do business in North Carolina, you would form your LLC there. Because you do your business in that state, your LLC is a Domestic LLC.
However, if you formed your LLC in North Carolina but did business in Florida or California, your business would be a Foreign LLC.
This setup allows businesses to operate in several states without having to form several LLCs and enables states to collect revenue from each business that operates there.
Are There Any Disadvantages to Forming a Foreign LLC?
The main disadvantage of a Foreign LLC is that you have to pay twice the fees compared to a Domestic LLC.
For instance, if you form an LLC in Wyoming and it is not your home state, you will then need to register the Wyoming LLC as a Foreign LLC in your home state before you can conduct business there.
That means two lots of State Filing Fees, the cost of a Registered Agent to use their address in the ‘foreign’ state, and two lots of Annual Report fees. This can complicate things, cost you more as your accountant has more to do, and may make it more likely that you forget to report your activity.
Business owners should also consider the potential impact of state income tax and franchise tax when forming a limited liability company for asset protection. There may also be filing fees and reporting obligations, such as the state fee and operating agreement, associated with the formation.
It is advisable that you seek legal guidance from professionals for comprehensive information on income tax rates, sales tax, and personal income tax in specific states like South Dakota, New Mexico, and Delaware.
What Happens if You Don’t Report Your Business Activity?
Whether you are unaware that you need to register your business as a foreign entity in your home state when forming a Foreign LLC or try to get around not paying your total amount of tax, there are consequences if you don’t report your total business activity, including income tax.
These possible consequences include:
- Fines (can range from a few hundred dollars to a few thousand)
- Interest on time you haven’t paid
- Court costs
- Restrictions on your business’s activity
If you are doing business in another state, you must register as a Foreign LLC in that state. Not doing so is simply not worth it. Connecticut collected $1.3 million in 2018 from businesses that hadn’t registered, and the average fine was $4,600. That’s a lot of money, so it’s best to get your legal ducks in a row.
Business Tax Implications: You Pay Tax Where You Make Money
The simplest way to figure out if you need to register as a Foreign LLC elsewhere besides your home state is to think about where you’re making money. If you’re making significant money in another state, you need to register there and report those earnings. This can get complicated, so if your operations are in multiple states, it’s best to work with an accountant who can advise and ensure you stay on the right side of the law.
Some states, however, have garnered a reputation for being “magical states”; they are believed to be more beneficial to register in. So, is this true?
Home State vs. “Magical States”
Wyoming and Delaware, among other states such as Nevada, have built a reputation among business owners for offering special tax benefits such as lower tax rates if you register as a Foreign LLC there.
There are indeed a couple of benefits, which we’ll look at below. However, it is very unlikely that these benefits will extend to the LLCs operating outside of these states.
Wyoming offers low tax rates with no income tax or franchise tax charges and the annual report fee is only $60 — making it one of the most business-friendly states to form a new business. They also have a sales tax rate below the national average of 4%.
This state also offers enhanced privacy protection as LLC owners are allowed to remain anonymous on the public record, which is unusual. This benefits small business owners who would prefer to keep a low profile or don’t want the actions of the business associated with their names.
As well as the increased privacy protection as also offered by Wyoming, Delaware has better legal protection than other states. There are many examples of LLCs that are formed in Delaware. They have a system known as the “Delaware Court of Chancery,” which is specifically designed to deal with corporate legal issues. Corporate cases are heard without the presence of a jury in the chancery court so Delaware is seen to be much more business-friendly.
Filing an LLC as a Non-US Citizen or Non-US Resident
You do not have to be a citizen or resident of the United States to form an LLC, and you can choose any state to form your LLC.
Your chosen state typically depends on how you intend to run the business. If you plan to or already have a physical building for business operations with employees, your LLC should be formed in the “home” state of the business. For example, if you run a successful chain of salons in New Jersey and intend to open a branch in Washington state, you should form your LLC in Washington.
If you are going to operate in the US but won’t have a physical presence, you can choose any state you like to form your LLC, but how you apply for an Employer Identification Number (EIN) or bank account may differ. You may have additional requirements for LLC filings with the IRS. The income tax rate may also vary depending on the state you choose.
The type of federal and state taxes you will need to pay will also depend on your business income.
What are the Best States to Start an LLC for an Online Business?
Of course, this all makes sense if you’re business formation includes a physical storefront or in-person service, but many of us do business online with customers all over the country or worldwide. What should you do if you make sales all over the country?
If your business is completely internet-based and your customers come from all over the country, or the world, then the best state to form an online LLC is still your home state. Your online business will likely be run from your home, or at least somewhere close to it, so that is where the business is being transacted, which is the factor that matters.
If you operate away from home a lot or have a location-independent business, you should choose the state that you are connected to most deeply, such as where your primary residence is located, where your family lives, where your driver’s license is registered or the state in which you are required to pay income tax.
Where Should I Register a Real Estate LLC?
As we mentioned at the beginning of this article, things are different if you’re forming an LLC for your real estate business.
The home state rule doesn’t always apply if your LLC is real estate-focused. This is because related business and the generated income are typically kept entirely within the state in which the property is located. In this case, the best way to limit costs is to form your LLC in the state(s) where the properties you own or work with are located.
For instance, say you live in Pennsylvania but own a rental property in New York. This means that all of your business activities (in this regard) occur in New York, and so this is where your LLC formation should be. This will enable you to only pay costs, including formation fees, state income taxes, and maintenance fees in one state.
If you’re an investor and intend to hold multiple properties in different states under one LLC (some people prefer to form separate entities for each investment, so do your research), make sure you register a Foreign LLC in each state you own property in.
Forming an LLC in your home state (a Domestic LLC) is simply more affordable and easier to set up than a Foreign LLC, and will be a better business structure for your LLC in the long term. Unless you are a non-US citizen, resident, or a real estate-focused LLC, you should always form your LLC in your home state to avoid potentially high fees. Of course, always ensure you form the right legal business entity as laws may change from state to state.
If you need help with forming your Delaware LLC or Wyoming LLC or have questions about the filing process in general, get in touch with doola! On top of our business formation service, we also provide support in opening a business bank account as well as services related to bookkeeping, financial management, and taxation.
What is the best state to start an LLC as a non-US resident?
If you are located outside of the US and want to form a legal entity like an LLC, we recommend Delaware or Wyoming to form your LLC. The state you choose depends on your business type and how you plan to scale your business or company. If you need help determining these factors, check out our guide on the best state to start an LLC.
Which state has the lowest filing fees for an LLC?
Wyoming has some of the lowest state filing fees and annual fees for filing an LLC compared to other states. You can expect to pay $100 as state filing fees and $60 as annual fees.
Which state is the best to start an LLC for an online business?
If you are located in the US or have a physical building in the US, it’s best to form your LLC in the state where you or your property is located – even for an online business. If you are not located in the US and do not have a property in the US, forming your LLC in Wyoming or Delaware is a great choice for forming a legal entity for your online business.