Updated November 16, 2020:

The best state to form LLC for online business will depend on your situation. Many businesses form a Limited Liability Company (LLC) in their home state because it seems to be the most obvious choice, or they didn't realize they had other alternatives. Incorporating in your home state may be the best option for your business, particularly if you conduct your operations in a home, store, or physical office.

Incorporating an Online Business

One of the first steps in starting an online business is to determine what state you'd like to incorporate in. Even though you're an online business, you'll still need to examine how your product will get delivered to your customers. Some of the most frequently asked questions include:

  • Are there any geographical borders or barriers in place when a customer places an order?
  • Will you be using the services of a shipping company to transport the product?
  • What licensing laws are currently in place in your home state and foreign state(s)?
  • What are the sales, income, and franchise tax rates/fees?
  • Are there any specific regulations or laws in place that may impact your business?

Where to Incorporate Online Business?

It's always worth the time to properly research the best state to form an LLC. When selecting the preferred state, both the long-term growth and the initial sales volume of your business may be influenced. What's the best state to form an internet-based LLC? The physical location in which you work will most likely be the best option for incorporating your LLC.

There may be significant reasons to incorporate outside your home state, but generally, the state in which you're physically present is the best option. For example, if you're working in Illinois, then you probably should form an LLC in Illinois. If you're working in Florida, then you probably should form an LLC in Florida.

Is My Home State the Best Choice?

Consider the following before incorporating an LLC in a foreign state:

  • Every state expects businesses operating within it to pay taxes. Therefore, if you decide to incorporate in a foreign state, but you have a physical location or employees in your home state, you'll still be expected to pay taxes on any revenue generated in your home state.
  • When a business lacks a physical address in a state in which it has incorporated, a registered agent is usually hired to legally represent the company.
  • If you're maintaining a physical location or hiring employees in your home state, then you'll need to pay fees and file annual reports with the state.

If you're currently living in California, which is inundated with taxes, fees, licenses, and permits, it may make sense to incorporate somewhere else. It's important to do the proper research before making the decision to incorporate outside of your home state.

What If You Choose to Operate Outside Your Own State?

If you decide to incorporate your LLC outside of your home state, and you have employees or a physical presence in your home state, then you will also have to incorporate your business in your home state. In this scenario, you will need to be incorporated in both states.

Your home state will now consider your business as a foreign company. Also, you'll have to generate annual reports and pay taxes and filing fees in both states. Many experts have agreed that the simplest solution is:

  • A non-U.S. resident should form their LLC in Delaware.
  • A U.S. resident should form their LLC in the state in which they're physically present.
  • A U.S. resident that doesn't have or plan on having a physical presence in the U.S. should incorporate in Delaware.

Why form an LLC in Delaware? It's considered one of the most business-friendly and best states for non-U.S. residents.

Which State is the Best for Incorporating?

Deciding to form an LLC in a particular state simply based on your physical presence there is typically justified. Generally, you should form your LLC in the state in which you're conducting the most business. For example, if you're currently in Iowa and operating an Etsy store, you'll want to form your LLC in Iowa.

Non-U.S. residents have more options on which state to form their LLC. Every state varies in which tax breaks, charges and fees, incentives, and penalties they may impose on businesses. There are many significant factors to consider before selecting a state in which to form an LLC, including:

  • Laws and regulations
  • Tax filing fees
  • Income tax
  • Franchise regulations and taxes
  • Sales tax

If you need help determining the best state to form an LLC for your online business, you can post your job on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.