Key Takeaways

  • The best state for an LLC internet business depends on factors such as filing fees, annual costs, taxes, and legal protections.
  • Delaware is ideal for corporations seeking strong business laws and investor appeal, but small businesses may not benefit as much.
  • Wyoming and Nevada are popular for LLCs due to their business-friendly tax policies, privacy protections, and lower fees.
  • Your home state is often the best choice unless there are substantial financial or legal advantages elsewhere.
  • Registering in a different state may require additional foreign qualification fees and taxes in your actual operating state.
  • Digital nomads or businesses without a physical presence should consider the implications of nexus laws before choosing a formation state.

Delaware is the best state to incorporate an online business if you are forming a large corporation. Small businesses may find Nevada and Wyoming to be more favorable due to lower filing fees and taxes.

Deciding on Your State of Incorporation

While determining your business structure, you should also consider the place where you would be forming your business. You can create a corporation or a limited liability company (LLC) in any of the 50 states without having to live there.

The state of registration is basically the state where you file your formation documents. If you operate your business in a different state than where you formed it, you must register to conduct business in that state. The concept under which a business entity formed in a foreign state becomes eligible to conduct business in another state is commonly known as foreign qualification.

For example, let's say you live in California but incorporate your company in Nevada in order to take advantage of the favorable tax laws. Now if you also wish to conduct business in California under the same company, you will have to register your company as a foreign business entity in California. Thus, your company will be incorporated in Nevada and registered to conduct business in California. This will subject you to several fees and taxes including state income tax in California in addition to the annual fees in Nevada.

If yours is a small business with not more than five shareholders, it is always advisable to form an LLC or a corporation in the state where you work. This way, you will not have to file papers or pay fees in two different states. Irrespective of your state of formation, you are usually required to comply with the tax requirements of the state where you conduct business.

Factors to Consider When Choosing a State for Your LLC

When selecting the best state to form an LLC for an internet business, consider the following critical factors:

  • State Taxes: Some states, such as Wyoming and Nevada, do not have state income tax, which can significantly reduce your tax burden. Others, like California and New York, impose higher state taxes on LLCs.
  • Annual Fees & Compliance Costs: Each state has different annual reporting fees, franchise taxes, and business renewal requirements. States like Delaware have relatively high franchise taxes, whereas Wyoming offers lower recurring fees.
  • Privacy Protections: If anonymity is a concern, states like Wyoming allow LLC owners to remain private by not requiring ownership details in public records.
  • Legal Environment: Delaware’s Court of Chancery provides business-friendly rulings, but small businesses may not benefit as much unless they seek investment or face complex legal disputes.
  • Foreign Qualification Costs: If you form your LLC in one state but operate in another, you’ll likely need to register as a foreign entity in your home state, incurring extra fees and paperwork.

Incorporation or Formation Fees

Income tax, filing fees, and franchise taxes vary from state to state. You must usually pay a filing fee while submitting your incorporation or LLC formation papers. This fee is quite low in some states (for example, it's just $50 in Colorado and Arkansas), while it's very high in others (for example, its $450 in Connecticut). However, since it's a one-time fee, it doesn't have much impact in the long term.

Annual Fees

Most of the states charge you an annual fee while some may also charge you a franchise fee. In California, for instance, you must pay an annual fee of $20 for an LLC and $25 for a corporation, along with your annual report. In addition to this, you must also pay a franchise tax of a minimum of $800 per year. Franchise tax is the tax you pay to the state for allowing you to conduct business; you must pay it even if you incur losses.

The Best State to Incorporate

If you are on a tight budget, you should incorporate or form a company in a state where fees and taxes are low. Nevada and Wyoming have low filing fees, and neither of these two states has franchise taxes or state-level income taxes.

Wyoming offers business facilities comparable to those available in Nevada and even goes further when it comes to privacy protection. In fact, Wyoming was the first state that allowed forming an LLC. It's also among the few states that allow forming a single-member LLC. However, although its legislature is favorable for businesses, it does not have a well-established case law.

As you might have observed, most of the large corporations are incorporated in Delaware. It is the state where more than 50 percent of all the listed companies in the United States are incorporated.

Delaware has a pro-business legal system that includes a separate Chancery Court dedicated to resolving business disputes, thus allowing for a much quicker resolution than other states. Businesses also find it helpful to have their cases reviewed by a specialized business judge rather than a jury.

Another major benefit of incorporating in Delaware is that venture capitalists and big investors are usually familiar with Delaware's corporate law and therefore mostly prefer to deal with Delaware-incorporated companies.

Although Delaware may not be the cheapest state in terms of filing fees, it's quite efficient for large corporations that involve complex business matters like mergers, governance, and litigation. However, small businesses may not be able to take advantage of all the benefits offered by Delaware. If your company doesn't require venture capital or a business court, you may not benefit much from incorporating in Delaware unless it's your home state.

Best States for an Online LLC & Why They Stand Out

While Delaware, Nevada, and Wyoming are often considered the top states for incorporation, each has distinct advantages:

Delaware

  • Home to over 60% of Fortune 500 companies due to its robust corporate laws.
  • Offers a dedicated business court (Court of Chancery) that resolves disputes efficiently.
  • Best for businesses seeking venture capital or operating at scale.
  • Higher annual franchise taxes and fees may not be ideal for small businesses.

Wyoming

  • No state income tax and no corporate income tax.
  • Strong privacy protections for business owners.
  • Allows anonymous LLC ownership, which is beneficial for those seeking discretion.
  • Lower annual fees compared to Delaware and Nevada.

Nevada

  • No state income tax and no franchise tax on income.
  • Strong privacy laws that protect LLC owners.
  • No information-sharing agreement with the IRS.
  • Higher annual fees than Wyoming but still more business-friendly than other states.

Texas & Florida (Honorable Mentions)

  • Texas offers no state income tax but has a franchise tax for businesses above a revenue threshold.
  • Florida has no state income tax, making it attractive for digital entrepreneurs.
  • Both states have large markets, making them viable options if you plan to hire employees or expand locally.

Should Digital Nomads or Remote Businesses Incorporate in Another State?

Many internet business owners operate without a physical location, leading them to wonder if they should form their LLC in a tax-friendly state. However, important considerations include:

  • Nexus Laws: Even if your LLC is formed in a no-tax state, you may still owe taxes in the state where you operate or reside.
  • Registered Agent Requirements: Most states require a registered agent with a physical address, meaning you may need to hire a service to maintain compliance.
  • Banking & Legal Implications: Some banks and financial institutions prefer dealing with businesses registered in the owner’s home state, which can affect ease of banking and securing credit.

For digital nomads or fully remote businesses, Wyoming often provides the most benefits due to its tax policies and minimal reporting requirements.

Frequently Asked Questions

1. Is it better to form an LLC in Wyoming or Delaware for an online business?Wyoming is often better for small businesses due to lower fees, no income tax, and strong privacy protections. Delaware is ideal for larger companies or those seeking venture capital investment.

2. What happens if I form my LLC in one state but operate in another?You will likely need to register as a foreign LLC in the state where you conduct business, which may involve additional fees and tax obligations.

3. Do I need to live in a state to form an LLC there?No, you can form an LLC in any state, but you must designate a registered agent with a physical address in that state.

4. Which states have the lowest LLC maintenance costs?Wyoming and Nevada have low maintenance costs, as they do not impose state income taxes and have minimal reporting requirements.

5. Can I avoid taxes by incorporating in a no-tax state?Not necessarily. If you live or conduct business in a state with income tax, you may still owe taxes there, even if your LLC is formed elsewhere.

If you need help with the best state to incorporate an online business, you can post your legal need 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.