Key Takeaways

  • Most LLCs are best formed in the owner's home state due to lower costs and simpler compliance.
  • States like Wyoming, Delaware, and Nevada offer specific advantages such as strong asset protection and no state income tax.
  • Foreign LLC registration is often required when operating out-of-state, adding costs and reporting duties.
  • Some states charge high annual fees or franchise taxes, which should be factored into the decision.
  • Consider your business model, physical presence, and growth goals before choosing a state.

LLC benefits by state are very similar. Although some states have more flexible reporting requirements, forming an LLC in many states means you'll have access to beneficial taxation and management options.

What Is an LLC?

A limited liability company (LLC), is one of the newest types of business entities. LLCs provide many of the same advantages as partnerships and corporations, with few of their drawbacks. If you want to form an LLC in your state, you will need to submit formation documents known as Articles of Organization and pay a filing fee.

One of the most interesting facts about LLCs is how these entities pay income taxes. Unlike other business entities, the Internal Revenue Service (IRS) does not have a specific tax classification for limited liability companies. Instead, these entities are taxed like other types of businesses.

The default tax treatment of an LLC will depend on the number of members the company possesses. If an LLC has a single member, or owner, it will receive sole proprietorship tax treatment. Multi-member LLCs are taxed as partnerships by default.

LLC Tax Advantages

Forming an LLC can be very beneficial when it comes to your company's tax burden. The tax rate that your company will pay depends on the owner's income. If an owner has a high net income, the tax rate may end up being lower than a corporation.

Another tax benefit of LLCs is the ability to avoid double taxation. With a corporation, company profits can be taxed twice, which isn't the case with an LLC. Only money distributed to LLC members is subject to taxation.

A lack of franchise taxes is another advantage of LLCs. In many states, corporations must pay an annual franchise tax, but in these same states, this tax may not apply to LLC companies. Whether or not your company will need to pay a franchise tax can depend on your state, so you should be sure to contact your state's tax agency for more information.

LLCs also have several tax advantages:

  • Profits are always taxable--Members of an LLC must pay taxes on their share of company profits, even if these profits haven't been distributed.
  • Property taxes--LLCs are not exempt from property taxes. Corporations are exempt from these taxes in some states.
  • Self-employment taxes--An owner of an LLC must pay self-employment taxes if they work in the company.

Comparing LLC Benefits by State

While LLC benefits are generally consistent across the U.S., individual states offer unique advantages that may influence where you form your company. Here are key differences to consider when comparing LLC benefits by state:

1. Home State AdvantageFor most small business owners, forming an LLC in their home state is the most cost-effective and straightforward option. Doing so avoids extra fees and legal complexity from operating as a “foreign LLC” in another state, which requires additional registration and maintenance fees.

2. Business-Friendly StatesSome states are known for providing favorable conditions for LLCs:

  • Wyoming: No state income tax, low annual fees, strong privacy protections, and asset protection.
  • Delaware: Popular for companies seeking venture capital; it has a specialized Court of Chancery and flexible business laws.
  • Nevada: No state corporate income tax or franchise tax, and strong privacy protections.

3. State-Specific Fees and TaxesDifferent states charge varying fees and impose different annual requirements:

  • California: Requires an $800 minimum franchise tax annually.
  • New York: Requires a publication requirement, which can cost several hundred dollars depending on the county.
  • Texas: No state income tax but imposes a gross receipts-based franchise tax.

4. Privacy ProtectionsStates like New Mexico and Wyoming allow LLCs to be formed without disclosing members’ names in public records, offering enhanced anonymity.

5. Asset ProtectionStates such as Nevada and Wyoming offer strong asset protection laws, shielding LLC members from creditors in many cases.

Before forming your LLC, it's critical to evaluate both the initial and ongoing costs, legal environment, and your specific business needs. If you form an LLC in a state other than where you do business, you will likely need to register as a foreign LLC in your actual state of operations, which adds administrative overhead.

Tips for Forming an LLC

Now that you know about some of the benefits of LLCs, it's a good idea to get some tips about how to form one of these companies. While it's true that starting an LLC does require formal registration and covering formation costs, the effort will be well worth it once you have created your company.

Getting a name is the first step of forming an LLC. Before you name your company, you should search registered business names in your state. This will save you time and will prevent you from choosing a name that conflicts with another business name. Typically, your company name will need an indicator such as Ltd. or LLC. You'll also need to avoid using restricted words in your company's name.

Filing Articles of Organization for your LLC is the next step of forming your company. Depending on your location, this document may also be called a Certificate of Formation or a Certificate of Organization. Regardless of the name, you will use your Articles to notify your state of important information about your business, including:

  • Its name.
  • Its address.
  • The number of members.

In most states, you'll need to submit your Articles with the Secretary of State. When submitting your formation documents, you'll also need to inform the state of your registered agent's name. Your agent will be your business's main point of contact for both state and legal notifications.

Paying a filing fee is also required. Typically, this fee will be around $100, although it can be higher in some states. In California, for instance, you'll need to pay an initial filing fee and then an $800 annual tax to maintain your LLC. Your state may also have a publication requirement, which means you'll have to publish a notice of LLC formation in a local newspaper. You may need to have your notice published for several weeks before the requirement is fulfilled.

Frequently Asked Questions

1. Is it better to form an LLC in Delaware, Wyoming, or my home state? 

Usually, forming in your home state is more cost-effective unless you have specific needs like raising venture capital or seeking privacy protections.

2. What is a foreign LLC?

A foreign LLC is an out-of-state LLC doing business in another state. It requires registration and may incur extra fees and reporting duties.

3. Which state has the lowest cost to form an LLC?

Wyoming is often cited as one of the cheapest states due to its low fees and no state income tax.

4. Can I avoid state taxes by forming an LLC in a no-tax state?

Not necessarily. You must still pay taxes in the state where you operate or generate income, even if your LLC is formed elsewhere.

5. What factors should I consider when choosing a state for my LLC?

Consider startup and ongoing costs, tax obligations, legal protections, compliance requirements, and where you physically conduct business.

If you need help with LLC benefits by state, 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.