Key Takeaways

  • Your home state is generally the best and simplest choice for forming an LLC due to lower costs and fewer administrative burdens.
  • Forming an LLC in another state may offer tax or privacy benefits but typically requires registering as a foreign LLC in your home state as well.
  • Delaware, Nevada, and Wyoming are popular LLC states due to business-friendly laws, tax advantages, and fast processing.
  • Factors to consider when choosing an LLC state include taxes, annual reporting requirements, privacy laws, and whether you plan to have a physical presence in that state.
  • Some states impose franchise taxes, publication requirements, or more stringent disclosure laws, which can impact cost and compliance.

A state LLC is a limited liability company that combines some advantages of corporations and partnerships. Most notably, LLC owners enjoy limited personal liability and tax-saving benefits.

If you start an LLC in your home state — the state where you live — it will be a domestic LLC. After you form an LLC, if you wish to do business in other states, you must register them separately in those states. An LLC registered in a different state from its principal location is known as a foreign LLC.

It's easier and less expensive to form a domestic LLC. It's also usually the best in terms of a long-term strategy for your company.

Choosing a State to Start an LLC

As you get ready to start your own LLC, you've probably heard that it makes a difference where you file your business paperwork if you choose to do so outside of your home state. Some states offer more financial benefits than others, but you should carefully consider all your options before forming an LLC elsewhere.

The most obvious place to start an LLC for most people is their home state. Some people don't realize they have a choice for where they can start their business, but you don't have to form an LLC where you live.

Home state filing is a good option for many new business owners, especially those who plan to conduct most or all of their business there and have a home and store in the state. You may be able to save money on fees by filing a domestic LLC since you won't have to register as a foreign business.

Keep in mind that “doing business” means more than just having a physical office — it generally requires you to have an active business presence. If you operate a domestic LLC, you won't have to find and pay a registered agent in another state to represent your interests there.

You should consider all the taxes and fees you'll be responsible for when operating a business. Therefore, if your business doesn't have a physical location — for example, you run a consulting business with no storefront — or if your plans are to conduct most of your business out of state, you may want to start your LLC in a state outside of your own.

Factors to Consider When Choosing an LLC State

When deciding which LLC state to choose for forming your company, it's essential to evaluate how each state's laws and fees align with your business goals. Consider the following key factors:

  • Tax obligations: Some states, like Nevada and Wyoming, do not impose personal income or corporate taxes. Others, such as California, levy an annual franchise tax or minimum fee even if the LLC doesn't generate income.
  • Annual reporting and fees: States vary in their LLC maintenance requirements. Some require annual reports, statements of information, or franchise tax filings. These can add complexity and cost over time.
  • Foreign qualification requirements: If you form your LLC outside your home state but do business there, you must register as a foreign LLC. This involves extra fees, paperwork, and maintaining a registered agent in both states.
  • Business licensing: Local jurisdictions often have additional permitting or licensing rules that may differ from state to state.
  • Privacy and disclosure: States like Wyoming and New Mexico offer stronger privacy protections by not requiring ownership disclosure in public filings.
  • Court systems and legal infrastructure: Delaware is preferred by many for its well-established Court of Chancery and business-friendly legal precedents.

By weighing these factors, you can determine whether forming a domestic or foreign LLC will provide the best long-term benefits for your specific business model.

Popular States for LLCs

Delaware is the most popular state in which to start an LLC. The state is well-known as one of the most business-friendly locations in the U.S. It's a small state geographically, but in business activity, Delaware has a large presence.

Delaware often offers big tax savings for Delaware LLCs who may not even do any business in the state. This is because it doesn't collect taxes on out-of-state income. Franchise taxes are low in Delaware, as are initial filing fees.

Another state that's popular for starting an LLC is Nevada. It's gaining a pro-business reputation due to the advantages it offers for LLCs.

One reason business owners favor Nevada is the state places no taxes on the following:

  • Capital gains
  • Inheritance
  • Business income

Nevada also has no franchise tax. However, be prepared to pay yearly fees and business license fees.

The state doesn't require business owners to hold yearly meetings, and they don't have to have operating agreements. Nevada doesn't have an information-sharing agreement with the IRS. Because the state requires little disclosure, business owners who prefer to remain anonymous in public filings appreciate the privacy the state affords them.

Both Delaware and Nevada have fast processing times, so business owners who want to get their LLCs up and running quickly often prefer setting up businesses there.

Wyoming isn't as well-known as Nevada and Delaware for LLC formation, but it's gaining in popularly quickly, mainly due to its lack of business income and franchise taxes.

While it's often cheaper and more convenient to form an LLC in the state where you live, you may have specific reasons for forming an LLC in another state. Be aware of the rules and regulations of the jurisdiction you choose to ensure you meet all requirements.

LLC State Requirements and Tax Considerations

Each LLC state has different filing and compliance rules, which can significantly impact your costs and obligations. Here's an overview of some of the more common requirements:

  • California: Imposes a minimum $800 annual franchise tax, plus additional fees based on income. Even out-of-state LLCs doing business in California are subject to these taxes.
  • Texas: Has no personal income tax, but LLCs may be subject to a margin tax based on gross receipts. Texas also requires filing a Public Information Report.
  • Florida: No state income tax and relatively low annual report fees make it attractive, especially for online businesses.
  • New York: Requires new LLCs to publish a notice in two newspapers for six consecutive weeks, which can cost hundreds to thousands of dollars.

Before selecting an LLC state, consider how these ongoing obligations will affect your business both financially and operationally.

Frequently Asked Questions

1. What is the best state to form an LLC?The best state to form an LLC is usually your home state, especially if you plan to operate there. However, Delaware, Nevada, and Wyoming are popular for their business-friendly laws and tax advantages.

2. What does it mean to register as a foreign LLC?Registering as a foreign LLC means your business is formed in one state but must register to operate legally in another. This is common if your LLC does business in multiple states.

3. Do I have to pay taxes in both states if I form an LLC outside my home state?Yes, if you form an LLC in a different state and conduct business in your home state, you may be subject to taxes and annual fees in both states.

4. Can I remain anonymous as an LLC owner?Some states like Wyoming and New Mexico offer more privacy by not requiring owners to be listed in public records, allowing for greater anonymity.

5. How do I choose a registered agent in a different state?You can hire a professional registered agent service to fulfill this role. They must have a physical address in the state and be available during business hours.

If you need help with an LLC in any 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.