Limited liability companies (LLCs) are a popular business entity choice for budding entrepreneurs and seasoned business owners because of the many benefits they offer. If you’re considering forming an LLC, you may have heard that some states offer advantages when it comes to LLCs. While this is true, forming an LLC in a state that’s not the state where your business is based is not always beneficial.
Here, you find details about the best states to form an LLC and why it may not be advantageous to choose one of those states.
What is LLC?
An LLC is a business entity that combines some of the features of a sole proprietorship or partnership and those of a corporation. Like a corporation, LLC owners, called members, have personal liability protection because members are considered separate entities from the LLC itself. The LLC thus has its own obligations, for which members have no personal responsibility.
An LLC also offers the same pass-through taxation of sole proprietorships and partnerships. The LLC has no tax obligation, and the profits are instead passed through to members to be taxed at their personal tax rates. Profits are reported on Schedule C of members’ personal tax returns.
LLCs also offer management flexibility without the management requirements that come with a corporation.
Forming an LLC
To form an LLC, you simply have to file a document with your state, which is usually called the articles of organization. Each state has its own document and process for LLC formation, as well as a fee, which can range from $40 to $500.
You can find guides, including state-specific guides, for forming an LLC on HowToStartMyLLC. It also offers many articles detailing other specific topics regarding LLCs.
Best States to Form an LLC
As mentioned, some states offer advantages when it comes to LLCs and for doing business in general.
Delaware often tops the list of best states to form an LLC. The LLC formation fee is reasonable, at $90, and its franchise taxes are relatively low compared to some other states. Delaware also does not tax out-of-state income, so if you’re selling in other states, that income won’t be subject to Delaware taxes.
Additionally, Delaware has very business-friendly laws and the Court of Chancery System, which allows business owners to settle disputes quickly. Out of all states, it also offers the highest level of personal liability protection for LLC members and reduced fiduciary duties for members.
Finally, Delaware boasts a strong economy and a highly educated workforce.
Interestingly, Wyoming was the first state to recognize LLCs as business entities, which occurred in 1977. The state has a highly pro-business environment, and has no state personal income tax, no corporate tax, and no franchise taxes. It’s affordable to form an LLC in Wyoming and comes with a cost of only $100.
Wyoming also offers a high level of personal liability protection for LLC members, reduced fiduciary responsibilities, and a layer of privacy for members, as member and manager names do not have to be disclosed on the LLC formation documents.
Nevada has a high LLC formation fee at $425, but it has no state income tax or franchise tax. It also has no corporate tax, and very pro-business laws. Additionally, it offers strong liability protection for LLC members, as well as privacy protection.
The tax benefits are the main reason that entrepreneurs often turn to Nevada for LLC formation.
Ohio often does not get recognized for its LLC advantages, but the state is an increasingly popular destination for businesses. LLC formation fees are only $99, and Ohio is one of the few states that have no LLC annual reporting or fee requirements.
Ohio is also quickly becoming a tech and industry hub, with companies like Intel and Google investing billions of dollars in facilities in the state. Ohio’s three main cities, Cleveland, Columbus, and Cincinnati, all have strong support systems for entrepreneurs.
North Carolina boasts the Research Triangle, which is the area surrounding Duke, North Carolina, and North Carolina State Universities, giving the state a highly educated workforce.
The state also has favorable business laws, low corporate taxes, and a $125 LLC formation fee.
Foreign LLC Registration
Now, here’s the catch – foreign LLCs. A foreign LLC is an LLC that is doing business in a state other than the one where the LLC was originally formed. LLCs must register as a foreign LLC in each state where they do business.
So, for example, if your business is located in Kentucky, but you decide to register your LLC in Delaware because of its advantages, you still have to register as a foreign LLC in Kentucky. This means that your business is subject to the laws, fees, and taxes of both states, so you’ve basically doubled your administrative costs and requirements by originally forming your LLC in Delaware.
Each state has its own rules as to what constitutes doing business in the state, thus requiring foreign registration. Generally, you’re considered to be doing business if:
- You have any kind of physical location in the state. This applies even if you’re based in Kentucky but do all your sales in Delaware.
- You have any employees in the state
- You have business meetings of any kind in the state
- You have a business license or permit in the state
- Your business owns property in the state
- Your business has a bank account in the state
Check with your state to see what the requirements are to determine if you must register as a foreign LLC, but chances are, you do.
The bottom line is that it’s generally not beneficial to register your LLC in a state that is not the state where you are based, even though some states offer advantages for LLCs.
If you’re considering relocating to start your business, some states do offer considerable advantages when it comes to LLCs and doing business. However, if you’re not relocating, it’s highly likely that forming your LLC in your home state is the best choice. If you’re in doubt, be sure to consult your attorney and tax advisor so that you can make a fully informed decision.
Martin is an attorney with over 20 years of experience in commercial law, and business strategy. In his current role with Step By Step Business, he has been entrusted with reviewing all content and documents for legal compliance and handling company contract matters.