5 Best States to Form an LLC

If you’re starting a new company and have decided to form a limited liability company (LLC), you may have heard that some states have advantages when it comes to an LLC. This is true, and it’s a good idea to do your research about states and LLCs, because there are a number of surprises. 

Lucky for you, this handy guide does much of the work for you, highlighting the best states in which to form an LLC and why. 

An LLC is a business entity that offers liability protection for owners, as well as pass-through taxation, much like a sole proprietorship.

1. Delaware

Delaware is a favorable state to form an LLC. Delaware does not tax out-of-state income, so if you do business in other states, there’s no Delaware state tax. The cost to register your LLC is only $90 and franchise taxes are low. Also, Delaware has the Court of Chancery system, which allows businesses to settle disputes quickly. Finally, Delaware offers the greatest liability protection for members, as well as reduced fiduciary duties, and is said to have the US’ most pro-business laws.

Delaware is strong economically, with 3.4% growth in real GDP in 2021. It also boasts an educated workforce and low cost of living. Impressively, nearly two out of three (63%) Fortune 500 companies are incorporated in Delaware.

Fees and taxes

• LLC formation fee: $90
• LLC annual tax: $300
• Graduated income tax rate

2. Wyoming

Wyoming is another good state for LLC formation. Wyoming has no state income or corporate tax, and no franchise taxes. In addition, registering your LLC in Wyoming costs a reasonable $100. The paperwork is minimal and no operating agreement is required. Wyoming is also one of the few states that recognizes nonprofit LLCs and Series LLCs. 

A Series LLC allows for the segregation of members’ interests, assets, and operations into independent series. Each series is its own entity and can have its own finances. Wyoming also offers more liability protection than most states and limited fiduciary duties for LLC members.

Wyoming won the Tax Foundation’s award for best business climate in the US five years in a row. 

Fees and taxes

• LLC formation fee: $100
• LLC annual report fee: $60 or $0.0002 of your total assets, whichever is greater
• No state income tax

3. Nevada

Nevada offers many advantages for LLCs: there’s no state income tax, no corporate or franchise taxes, and no personal state income tax. Nevada’s LLC formation fee is high, at $425, plus annual filing fees as well. But the tax and other benefits outweigh this. Nevada also has strong liability and privacy protection, no operating agreement or annual meeting requirements, and favorable business laws.

Leaving out Las Vegas, Nevada also has a low cost of living.

Fees and taxes

• LLC formation fee: $425
• Annual list fee: $150
• No state income tax
• No corporate or franchise taxes

4. Ohio

Ohio’s LLC formation fee is quite reasonable, at $99. The state has no annual report requirement for LLCs and is home to a strong economy based around three hubs for tech and industry, Cleveland, Columbus, and Cincinnati. It also has a low cost of doing business and a low cost of living.

Fees and taxes

• LLC formation fee: $99
• Annual report fee: None
• Graduated state income tax rates
• No corporate income tax, though it does have a commercial activity tax based on gross sales

5. North Carolina

North Carolina’s greatest benefit for new businesses is its highly educated workforce. Known as the Research Triangle, the area encompassing Duke University, the University of North Carolina, and North Carolina State University pumps out most of this skilled workforce.

North Carolina also has a favorable regulatory environment for businesses, the lowest corporate tax rate in the country, and a low cost of doing business.

Fees and taxes

• LLC formation fee: $125
• LLC annual report fee: $200
• Low corporate taxes at 2.5%
• 4.99% income tax rate

Should You Choose a State Other Than Your Own?

If you’re thinking of forming an LLC in a state that’s not currently your home state, you may only be doubling your paperwork and filing fees. This is because you will likely still need to register as a foreign LLC in your home state and be subject to its laws and taxes as well as those of the state in which you form your LLC.

This is true even if you merely base your business in your home state, but don’t do any sales there. This is because your business headquarters must be in the state where you live, whether you work from your home or not. Most state laws dictate that you must physically move to the state in which you form your LLC in order to avoid registering as a foreign LLC in your original home state.

A foreign LLC is simply an LLC doing business in a state other than the one in which it’s registered. For example, if your LLC is registered in Alabama but you also do business in Georgia, you’ll need to register a foreign LLC in Georgia.

If you have an LLC in your home state but do business in other states, you likely need to register as a foreign LLC in all of the states where you do business. Each state has different rules defining what doing business in their state means. Check with the secretary of state in any states where you do business to see if you qualify. Generally, you are officially doing business in another state if:

• You have a physical presence of any kind in that state
• You have employees in that state
• You regularly meet with clients, managers, or investors in that state
• You are licensed to do business in that state

You also may be considered a foreign business if your business has a bank account or property in that state. However, if you’re an online business in one state and happen to make a lot of sales in other states, you’re probably not considered a foreign business and thus not required to register a foreign LLC.

In Closing

Generally, it’s best to form your LLC in your home state. But a number of states, including those listed above, offer particular advantages. Before creating your LLC, however, it’s a good idea to speak to an accountant and an attorney to make sure you’re making the right choice for you and your business. 

Forming an LLC is a major entrepreneurial decision that should not be done without professional advice.