How to choose the best state to form an LLC? This is an important question for new LLC owners to answer. While in most states, the process of forming an LLC is fairly similar, there are a couple of key factors that set different states apart from each other.
The most important difference between one state and another is how easy it is to form an LLC in that particular state. For example, some states allow you to form your LLC online, while others require you to mail in all of your forms via snail mail.
While some states place no requirements on the owners of an LLC, other states require that all LLC members be US citizens or permanent residents who are present in the United States when they form their LLCs.
Moreover, most states allow LLC owners to choose whether they want to be treated as a C-corporation or S-corporation. Some states even allow LLCs to opt for taxation under an EIN instead of the default federal tax ID.
What Is a Limited Liability Company?
A limited liability company is a business structure that allows its owners to enjoy personal liability protection.
The key difference between an LLC and any other type of business structure is that LLCs don’t have shareholders or stockholders; instead, they are made up of members who enjoy all the profits and losses associated with running the business equally on a per-member basis.
To take it a step further, most LLCs don’t have to make any kind of formal declaration about how the profits will be distributed or how much each member will contribute to running the business; instead, these matters are all decided informally between members as they operate their businesses day by day.
You’d think it would be pretty simple to form an LLC in any state with that in mind. Unfortunately, the reality is a bit more complicated than that.
First of all, before you can even start thinking about forming your own LLC, you need to make sure that another LLC doesn’t already take the name you have chosen for your new company in your state.
If you search your state’s business name database and the name you have chosen turns up as already taken, you will need to either choose a different name or consider forming your LLC in another state with more relaxed naming requirements.
Common Steps to Form an LLC in all States
Once you have chosen a name for your LLC that hasn’t already been claimed, you will need to gather the forms necessary for filing in your state.
While there are some variations from one state to another, most states follow a similar three-step process when it comes to forming an LLC:
Step 1: Choose an Operating Agreement and Distribute it to LLC Members.
The very first thing you’ll have to do is decide how your new LLC will be run on a day-to-day basis.
You’ll need to plan and create an operating agreement that details the rights, powers, and duties of each member of your LLC, as well as how the members will share profits, losses, and capital contributions.
Failing to create an operating agreement can cause you problems in the future because your LLC will not be considered valid in terms of state law until it has been formally organized and filed according to your state’s business registration laws.
Furthermore, if there is no formal operating agreement among your LLC members, each member is legally entitled to an equal share in any profits or losses associated with the business.
This means that if you have sole ownership of an LLC and you get sued, your personal assets will not be protected from being seized to pay off your business debts unless you can prove that your personal funds were used for operating expenses.
Step 2: Submit Your Articles of Organization or Certificate of Formation.
As you research the LLC filing process in your state, you will find that most state governments use one of two forms to organize new LLCs:
- Articles of Organization
- Certificate of Formation.
States that allow for the Articles of Organization typically also offer an online form available through their website to register an LLC; some states even provide you with a pre-written Articles of Organization form.
States that allow for the Certificate of Formation typically require that you download and print off a PDF file from their website. You complete all the necessary information then submit it to your state government by mail or in person.
In most cases, you will have to pay a filing fee ranging from $50 to several hundred dollars, depending on the state in which you are creating your LLC.
Although it is called a Certificate of Formation, this document actually serves as an operating agreement between all members that details how members will share profits and losses; Additionally, you may also elect to list out any capital contributions from each member.
It is important to note that the Certificate of Formation also serves as a public record in most states, and you will need to make sure your LLC’s name and address are included on it.
Step 3: Obtain an EIN for Your LLC.
Finally, after you have completed both the Articles of Organization or Certificate of Formation forms and paid your filing fees, you will need to obtain a Unique Employer Identification Number (EIN) for your LLC from the IRS.
The EIN is used as a unique identifier for corporations or LLCs and is necessary since it allows you to open bank accounts in your business’ name and pay federal and state taxes on its profits. To apply for an EIN, simply visit the IRS website and fill out Form SS-4.
This application is fairly straightforward and only requires you to provide basic information regarding your business, such as its address, description of its products or services, and your taxpayer identification number (usually a Social Security Number).
Once your LLC is created, it is good practice to register it with the state in which you conduct business and any federal agencies that regulate your profession (e.g., the Food and Drug Administration if your company makes pharmaceuticals).
Most government entities will provide a registration form. You need to distill all relevant information about your LLC, including name, address, and activity conducted within one or two paragraphs.
More complex organizations might need to provide additional information, but the form will usually direct you to what is necessary.
Domestic LLC vs. Foreign LLC
The essential step in forming a new LLC will be choosing between the two types of LLCs available to you: a domestic or foreign LLC.
Like it sounds, these terms refer to whether or not an LLC is formed inside the borders of its own state or if it is formed outside of those boundaries (i.e., overseas).
For example, a domestic LLC is formed within a state’s borders, while a foreign LLC must be formed outside of those same borders.
The choice between a domestic and foreign LLC is largely practical. On the one hand, you will have to pay extra fees in many cases if you form your new company as an offshore LLC instead of a domestic one.
However, a major benefit of incorporating your new company offshore is that you can generally avoid having to file separate state tax returns for your LLC in many cases. Instead, if you form an offshore LLC, your home state’s laws governing incorporation and taxation will apply.
The main downside of forming an offshore LLC as opposed to a domestic LLC is that if your company ever wants to do business or own property inside your home state’s borders, you will have to officially register your new company with the state.
This registration process can cost anywhere from $50 in some states all the way up to thousands of dollars and multiple trips back and forth between your bank and the state office building in other states.
The point is if you want to avoid having to register your LLC as a foreign entity with the local state government anytime in the future, forming a domestic LLC from day one will save you money and time over the long term.
Documents Filing Requirements in different states
There are a few things you should know about the documents filing requirements in different states.
- For starters, every state requires that an operating agreement be filed as part of the LLC formation application. However, it is important to note that this form won’t actually become effective until after all the administrative steps associated with forming the LLC have been taken, and a final filing has been made.
- Another point to remember is that some states require information about company members and managers to be included as part of the public record when an operating agreement is filed. Finally, your LLC is formed in one state does not mean you can automatically do business in other states. If you ever plan on opening a physical location or operating a sales office of some kind for your new company outside the state where it was formed, you will have to register your LLC with that state if required by law.
- Also, any designated managers you choose for your LLC during the initial formation process must be residents of the state you are forming in. So, if you choose someone from another state to manage your company but that person is not a resident of the state where it was formed, he or she will have to register as a foreign manager with the local secretary of state’s office.
List of Documents to File when Forming an LLC:
- Articles of Organization or Application for Authority ( some states may use one term, while others may use a different term)
- Operating Agreement
- Company seal/stamp
- LLC’s Federal Tax Identification Number (EIN) and Certified Copy of its State Tax ID Certificate
List of Documents that are not Necessary to File when Forming an LLC:
- Minutes or resolutions for any company meetings are internal documents used exclusively by the members themselves.
- Corporate By-Laws, which are internal documents used exclusively by members and managers.
- Corporate Resolution appointing a Registered Agent, as the company itself can be appointed as its own registered agent ( aka corporate officer ).
Note: Depending on where you live, you may or may not have to file separate state tax returns for your LLC. Because of this issue alone, forming an offshore LLC may be a smarter move than forming a domestic LLC from the moment you create it.
However, as mentioned earlier, other factors should be taken into account when comparing the costs and benefits of forming either kind of business entity.
If you form a domestic or foreign LLC without consulting with a lawyer first for some sort of legal advice, you may be left with a huge waste of time and money.
Role of Registered Agent
Because every state requires that an LLC appoint a registered agent to handle all official correspondence on its behalf, you should consider this appointment carefully before moving forward.
The main benefit of hiring someone like your company’s representative is that he or she will be responsible for filing any legal papers associated with the formation, management, and termination of your new business.
In some states, the registered agent will also be responsible for notifying your company of any legal proceedings or notices involving a lawsuit initiated by another party.
For instance, if you are sued, and your agent does not receive notice of the suit quickly enough to prevent it from progressing through the state court system, there is a chance that a default judgment could be awarded to the plaintiff in your place.
Registered Agent Requirements:
- The registered agent must be a resident of the state where you are forming your LLC.
- He or she cannot personally appear on behalf of your company in any legal proceedings. In other words, they cannot take the stand and be questioned by the court or a jury during trial. (Note: if you live in a state that doesn’t require you to have a registered agent, then you are not required to appoint one. In states that do require an LLC to have a registered agent but not a corporate officer or representative, the LLC itself can be appointed as its own registered agent)
- The address of your registered agent must be clearly listed in your Articles of Organization or other appropriate documentation.
State Requirements for a Registered Agent:
- Your registered agent cannot be an attorney. This is because attorneys are specifically prohibited by law from serving as registered agents in most states. Therefore, if you need to appoint someone who is an attorney or professional manager of some sort to act as your LLC’s representative, both he/she and your company will need to hire separate entities to fulfill the requirements of the role for their respective businesses.
- Your registered agent cannot be anyone who is a felon, has served jail time, or has been convicted of a felony offense within the past 5 years.
- The address listed in your Articles of Organization must be your registered agent’s physical location (as opposed to a legal address). This means that you cannot use the personal home address of your agent as the registered office location on your LLC’s paperwork. Offices used by attorneys, accountants, and most other professionals are not considered physical addresses – only residential or commercial properties are acceptable for this purpose.
- Your registered agent can be an individual, trust, or company, provided that it is physically located in the state where your LLC is being established. The only exception to this rule occurs when you are trying to form a Delaware LLC. As mentioned earlier, Delaware does not require its business entities to appoint a registered agent at all.
- If your jurisdiction does not specifically note any requirements regarding the appointment of a registered agent in your state’s LLC laws, you should check with the Secretary of State or another corporate filing office to see if they can provide any more information. For instance, some states do not permit businesses to have a foreign registered agent (an individual that resides and has their business address in another state), but others do. If possible, you should try to find a registered agent that is already familiar with your state’s business laws.
Benefits of Forming an LLC in Your Home State
If you decide to form an LLC in your home state, you will be afforded several benefits over those who choose to incorporate their businesses offshore.
First of all, when you form an LLC within the borders of your own state, it is treated like any other business structure and is granted many of the same rights as any other corporation. These include:
I. Limited liability protection. When you form an LLC within the boundaries of your own state, it is treated like any other business entity and granted limited liability protections just like a corporation or sole proprietorship.
This means that if one of your employees injures someone while working for you, your personal assets are generally not going to be at risk when they file a personal injury lawsuit.
II. The right to vote in business-related matters and elect company officers. When you form an LLC within the boundaries of your home state, it is granted voting rights and can appoint group leaders or other officers just like a corporation or sole proprietorship.
This means that if one of your employees causes major damage while working for you, you can hold a group vote among all of your other LLC members and elect new leaders to take charge of the company.
(Note: When forming an LLC under state laws, you don’t actually have to use words like “limited liability company” or “LLC” anywhere on the official documents filed with the Secretary of State’s office in your home state. Instead, you may form your company as an “L.L.C., Inc., Corp., Company,” etc.)
III. The right to raise capital in the future. When you form an LLC within the boundaries of your own state, it is granted all of the same corporate powers and abilities that a corporation could have and can therefore raise capital in the future through issues of stock.
This means that if your business is ever looking for outside investment or a way to fund major projects, you can introduce an LLC “stock offering” to potential investors and shot up the value of your company’s architecture.
IV. The right to sue and be sued as a separate entity. When you form an LLC within the borders of your home state, it is granted all the same legal rights and powers that any other corporation has.
This means that if you form an LLC authorized to conduct business in another state, it can sue or be sued as a separate legal entity without exposing its owners to liability.
V. The right to file taxes as a distinct entity. When you form an LLC under state laws, the business is generally required to file its own corporate income taxes on a separate schedule from its owners.
This means that any profits or losses generated by your LLC may be taxed at a different rate than those of the company’s shareholders.
This also means that if your LLC suffers major losses in one year and you have to use your personal funds to make up for the difference, you will not have to pay taxes on that amount of money.
As an individual filing under your own name, however, you would have to declare that part of your income as a loss – meaning you might end up paying more in taxes than necessary on revenues earned from outside sources.
In addition, when you form an LLC within the boundaries of your own state, it is generally required to file separate tax forms from the owners.
This means that if one of your employees steals money from your company and then files for bankruptcy without revealing his or her role in your organization, it will be much easier to recover these funds because they do not appear on your personal tax returns.
If the same employee embezzles funds from a corporation or sole proprietorship that you own personally, any unpaid amounts will show up directly on your personal income tax form, and it will be much more difficult to discover who took the money because of the way taxes are filed.
Does It Ever Make Sense to Form an LLC out of state?
- You might file for LLC status in another state if your home state does not offer the same level of corporate protection and tax benefits that other states do. This means that if your business has no problem raising capital or protecting its assets, it might make sense to form an LLC in a more profitable locale. This will generally mean passing on the right to vote for new company leaders and not having access to the same types of legal protections provided by your home state.
- In some states with less corporate-friendly laws, there are fewer restrictions on how many members an LLC may have (which means it might be easier to raise capital).
- There are also fewer restrictions on how many shareholders the business may have, which means that if you are hoping to start a large corporation and make your LLC a publicly-traded company , it might be easier to do in another state where corporate laws make it much easier for these types of businesses to be formed.
This should not suggest that it is a good idea to form an LLC outside your home state.
Before you take any steps toward incorporating your business in another state, make sure that the corporate structure will offer protections and benefits superior to those of your home state.
If not, it might be wise to remain incorporated within the borders where you live and conduct business – which means that you will be able to take advantage of the perks and protections given to LLCs formed in your state.
Are there any disadvantages to forming a Foreign LLC?
One of the major disadvantages of forming an LLC outside your home state is that you may be forfeiting protections and benefits given to businesses incorporated within your borders.
However, these drawbacks can often be overcome if you follow a few steps before deciding where to form your business.
- If you are hoping to raise capital from outside sources through a public stock offering, it might be easy to accomplish this if you incorporate it in a state that makes it easier for firms like yours to go public .
- If you are hoping to benefit from the type of legal protection given by your home state and want to maintain local voting rights on company matters (instead of having a vote cast by another member), there are two main ways you can ensure this:
- Choose an out-of-state partner who is already a voting shareholder in your LLC. This means that you could form an LLC in another state but keep all the same ownership stakes that your company had when it was incorporated within your home state. If more than one person owns a stake in the business, they can still maintain local ownership rights. If you have any out-of-state partners, make sure that they appear on the company’s incorporation paperwork as shareholders. Also, make sure your partners’ addresses are listed as your business address if they do not live in your home state. This ensures that all voting matters will be handled within their home states and makes it easier to cast votes.
Perform a close review of the protection and benefits your LLC will be receiving by incorporating outside your home state.
Before you begin the incorporation process, see what perks and protections are provided by each governing state. This way, you can choose an option that provides as many of these benefits as possible .
What is the cheapest state to form an LLC?
There are many reasons why a person or company will consider the formation of an LLC. Two of the main reasons to form an LLC are liability protection and tax savings.
Any state can provide these benefits, but it depends on what state laws allow.
The cheapest state to form an LLC considers not only the price of forming an LLC in that state but also the other benefits.
Cheapest states to form an LLC:
- Wyoming: $125
- Delaware: $90
- New Mexico: $50
- Nevada: $70
Before you decide on which state is the cheapest place to form your LLC, be aware of the following facts:
- The price of forming an LLC varies in each state.
- The cheapest state may not always be the best place to form your LLC. Many states have special laws that may benefit you and your business. You must know what those laws are before deciding where to form your LLC.
- If you decide to form your LLC in the cheapest state, make sure you understand the tax laws for that state. In each state, there is a different corporate tax rate on profits and revenue.
- If you want to save money when forming an LLC, be aware of services that reduce the cost. Some states offer free formation, while others offer discounts if you form the LLC online.
- Other benefits that may persuade you to form your LLC in a certain state are special incentives, free training, and legal assistance.
Why Incorporate in Delaware?
Delaware is a great state to form an LLC and one of the cheapest places in the country.
The benefits associated with forming an LLC in Delaware are trust, liability protection, tax savings, and a flexible management structure.
Incorporation in Delaware also has other benefits such as:
- It’s not unusual for a lawyer to recommend incorporation in Delaware because of the legal protections and tax benefits.
- The laws in Delaware are also favorable for other reasons, such as it’s an international trade hub, many corporations use Delaware to protect minority stakeholders from lawsuits, and if you receive a letter threatening litigation from a corporation or individual lawyer; they must file a lawsuit against your LLC in Delaware; therefore you will know where the complaint is coming from.
The benefits of forming an LLC in Delaware outweigh any negatives.
To gain these benefits, the person or company must form the corporation correctly by following all state laws and filing all required documents with the Secretary of State’s office.
If licenses are not filed correctly, it is possible to lose the benefits of incorporation.
- Incorporating in Delaware may also have other legal and tax benefits, such as: exempting the company from state income taxes, favorable tax treatment for corporations owned by members that qualify as S-Corporations, being able to charge clients different prices depending on what state they are located in, and the list goes on.
- Being able to offer your company for the sale or transfer shares without paying a state income tax. This may allow you to make more money from your business due to a lack of taxation. However, if the LLC is not set up properly or run correctly, incorporating in Delaware has many disadvantagesare.
Below are a few disadvantages to incorporating in Delaware:
- Many corporations prefer this state for their headquarters, but there are consequences if the LLC does not have an office within the state. To avoid these consequences, you must register an agent for the service of the process. This will allow someone to accept legal documents, correspondence, and subpoenas. Also, if an attorney is needed to handle any legal issues with your LLC , he or she can be hired by the registered agent.
- If you incorporate in Delaware but reside in another state (or a different country), there will be a risk of personal liability. This means that if someone has a complaint with your business, they can sue you personally. However, if the LLC is properly run and managed, no personal liability could harm you.
- Family members are not allowed to serve as corporate officers or directors of the corporation. This is to avoid conflicts of interest and create a non-family atmosphere during decision-making processes.
- If you incorporate Delaware, all decisions must be made by the board of directors. This can restrain single or multiple owners from deciding on their own or without approval. A simple solution to this problem is having a majority running the company and one person serving as a tie-breaker if needed.
Why Incorporate in California?
The benefits of forming an LLC in California include:
- According to the State Franchise Tax Board, residents and companies incorporated in California can claim up to $800,000 tax credit. If you have been paying taxes for years and consider moving your business out of the state , it would be beneficial to consider incorporating or registering a DBA (doing business as) in California.
- The minimum fees to register an LLC are $70 for the first year and a $50 annual renewal fee every year after that. If you incorporate or register your business with any other state, you will have to pay at least $200-300 more per year.
- To have a Delaware corporation, you must apply for tax exemption with the IRS and pay federal taxes. If you would like to avoid paying federal income taxes on your company profits, you may register as a California S-Corporation or simply form a regular corporation in California.
- The LLC offers the best protection from liability while operating a business. If you are operating a company in California, using an LLC will protect your personal assets from any mistakes made while running the corporation. Also, if a partner makes a mistake and faces litigation, that person may be sued personally since his or her name is on the articles of incorporation. However, if the LLC is properly set up, it will protect from all losses, damages, and liabilities incurred by the company.
Disadvantages of Incorporating in California:
- It is estimated that if you form an LLC in California or do business as (DBA) a single person will have to pay almost $400 more per year, depending on their business income.
- The minimum annual fee for maintaining a corporation in California is $800. If the LLC is registered as a partnership, there will be no fees.
- Many businesses prefer to set up their headquarters in Delaware due to its legal system and access to federal courts. If you plan on starting an LLC in this state, it would require a two-day minimum stay, and the cost of living in Delaware is more expensive than in other states.
- If you form an LLC in California, there will be no restrictions on the number of allowed members. This can make dividing profits and assets difficult if they are not divided properly from the beginning or if one member does not follow through with their responsibilities as a partner.
- California does not offer any tax incentives for choosing to register an LLC in this state. Most other states and countries have favorable benefits and taxes when incorporating or registering your business with them. This can provide a major advantage in terms of reducing costs and taxation imposed on your company and the personal profits of the owners.
- If you form a Delaware corporation, you are required to have at least two or more officers and directors in addition to the company secretary. This is not the case for California LLCs. The minimum number of members that can be included in an LLC makes it easier to manage personal financial decisions compared with a corporation.
Why Incorporate in Wyoming?
The benefits of forming an LLC in Wyoming include:
- The minimum registration fee is only $50! Many other states charge hundreds or thousands just to register your business.
- You will pay no annual fees for operating a corporation. In California, it can cost you up to $800 per year to maintain your corporation.
- Wyoming is the best state to set up an LLC for tax exemption. It does not require you to have a specific business or set up any corporations within your states. Therefore, all of your profits will be 100 percent yours.
- You are not required to maintain any officers and directors, making it easier on one person or multiple members. The only member must be listed as the member in charge (MIC). This can prevent confusion if there are multiple members since each owner’s name will be listed under their designated percentage share of LLC ownership.
- You cannot get personal liability protection from your corporation in this state. To receive this protection, you would need at least two partners and a registered agent to accept any official service papers.
- If you feel that it is too difficult to form an LLC in this state, there are other alternatives. You can form a corporation and then convert the registration into an LLC or pay the fees for operating your company as a sole proprietorship. The latter may be ideal for single owners or even partners who do not want their personal assets to be at risk in case of loss or if they face litigation due to mistakes made while running their company.
Wyoming has many unique advantages over other states when choosing either corporations or partnerships . This is why it is one of the main choices for business owners living in California who wish to start a new venture out of state.
Overall, the most important thing to consider when formulating your LLC is whether or not you are willing to pay more money than in other states.
Why Incorporate in Nevada?
The benefits of forming an LLC in Nevada include:
- The only required initial fee for registering a corporation is $75 , making it one of the least expensive states to register your business.
- If you form a corporation, you will have access to more affordable health insurance. This can be very helpful if your business requires employees. Many other states do not offer any health coverage or cannot accommodate workers that fall within certain income brackets.
- You will pay zero percent corporate tax on your profits. It is also possible to reduce what percentage of taxes you pay by having lower-wage earners on payroll instead of higher-paid staff who earn most of its revenue. This could be beneficial if you plan to hire employees shortly.
- Nevada allows you to register a corporation anonymously if you do not wish your personal information listed on public documents. This is one of the most important benefits for those who want their business and personal identities separate without forming an LLC. You can also incorporate under a fictitious name if desired.
- Your company will need at least two officers or directors if it is registered as a corporation . When forming an LLC, this number is reduced to just one person, which could save you time and money in maintaining corporate records since multiple people would not have access to them anyway.
- If multiple owners are involved in each type of business entity, then each company will be subjected to a separate filing fee. These fees may add up over time with the number of corporations that are formed so that you could incur additional costs.
- Nevada is not as private as Wyoming when it comes to its state laws regarding corporations. Anyone can request information from your company through public records, including your home address and phone number, if they wish.
You should always weigh out all of the options carefully before choosing how you would like to register your business entity.
However, keep in mind any plans for hiring employees or expanding your company beyond one owner to influence what type of business structure is best suited for you.
For instance, if you plan to hire independent contractors shortly, having a corporation could be the easiest way to maintain records for each worker.
Why Incorporate in Alaska?
The benefits of forming an LLC in Alaska include:
- Your business will have privacy. The state does not require you to list your name on public documents or reveal other personal information. If you choose to be anonymous, your company and its assets are protected from being seized by creditors. This is one of the main reasons why people incorporate in Alaska.
- The fees to register a corporation are not as high as they are in other states. There is also no state income tax for corporations, which can save you money, especially if you plan on earning a significant amount of revenue from your business.
- Alaska allows you to form an LLC online and receive the Certificate of Formation within minutes. This is a much more convenient way to register your company, especially those who have never done so before.
- There are no annual report fees when you incorporate in Alaska. The other states will charge you an annual fee and require that you submit an income statement and balance sheet each year.
- Your corporation will be treated as a separate entity from you if any legal issues occur . This can lead to having your personal assets seized by creditors or even the government in some cases. You are not required to pay taxes on corporate profits as an individual since it is a separate entity.
- The state of Alaska does not allow for anonymous incorporation. All new corporations will include the names of directors or officers in public records. Even when the company is being run under a fictitious name, there is still a requirement to list who is responsible for maintaining the business.
- You are not permitted to form an LLC online in Alaska . In other states such as Wyoming, you can do this as long as you have a certificate of good standing from your previous state or country and are filing your application with a registered agent in Alaska. Most people choose to use a lawyer, but this can be a hassle if you just want to complete the incorporation paperwork on your own.
- There are an additional 100 pages that need to be filed when incorporating in Alaska. This is much more extensive than other states and could take up valuable time that could have been used elsewhere for a more productive purpose.
If you choose not to use an attorney to register your business in Alaska, you will have to fill out a notice of formation under 5 AAC 97.150 and submit the filing fee online through the Corporations Commissioner’s office.
Why Incorporate in South Dakota?
The benefits of forming an LLC in South Dakota include:
- You will not be required to pay state income tax on money earned from your business, allowing you to retain more profits for yourself. Since there are no personal or corporate taxes in this state, it is often used as a loophole for those who wish to avoid paying their fair share.
- They have no annual report requirements. This is not true in certain states where you are required to submit an income statement and balance sheet each year. As long as your business remains profitable, there is no need to file these documents with the state government or pay additional fees.
- If a creditor goes after you for any reason, your personal assets will be included in the judgment. In some states where you form an LLC online, there are strict laws that protect personal assets. However, this is not true in South Dakota.
- There are additional fees to incorporate there than in other states . To create a new corporation and maintain it each year, you will have to pay an additional filing fee.
- When registering a corporation in South Dakota, you will be required to submit the annual corporate report form from April 1st to July 31st of every year. This form is under SDCL 48-13A-1 et seq and can cost anywhere from $50 to hundreds of dollars to file.
You can register your business in South Dakota by taking a full-day seminar on the laws of this state and then filing online in a matter of minutes.
The drawback is that it can cost up to $300 for this service, so you should only opt for it if you are very serious about forming an LLC right away.
The easiest way to form a corporation in South Dakota is through a lawyer who has the knowledge and experience required to get the job done promptly. This will usually be anywhere from $300-800, depending on your legal needs.
The most important thing is that you choose an attorney who will work with you through each stage of the process, not just present you with a contract to sign.
There are several different ways in which you can form an LLC in South Dakota:
- The Express Plus LLC package is offered by the SD Secretary of State for $149. This includes all of the required documents that you need to get your business off the ground. You will be ready to do business as soon as it is formed and registered with the state government in Pierre, SD. This package is suitable for those just beginning to get their business off the ground and will not need the more comprehensive documents offered by a lawyer or corporation service.
- The Stand Alone LLC Package is also available from the SD Secretary of State’s office for $250. This includes everything you need to form your own limited liability company. However, you will have to register with the state yourself. This package is suitable for those who wish to do it themselves and only require the most basic services and documents.
- The Professional/Limited Liability Partnership (LLP) Package is available from law firms in South Dakota such as Dinsmore & Shohl LLP. They can register your business with the state and provide you with everything you need to do business; however, this can cost anywhere from $600-800. This package is suitable for those looking for a step up from the SD Secretary of State’s express services and wish to have more control over their own legal affairs.
Best State to Form a Corporation
The best state to register a corporation is, in most cases, the one that offers the lowest fees and filing requirements.
Wyoming is one of the most popular choices for these companies because it offers many different benefits over any other form of business entity. This includes:
You will only have to pay $75 when registering a corporation in Wyoming. This is significantly lower than the standard $125 fee charged by most of the other states.
For businesses that have multiple owners, this will mean less money out of your pocket.
If you do not want anyone to know about your business because it could cause problems or legal issues involved, then Wyoming is a good place to register your company.
The state offers corporations that are restricted, and there will not be any public records of your personal information . This makes it one of the most secretive states when it comes to business registration.
No State Tax:
You will not have to pay taxes on profits in this state, which is great for those who have recently started a corporation and have not made any revenue yet.
Most of the other business entities will be required to pay at least some taxes every year.
When forming a company in this state, you could choose from either an LLC or a corporation. This gives your business more flexibility in the future if you plan to make any major changes.
You will not need any minimum business capital because you could simply put your home address on your registration documents for as little as $50.
While there are many advantages of registering a corporation with Wyoming, some disadvantages may apply depending on what type of business entity you already have or plan to form in the future. These disadvantages include:
Small Pool of Employees:
This state does not allow corporations to employ people, which may be a problem for many companies that you run with a large staff. There are only two main industries that rely heavily on human employees in Wyoming—mining and tourism.
Both of these fields use low-wage labor, which could result in your company having to hire independent contractors to complete jobs that employees would otherwise do.
You will have to pay state income tax if you choose this state for a corporation. The rate is 2.9 percent, and there are only two tax brackets for single filers.
However, the tax is not due until April 15 of the following year when filing taxes for income earned during the previous calendar year.
If you are still unsure about which state would be best for your corporation, there are many advantages and disadvantages to consider before making a final decision on how you would like to register your business.
You may want to think about doing some research on the different benefits, costs, and businesses that are located in each state before you decide which would be most beneficial for your corporation.
Best State to Form Single Member LLC
In most cases, the best state to form a single-member LLC is dependent on your business needs and preferences. However , there are some states that may be more beneficial than others depending on certain situations you might encounter in the future.
These states include:
Sole Proprietorship: Wyoming, Delaware, Colorado
If you want to form an LLC for personal reasons and you have no intention of adding any other members in the future, then these three states would be good options.
This is because these are the only states that do not require a minimum number of members.
Multi-Member LLC: Delaware, Wyoming
If you are running an LLC and plan to expand in the future by adding additional members, then Wyoming is a good state to consider because it does not require any annual meetings or filing fees for multi-member LLCs.
These states also do not charge a separate tax on your income, which means you will only have to file a personal income tax in each state where you own property.
Single Member Corporation: Wyoming, Nevada
If you do not want to form an LLC, then forming a corporation may be your best option. This is because these corporate entities are the only business structures that can be owned by one person and registered as LLC .
However, there are still some states that may make more sense to register a single-member corporation in depending on your individual needs.
These options include Wyoming and Nevada, which do not require any minimum capitalization when forming a corporation.
Best State to Form a Trust for Your LLC
If you would like to protect your assets by forming a trust and establishing multiple layers of protection for your business, Delaware is the best state to form an LLC trust.
This is because this state does not collect taxes from trusts or corporations that are used exclusively as trusts.
This means that you will only have to pay taxes on the trust income received from your business if you live in Delaware and also own property there.
However, even then, you may not qualify for any state taxes depending on the circumstances of your situation and your other holdings.
- On top of not requiring tax payments on primary or secondary trusts, Delaware is also an excellent place to form a living trust because residents are not required to file any supplemental paperwork.
- If you live in another state and want to establish an LLC trust there, you will typically have to pay income tax on any corporate earnings that the trust receives and personal taxes on the net worth of the trust. This is because most states do not recognize trusts as separate entities and view them instead as business holdings.
- However, each state has different laws regarding forming a trust for these specific purposes. You should consult your attorney in the state in which you want to form an LLC trust to see if additional paperwork would have to be filed and how much it would cost .
Best State to Form an LLC for an Internet Business
According to the most recent report from the IRS, a total of 9.5 million businesses were registered in 2012, and 76 percent of these businesses conducted at least one transaction over the Internet.
- If you operate an e-commerce business or plan to open one in the future, then your best option is Delaware because it does not collect any taxes on the net income of corporations that are used exclusively as holding companies and are located in this state. This means you will only pay income tax on your business profits if you live in Delaware. You can also avoid personal property taxes for any goods that are purchased or stored in the state but may not be immediately sold to customers.
- Each state has different requirements for registration and tax filings when it comes to operating a business online. The best state to form an LLC for this type of business would also be Nevada because the state does not require any specific forms or paperwork to be filed if you conduct your company online.
In addition, the state also offers an additional incentive in the form of tax payment reductions for online businesses. This means that you will pay a lower business tax rate than your competitors who run traditional brick-and-mortar shops in Nevada.
Best State to Incorporate a Tech Startup?
If you plan to start a tech startup in the future, then Delaware is one of the best states to form an LLC.
- This state does not collect any taxes on income from single-member LLCs that are used exclusively as holding companies and have no physical presence in Delaware.
- However, if your business will be operating online or plan to open a retail location in Delaware, the state will collect taxes on revenue from those sources . In addition, if your business has multiple members, then you may be required to pay up to $250 per year for sole proprietorships and partnerships and $300 per year for limited liabilities companies.
- According to the most recent report from the IRS, about half of the startups in Silicon Valley were incorporated in Delaware . This is because the state provides a simple and affordable corporate structure that does not require any annual reports or fees for single-member LLCs.
The only potentially negative aspect to forming an LLC in Delaware is that you may need to appoint a registered agent for your company.
This is a person who has registered with the state to receive all legal service documents on behalf of your business, which will be very inconvenient if you live in another state.
Best State to Incorporate a Nonprofit Organization?
If you want to form a nonprofit organization, then Nebraska is one of the best states to form incorporation. This is because this state does not require any income tax for nonprofits formed in and operated exclusively from Nebraska.
However, you may be required to file additional paperwork with your local county clerk and pay an initial report fee when you file your nonprofit incorporation paperwork.
In addition, you may have to report additional information about the sources of your income and pay an annual fee if you receive any federal funding.
This is because Nebraska requires nonprofits that receive more than $500 a year in support from the government to register with state officials as charitable organizations.
Which states have the best business tax climate for forming an LLC or corporation?
When it comes to the states with the best business tax climate, you should look for a state that does not collect taxes on revenue from single-member LLCs that are used as holding companies and do not have any physical presence within the state.
This is because most states will not allow LLCs that serve as holding companies to file under their own names, so you may have to file as a sole proprietor instead of an LLC.
- You should be aware that Delaware collects taxes on revenue from single-member LLCs in some circumstances . For example, if your business has a physical presence in the state or if you are using the LLC to operate an online business. This means that your business will need to register as a sole proprietor or partnership if you change your mind later and decide to switch from an LLC.
- In addition, you should make sure that the state does not require all businesses operating within its borders to file regular reports with tax officials. This means that you may need to appoint a registered agent for your company if you live in another state.
- Finally, you should make sure that your business will not be subject to any additional fees if it receives any type of federal funding. This is because some states require nonprofits with more than $500 a year in support from the government to register as charities and pay an annual fee.
In addition, U.S. territories are also considered separate states for the purpose of incorporating businesses, so you should consult your Secretary of State to determine if they offer any tax benefits to LLCs.
Issues with Seller’s Permits in Some States
Your state may require that you obtain an additional permit or license in order to sell products out of your own home.
For example, if you live in California and operate a drop-ship business from your house, then you will need to first register as a “home-based seller,” which requires a $100 fee.
However, keep in mind that if you run a home-based business from your house, then it may raise legal issues when you attempt to sell the property later. This is because buyers will not want to purchase a property where they know that people regularly work on their own products or offer services.
Home Business Tax Breaks
If you do operate a home business, then you may be eligible for some special tax breaks. For example, most states allow homeowners to deduct property taxes and mortgage interest payments on the first portion of their primary residence that they use as a home office.
Other Ways to Save on Taxes
If you’re operating an online business, then you should check with your state’s Department of Revenue to make sure that you are not required to charge sales tax.
However, keep in mind that you may still be required to report and pay taxes on revenue from your business if it is large enough. This is because most states require any businesses with over $10,000 in annual sales or more than 200 transactions per year to pay income taxes.
In addition, you should also check with your state’s Department of Revenue to make sure that your business is not required to file regular reports. This means that you may need to appoint a registered agent for your company if you live in another state.
And finally, if the majority of your customers are located outside of the state, then you should check with your Secretary of State to see if you are required to pay state taxes.
Non-U.S. Citizens and non-U.S. Residents
If you are not a U.S. citizen, you also need to ensure that your LLC is formed in the correct state. This is because only one state – Delaware – allows non-U.S.-residents and non-U.S.-citizens to form LLCs within its borders .
In addition, if you are a non-U.S.-citizen operating an LLC from another state, then you may need to appoint a registered agent for your company in Delaware .
And finally, if you do not live in the U.S., then you should also make sure that your business is not required to pay any type of tax to U.S. authorities .
For example, if you are using an online business to sell products to customers in the United States, then you may be required to pay use tax on all purchases from U.S.-based customers.
Nonprofits and IRS Reporting Requirements
If you operate a nonprofit organization, then your state’s Secretary of State or Corporation Commission will likely ask that you register your business as a nonprofit corporation or foundation . However, you should also note the following:
The primary benefit of filing for nonprofit status is that it will allow your company to receive donations without paying taxes on them.
For example, if someone donates $10,000 to your organization, then they can claim it as a deduction on their tax return.
However, if your nonprofit organization has annual revenues of more than $25,000, then it will also have to pay income taxes like other businesses.
For example, if a nonprofit company makes $100,000 in revenue and spends $90,000 on salaries and overhead costs, it must pay taxes on the remaining $10,000 in income .
Can an LLC do business in multiple states?
Yes. An LLC is not required to register with the state or file annual reports in all of the states where it does business.
This is because the Tax Equity and Fiscal Responsibility Act of 1982 require the IRS to treat an LLC as a corporation for federal tax purposes, which means that your business will need to file a separate tax return every year regardless of where it is incorporated or operates.
However, an LLC in the state may be required to register with the state if it conducts business in a particular location, which means that your business may need to file multiple reports and pay multiple fees annually.
It’s also worth noting that certain states, such as Delaware and Nevada, do not require any businesses operating within their borders to file reports with state tax agencies. However, you should note that these states may still require you to appoint a registered agent and maintain other records.
This means that your business could be subject to additional disclosure rules in one or more states instead of filing just one set of forms or paying a single annual fee.
What are some examples of different types of business entities?
There are many different kinds of business structures to consider when you are trying to decide how to structure your LLC.
- Sole proprietorship — a business owned and operated by one person.
- Partnership — an ownership arrangement between two or more people, with all owners sharing in the profits and losses of the business.
- Limited liability company (LLC) — an ownership structure that combines aspects of corporations and partnerships. LLCs offer limited liability protection to their owners and have more flexibility than corporations.
- Corporation — a business owned by shareholders, with the board of directors elected by those shareholders. The corporation is taxed separately from its owners.
- S-corp (small business corporation) — a type of corporation that passes profits to its shareholders as personal income instead of corporate profits . Owners pay taxes on the money immediately instead of when they withdraw or take distributions from the corporation.
- C-corp (regular corporation) is a type of corporation subject to double taxation and requires owners to pay corporate taxes on their profits. Owners also get taxed later if they withdraw or take distributions from the corporation.
Which States Are the Best at Protecting My Personal Assets and at What Cost?
When you are performing your research into the best state to form an LLC, it’s highly recommended that you take a look at each of the various states’ annual filing fees and requirements for tax officials.
It is also important to consider which states offer the most personal protection while operating your business in that particular location.
This means making sure that you check how much insurance coverage you are required to have in the states that either of your home and business locations ‘ have a claim on them.
In fact, some states charge more for basic protection than others . Your goal should be to find the best combination of high personal protection with low annual fees. This will ensure that you get the most for your money.
Moreover, some businesses may need to purchase additional coverage for certain high-risk situations, such as a lack of fire sprinklers in their facility or location.
You should also carefully consider whether you would like to register with the state if you have operations in multiple locations or want to maintain legal protection from one state to another . These are all things that you should keep in mind when researching the best state to form an LLC.
How to Decide on a State for Your Real Estate LLC
- If you are considering conducting business in real estate, your LLC may need to be registered with the state your property is located in. This means that before you make a decision on where to form an LLC, you should check if the state property is located in requires businesses like yours to register .
- Furthermore, some states require additional registration even for property located within that state that a foreign LLC creates. You should check with your proposed business’s intended location as well as the state of registration.
- If you plan to do business in multiple states, you may be required to register your LLC separately for each one. For example, if your property was purchased with cash in California and is being renovated in New York, you will need to register your LLC in both places.
- One of the biggest reasons people decide to use an LLC is that it offers personal asset protection. If you are doing business outside of your state of residence, this may not be a high priority for you and can be more costly than what you actually receive. Before deciding on the best state to form an LLC, you should look at each potential location’s qualifications . Not all states’ LLCs are created equally. This means comparing business owner liability protection and annual fees for filing your LLC to that of other nearby states. You may find that it would be better for your situation to register in another state or even change the state in which you are registered. This will help ensure that your personal assets are protected and also save you money on the fees by comparison shopping.
Weigh Short-Term vs. Long-Term Real Estate Investment Risks and Rewards
Another thing that you should always consider before choosing where to register your LLC is the type of real estate investment that you are considering making.
For example, if you plan on investing in a rental property that will make passive income over time, this may be less risky than purchasing an extremely expensive home and remodeling it for sale.
This is important because the fee that you pay to register your LLC and the state’s business tax is based on the number of assets that your company owns.
For example, if one of your properties only earns $500 a month in passive income while another generates over $1 million per year , this can have an impact on which state is best for forming your LLC.
There are some states that are more expensive for annual fees and others that have a higher tax rate . If you do not think that this will be worth the investment, you should look into registering in a state where there is less of both required to protect your personal assets.
Expand Your Company Across State Lines
The other scenario that can change where you register your LLC is if you plan on expanding your business. If you want to expand, there are a couple of things to consider when trying to decide the best state for an LLC .
If you currently have operations in one location but plan on opening up another, it may make sense to get your LLC registered in that state. This will help to avoid paying the LLC registration fee more than once.
But, if you don’t mind keeping your business registered in a state different from where it was formed and plan on expanding out of state , then you can always register later when this happens .
Other Options for Business Owners
If your main priority is asset protection and you do not plan on growing your business state by state, you might consider other options for liability protection.
If you are just starting out and don’t think that it makes sense to register your LLC in multiple states, there are still things that you can do to protect yourself.
A good place to start an LLC is a Business Owners Policy from North American Specialty Insurance or a similar provider.
This policy will provide you with liability protection and additional coverages that are not included in your residential homeowner’s insurance. It also works to keep the amount of money that you pay for coverage down over time, increasing as your business grows.
To learn more about this policy and how it can help protect your assets, contact an independent insurance agent like those at Insure-Rite.
This will ensure that you get the best protection for your personal assets while lowering your overall costs of doing business.
You may even be able to amend your policy as needed in order to protect yourself from changing legal issues like those listed above.
Before You Decide on a State
So, which states offer the most personal protections? Based on rankings from Forbes, here are some of the top choices for individuals looking to protect their assets:
I. Delaware – ranked no. 1 overall for the fourth consecutive year. Delaware does not require LLCs with single owners to register or file a separate tax return as an added bonus.
II. Nevada – ranked no. 3 overall. Nevada waives the filing fee for its LLC state tax returns on the anniversary of each company’s formation.
It also applies a significantly lower income tax rate to LLCs than regular corporations.
III. Utah – ranked no. 6 overall and no. 1 for limited liability protection.
According to Forbes, Utah is the best state in America to form a company without worrying about lawsuits or your personal assets. It was also named as one of CNBC’s “top states for business.”
IV. North Dakota – ranked no. 8 overall. This state does not require LLCs to file an annual report and has no franchise tax for LLCs.
V. South Dakota – ranked no. 10 overall, but no 1 “best state” for limiting personal liability.
South Dakota only requires LLC owners who are residents of the state to file a tax return and pay taxes in the same way as traditional corporations.
All of those states are great choices for anyone who is trying to form an LLC, but the best state will be the one that has all of the elements you need at a price that fits within your budget .
The most important aspect to consider about any business or partnership is liability.
If you’re considering forming an LLC and want to keep your personal assets protected, you should definitely think about choosing one of the states listed above.
Best State to Form LLC: FAQ
Q. Is there a state with no personal liability protection?
A. Unfortunately, the answer is yes. If you are in Arizona or New Mexico and decide to form an LLC, then you risk losing all of your personal assets if your company fails or lays off employees.
Q. Is there a state that does not require LLCs to file an annual report?
A. Yes, and it is a very popular choice for many business owners: Nevada.
If you do not want to worry about filing forms for your company, then consider incorporating in Nevada .
This state requires users to pay $75 to file an annual report, in addition to their normal business taxes.
Q. How can I check my state’s LLC rules?
A. Contact your secretary of state’s office.
The website of each state provides the contact information for its secretary of state.
Q. How many states offer LLC protection for single-member companies?
A. Eight states allow just one member in an LLC: Delaware, Idaho, Iowa (does not require a registered agent), Kentucky, Missouri (does require a registered agent), Montana , South Carolina, and Washington.
This limits the liability someone would face if they don’t have enough money to pay debts.
However, you should also check your state’s business laws before deciding on a single-person company, as some states require members to act more like board members .
Q. Where can I go if I have more questions about LLCs?
A. A good place to ask is your local business chamber.
The chamber of commerce can connect you with a commercial law attorney , who can help you navigate through some of the intricacies of forming an LLC.
Q. Are there any other choices for LLCs?
A. Yes, some states allow an LLC to be either taxed as a corporation or as a partnership.
These states are Alaska, Arizona, California, Georgia (some), Massachusetts (partnerships only), and Nevada (taxed as partnerships).
Q. If I am considering forming an LLC in any state, what are the main things I should think about?
A. The most important aspect to consider is a liability.
You also want to make sure that there are no complicated regulations you must follow or fees involved with incorporating in a certain state.
Top LLC Formation Services
If you need help forming your LLC, consider hiring a service specializing in helping people form an LLC.
There are many different types of services available online, and they vary widely based on cost, experience, and the amount of assistance they provide.
Here are some of the most popular:
- Jurisdiction Solutions – offers LLC formation services for $69. This company will help you set up your file structure, manage your accounts and provide legal documentation.
- ZenBisuness Solutions – offers a low-cost LLC formation service for $149. This online business will help you locate and choose the best jurisdiction for your company.
- LegalZoom – offers an online package that costs less than $100. This service helps you form an LLC within days and provides a registered agent in each state where it is active.
- LegalShield – an all-inclusive LLC formation and registered agent package that costs approximately $600 per year. This service also offers a variety of other legal services .
- My LLC Formation (LLC Company) – a low-cost alternative to LegalZoom’s basic LLC package . This package costs less than $60 and provides you with a registered agent in the state where you choose to form your LLC.
- LegalGems – another service that offers low-cost alternatives to LegalZoom’s services. This package costs around $50, and the company will help you manage your LLC’s books and records while helping you file tax returns.
- IncNow (1-800FormAnLLC) – offers a low-cost LLC package . This service costs less than $75 and provides registered agent services in one state.
- LegalFilings (Legal Filings For Less) – an option that charges slightly more than IncNow for the same services. LegalFilings also provides registered agent service in one state, but its website says that it supplies the agent for free.
You should be able to find the best state to form LLC once you know what your goals are in writing a business plan.
As a reminder, in the case of any doubt or dispute, you may want to ask an accountant or lawyer.
If you have to spend that much money, it’s worth your while to save the extra hundred dollars for peace of mind.