Here’s the basic bottom line - the best state to form an LLC is almost always the state you’re based in as long as you use a reliable LLC formation service. For the most part, anyone who tells you that a Texas LLC is fundamentally ‘better’ than say an Ohio LLC doesn’t know what they’re talking about.
Ask any reliable LLC formation service worth talking to and they’ll agree.
There are occasional exceptions to the rule, but starting an LLC in your home state is almost always the way to go. There may be corporate taxation differences between a Georgia LLC, a Montana LLC and an LLC in California, but keeping things close to home is usually your best bet.
If you’re planning to start an LLC of any kind in the near future, here’s all you need to know about the pros and cons of venturing further afield.
What Is the Best State to Form LLC in the US?
It’s the first (and seemingly most important) question daily by thousands of American entrepreneurs:
Which state is best to form an LLC?
Speak to almost anyone who thinks they know about the US business landscape and they’ll tell you the same:
Even when statements like these are based on a certain amount of logic, they’re almost always completely misleading. The reason being that even when there are advantages to say setting up an LLC in Missouri (or anywhere else), the issues associated with starting a business away from your home state can completely augment the potential benefits.
What is the best state to form an LLC for real estate, retail or any other business venture?
In almost all instances, it’s the state you’re based in - nowhere else.
Domestic LLC vs. Foreign LLC
When you establish an LLC in the state you’re based in, this is referred to as your ‘home state’ and is therefore established as a Domestic LLC. If you decide to form your business anywhere else, it will be considered a Foreign LLC.
In a typical example, you could live in New York and decide to set up a Michigan LLC. Conversely, you could reside in Detroit and decide (for any given reason) to set up an LLC in New York. In both instances, you would need to register you LLC both in the foreign state and in your home state.
Subsequently, this means setting up two LLCs, paying two state filing fees and forking out for two annual report fees. So already, you’re looking at TWICE the normal costs in some areas, along with twice as much admin to take care of.
States Charge Fines and Penalties
Every state has its own unique policies in place that apply when registering and running a foreign LLC therein. Potentially heavy fines and penalties are payable in the event that you fail to appropriately register as a foreign LLC within the allocated time.
For example, fail to register your foreign LLC appropriately in Connecticut within 90 days and you could face a monthly penalty of $300, payment of all outstanding taxes (plus interest) and the potential closure of your business. Many smaller businesses simply don’t bother with the formalities of the registration process to save time and money, though face thousands of dollars in penalties if (or when) they are tracked down.
Taxes Are Paid Where Money Is Made
One of the biggest mistakes you can make when forming an LLC is to focus too heavily on the potential ‘tax savings’ of setting up a foreign LLC. You may have heard that setting up an LLC in Utah or running a New Jersey LLC brings more tax breaks than those afforded by your own state, but this doesn’t mean setting up away from home is a good idea.
The reason being that if you set up a Wisconsin LLC (for example) but your LLC actually operates in your home state of Maryland, you’ll be paying taxes in Maryland as that’s where your business is doing business. The taxation system of Wisconsin will be completely irrelevant, as you are still technically running a Maryland LLC.
Worse still, you could find yourself liable for additional taxes and levies for registering yourself as the owner of an LLC in Wisconsin, meaning you’ll be paying way more than you need to.
There’s a chance you’ll have heard more than a few mentions of Nevada LLCs on the grapevine over the years. Many of which seem to suggest that Nevada is the place to set up a foreign LLC, if looking for the most cost-effective option.
In reality, this is all hype that really isn’t justified. For one thing, much of this information is penned and published by the companies that make huge amounts of money bringing new business registrations into the state. In addition, Nevada has a pretty poor record overall where fraudulent business activities are concerned.
An important lesson in the criticality of carefully assessing the reality of the situation, rather than buying into the hype and setting yourself up for disappointment.
It’s a similar situation with LLCs in Wyoming, which is often hyped as the ideal option for entrepreneurs setting their sights further afield. Wyoming may be a relatively generous state when it comes to things like low corporate taxation and benefits for business, but the negatives of setting up a foreign LLC are almost guaranteed to outweigh the positives.
Where you come across supposedly ‘independent’ advisors suggesting you set up your LLC in Wyoming (as opposed to your home state), you can pretty much rest assured that they stand to get something out of the deal.
There’s a reason why so many major brands and businesses set their sights on Delaware. In terms of Delaware LLC tax obligations for businesses, big savings can be made by upping sticks and relocating. If you’re a corporation looking for an affordable place to set up your HQ and do business, Delaware has more than its fair share of appeal.
In this instance, however, we’re talking the prospect of setting up a foreign LLC, though doing business in your home state. Unless you plan on setting up your LLC in Delaware and actually doing business in Delaware, you face the same complications and added expenses as you would with any other foreign LLC.
Home State vs. “Magical States”
The three state above are often singled out by (questionable) advisors as the ‘magic’ states in which to set up an LLC. Just as some will tell you that a Washington State LLC or a Kentucky LLC is always preferable to an LLC in Alabama.
In all instances, such advice either overlooks or fails to take into account the downsides of setting up a foreign LLC. Irrespective of the potential tax benefits a state affords entrepreneurs, the best state to incorporate an LLC is almost always your home state.
LLC in Your Home State
Setting up an LLC in your home state pretty much guarantees the quickest, easiest and most cost-effective establishment process, along with the best possible chance of long-term stability for your business. This is why most successful business owners and economists always advise keeping things close to home.
The state in which your business does business (as in where the transactions take place) is the state in which it should be registered. If you’re starting a business in Illinois, register your LLC in Illinois. If you’re considering relocating to Montana and setting up a business there, register a Montana LLC.
Don’t be blindsided by what appear to be irresistible perks associated with setting up a foreign LLC. There are (extremely) rare instances where setting up out-of-state could be advisable, but doing so should only be considered under the advisement of a qualified legal advisor.
If you run (or plan on starting) a business that will maintain a presence in two or more states, choosing which state to register the LLC can be a confusing issue. Though again, it’s a case of identifying which state is your ‘home state’ and registering it accordingly.
Identifying your home state can be as easy as considering a few simple questions. Where do most of your business transactions take place? Where is your primary place of residence? Where do you file your tax returns? Where was your driving license and your state ID issued? Where is the primary headquarters of your business? Where have you spent most of your time within the past 365?
More often than not, figuring out which state is your home state really isn’t rocket science. Seek support from a qualified solicitor if necessary, but you should be able to figure things out for yourself.
Online Business Registration
Last up, what happens if you’re planning on registering a business that operates exclusively online? Given that your business isn’t ever likely to have a physical presence or even any employees, can you take advantage of attractive corporate taxation in a foreign state?
The short answer is no, given how a physical business presence has no relevance on the whole thing.
Once again, it’s entirely down to where your business does business - where it is operated from, where the transactions are carried out and ultimately where it makes money. Irrespective of whether you run your business from a back bedroom, a nearby coffee shop or a permanent office, the same rules apply.
Setting up your LLC in a foreign state is an option, but you’ll simply be doubling the administrative workload and paying way more than you need to.
The 10 Worst States to Form an LLC
If your intention is to relocate entirely and set up an LLC in a foreign state, some states offer more desirable perks and privileges than others. Right now, perhaps the worst places to set up and run an LLC are as follows (in no particular order):
1. New Jersey
An excessive corporate tax rate of 9% coupled with high property taxes and elevated unemployment add up to an unappealing prospect.
Progressive in many ways, California remains behind the curve with a corporate tax rate of 8.84% and a sales tax rate of 7.25%.
3. New York
Corporate taxation in New York is currently set at 6.5%, with businesses also being forced to contend with spectacularly high property prices.
Connecticut has an elevated corporate tax rate of 9% and a sales tax rate of 6.35%.
The corporate tax rate in Minnesota is currently a whopping 9.8%, coupled with a sales tax rate of up to 8.37% in some areas.
Don’t be fooled by Ohio’s seemingly attractive 0% corporate tax rate - sales tax can be as high as 8% and individual income tax is payable up to 5%.
The current corporate tax rate in Maryland is 8.25%, alongside a sales tax rate of 6%.
A variable corporate tax rate of 4% to 8% applies in Louisiana, along with sales tax of 4.45% and individual income tax of up to 6%.
Businesses in Vermont face corporate taxation of 8.5% and an individual income tax rate as high as 9%. Sales tax can also reach 7% in some municipalities.
Iowa is home to the highest corporate tax rate in the country of up to 12%, along with individual income tax of up to 9% and sales tax of 6%.
Which states have the best business tax climate for forming an LLC or corporation?
At the opposite end of the scale, the following 10 states are famed for their attractive business tax climates (again, in no particular order):
0% corporate tax and 0% individual income tax, with a sales tax rate of just 4%.
Corporate taxation at a relatively high 9.4%, though coupled with 0% individual income tax and 0% sales tax.
3. South Dakota
No corporate tax or individual income tax in South Dakota, where the sales tax rate sits at 4.5%.
The current corporate tax rate in Florida is 5.5%, though with a 0% individual income tax rate.
Often highlighted as one of the most attractive states to set up an LLC, Nevada charges no corporate tax and no individual income tax.
The corporate tax rate in Montana is currently 6.75%, while individual income tax starts from as little as 1%. There’s also a 0% sales tax rate to sweeten the deal.
7. New Hampshire
Corporate tax in New Hampshire is a little high at 7.9%, though the state’s business enterprise tax rate is just 0.72%, individual income tax is zero and sales tax is also zero.
Set up your business in Utah and you’ll be liable for a corporate tax rate of 5% and an individual income tax rate of 5%.
Oregon imposes a corporate tax rate of 6.6% as standard, with 0% sales tax and an individual income tax rate starting from 5%.
Last up, Indiana is a popular choice for relocating businesses with its (soon-to-be) 4.9% corporate tax rate and individual income tax rate of 3.23%.