For decades, the limited liability company (LLC) has been one of the most popular legal structures for small business owners. There are a number of reasons for this, but foremost among them is sheer flexibility. Simply put, the LLC structure provides business owners with a lot of wiggle room to run their company as they see fit. In fact, you can choose to start your LLC in any state, even if it’s not the state of your residence. Of course, this presents business owners with an important question: What’s the best state for LLC formation? (This is one of the most common questions that prospective LLC owners ask right behind: How long does it take to get an LLC?) Here’s a quick rundown.
LLCs Explained
To begin with, it may be helpful to review exactly what an LLC is.
The LLC is a type of business entity that provides business owners with a high level of personal liability protection. Simply put, LLCs create a clear line between the business and the business owner and, thus, between LLC assets and personal assets. This distinction may be preserved by maintaining a business bank account separate from any personal account.
What this means for the business owner is that if a lawsuit or creditor ever comes after the LLC, all personal assets are off the table. Courts cannot seize personal assets in order to cover the LLC’s liabilities. This provides entrepreneurs with a high level of peace of mind, particularly those entrepreneurs who work in litigious industries or environments.
The LLC is also popular because it offers tax flexibility, minimal administrative burdens, and flexibility for the LLC’s owners to manage the company as they see fit.
What’s The Best State To Form Your LLC?
Now, let’s get back to the question at hand: What’s the best state in which to form your LLC?
The answer may not be what you’re expecting. Simply put, and with few exceptions, the best state in which to form your LLC is the state where you currently live and do business.
Why is this the case? The answer is that when you form an LLC in the state where you live and do business, it’s considered to be a domestic LLC. You can always elect to base your LLC elsewhere, but this runs the risk that your company will be considered a foreign LLC. Maintaining legal compliance will then require you to register in multiple states, which may mean paying multiple annual fees and multiple sets of taxes.
For the sake of simplicity and for managing LLC expenses, it’s almost always best to stick close to home.
Exceptions to This Rule
As noted above, there are some possible exceptions to this rule. These include:
● You live in one state but do business exclusively in another. If your business operates exclusively in North Carolina (for example) but you live just over the border in South Carolina, then establishing your LLC in the state where you do business is probably the best option.
● Your LLC invests in real estate. If this is the kind of business you’re starting, you’ll want to register your LLC in whichever state you’re buying, selling, or renting properties.
● You’re a non-resident of the U.S. If you don’t actually have a home state, then you’ll likely just want to talk with a tax professional to determine the best venue for your LLC’s formation.
Which States Are Most Advantageous Toward LLC Formation?
As for which states offer the most favourable environment for LLC formation in general, there are several factors to consider: taxes, annual LLC fees, and more. Here are a few of the top options:
Delaware
Delaware’s reputation stems from its possession of some of the most business-friendly laws in the entire United States. For one thing, it’s one of only four states that offers an “anonymous LLC” option, which denotes robust privacy protection for LLC owners. This is just one of several reasons why business owners flock to Delaware.
Wyoming
Back in the 1970s, Wyoming became one of the first states to really popularize the LLC model, especially for companies looking to invest in real estate. Today, Wyoming offers a very business-friendly tax environment, as well as strong privacy protections for LLC owners.
Nevada
Nevada offers a tax environment that is just as favourable as Wyoming’s: LLC owners do not have to pay personal income taxes or franchise taxes. Note that all Nevada LLCs are required to provide the state with a list of all members and to update that list annually.
New Mexico
The State of New Mexico offers a number of enticing benefits to LLC owners, including very low annual LLC filing fees, no annual reporting requirements, and some robust privacy protections. All of these factors make it among the best places to consider starting an LLC, though again, it’s most advantageous for those who already call New Mexico home. It is one of the best state for LLC Formation
Arizona and Mississippi
These states may be lumped together as “honorable mention” picks. Though they don’t offer the same privacy protections and administrative benefits as the other states on our list, they have very low annual filing fees, making them pretty decent places to register an LLC.
Start Your LLC Right Where You Are
The bottom line for aspiring entrepreneurs: If you’re a U.S. resident, chances are the best way to start your LLC is to do so in the state you currently call home. There are exceptions, and a tax expert or business attorney can advise you further. But generally speaking, the best way to take advantage of the LLC’s many benefits is to register right in your own backyard.