From cheaper filing fees to lower taxes to increased anonymity, there are plenty of reasons why you might want to form your LLC in one state over another. Here are the five best states to form an LLC in 2023.
What Is an LLC?
A limited liability company, or an LLC, is a type of business entity that's popular among small business owners due to its easy setup process, relatively low regulatory fees, and robust liability protection. LLCs combine the flexibility of a sole proprietorship with the legal defense of a corporation.
When you form an LLC, you're officially separating your business's assets from your personal ones. That means that if your business runs into legal trouble or financial challenges in the future, your personal assets won't be at risk.
Yet despite offering such powerful asset protection, LLCs don't make doing taxes a nightmare. That's because LLCs are subject to pass-through taxation, which means your LLC's income will simply be taxed as your own personal income.
The 5 Best States to Form an LLC
While the best state to form an LLC can depend on your preferences, business model, and needs, several states are especially favored among entrepreneurs.
As one of the best-known business-friendly states, you've probably heard of entrepreneurs filing their Articles of Organization in Delaware before. That's thanks to Delaware's tax flexibility and business-focused court system.
Pros of starting an LLC in Delaware:
- The state's Court of Chancery is nationally recognized for its speedy and accurate handling of business disputes.
- It's possible to file your LLC anonymously (i.e., your name and address won't be publicly listed).
- No annual report is required.
- There is no state sales tax in Delaware.
Cons of starting an LLC in Delaware:
- Foreign businesses must pay $200 to file an LLC, compared to $90 for domestic businesses.
Taxes for Delaware LLCs:
- All LLCs must pay a flat tax of $300 each year by June 1.
With its low fees and flexible requirements, the Cowboy State is particularly popular with budget-minded entrepreneurs.
Pros of starting an LLC in Wyoming:
- There's a low initial filing fee of $100.
- Wyoming has no state income tax.
- The annual report fee is low: $60.
Cons of starting an LLC in Wyoming:
- An annual report is required.
Taxes for Wyoming LLCs:
- Wyoming has no state income tax.
A lack of taxes and plenty of privacy come together to make Nevada a highly attractive state for entrepreneurs looking to create an LLC in another state.
Pros of starting an LLC in Nevada:
- There's no state income tax.
- You can file your LLC anonymously.
Cons of starting an LLC in Nevada:
- In addition to the $75 filing fee, most LLCs will need to pay a $200 state business license fee, plus $150 to file an initial list of members.
- Each year after formation, all LLCs must submit an annual list of members and pay a filing fee of $150.
Taxes for Nevada LLCs:
- None, except in the case of businesses that generate a gross revenue of more than $4 million per year — those companies are required to pay Commerce Tax.
This state's minimal maintenance requirements and optional anonymity make it a great option for some entrepreneurs.
Pros of starting an LLC in New Mexico:
- You can start your LLC without disclosing your name and address.
- The state has low LLC filing fees ($100 for foreign LLCs).
- No annual report is required.
Cons of starting an LLC in New Mexico:
- You may be required to file Form PTE if your LLC has more than one member.
Taxes for New Mexico LLCs:
- With Form PTE, New Mexico LLCs with more than one member can pay income taxes at the entity level.
- New Mexico's individual income tax rate ranges from 1.7% to 5.9%, depending on the amount of money earned.
If you're looking for an affordable place to start an LLC, Montana might be right up your alley.
Pros of starting an LLC in Montana:
- It has affordable filing fees ($70 for foreign LLCs).
Cons of starting an LLC in Montana:
- There's no option for anonymity.
- You'll need to meet annual reporting and name registration requirements.
Taxes for Montana LLCs:
- Montana's individual income tax rate ranges from 1% to 6.75%.
Forming an LLC in Your Home State
Even if you don't live in one of the best states to form an LLC, starting a business in your home state can be a practical and convenient option. After all:
- You're already at least somewhat familiar with your state's customs and regulations.
- You have the option to visit your state government's offices in person if you need additional help.
- You may know other small business owners in your home state who can help you navigate relevant rules and regulations.
But on the other hand, you might not want to start an LLC in your home state for one reason or another. For instance, your home state may:
- Have expensive fees associated with LLC formation and management (in California, for example, LLCs must pay an annual fee of $800)
- Have a high income tax rate
- Have a high sales tax rate
Forming an LLC in a Foreign State
If you want to form a business in a different state than where you live, such as one of these top five states, you can do so. Creating an LLC in a state other than your own is referred to as filing in a foreign state or getting a foreign qualification. Forming an LLC in a foreign state could allow you to:
- Pay lower filing and management fees
- Access a more business-friendly court system
- Avoid paying as much income tax as you would in your home state
- Sidestep your home state's undesirable requirements
However, filing your LLC in a foreign state isn't without drawbacks. For example:
- If you primarily do business in your home state but start your LLC in another, you may have to take the additional step of registering your company as a foreign entity in your home state.
- If you don't know someone who can serve as your Registered Agent in your foreign state of choice, you'll need to use a Registered Agent service to get one.
- If the majority of your business is conducted in a state other than the one you form it in, you may be subject to additional taxes and/or fees, depending on the state in question.
Keep State-Specific Regulations in Mind
Before you start registering your LLC, remember to carefully research each state's individual rules and regulations (including that of your home state).
For example, states like Montana and New Mexico may offer enticingly low filing fees, but they also require foreign LLCs to provide a Certificate of Good Standing before registering. In other words, if you want to register your LLC in those states, you'll need to form it in your home state and obtain a Certificate of Good Standing before you can do so.
Similarly, if you form your LLC in a state with no income tax but still conduct the majority of your business in your home state, you'll likely still have to pay taxes in your home state. Whether or not that will be true for you depends on your state's individual laws.
And as mentioned above, you'll need a Registered Agent in each state you're doing business in. Each Registered Agent will need their own physical address at which they can receive official mail from the state's government agencies, so using a Registered Agent service can be a convenient option for entrepreneurs doing business in multiple states.
Those are just some of the regulations that you should keep in mind when choosing a state in which to create your LLC. Before making any decisions, be sure to do your due diligence and get familiar with all the applicable fine print.
And no matter which state you choose to start an LLC in, Incfile can help you do so for $0 plus state fees.