The best states to open an LLC are Delaware, Nevada, Wyoming. You will not find a state with better incentives to form an Limited Liability Company (LLC) than these three. From requiring no state income tax, no corporate income tax, no sales tax, to protecting your identity as the business owner, you have every reason to start your LLC in one of these states.
But, here is a shocker. Even with all these financial advantages, the said states may not be the best states for you to form an LLC? That is unless you reside in one of them.
If you don’t live in Delaware, Nevada, or Wyoming, the financial drawbacks of setting up your LLC in one of them will often outweigh any benefit they offer.
Therefore, unless under certain special circumstances that we will discuss, the best state to FORM an LLC is your home state.
But, one step at a time. First, let’s explore what makes these states the most business-friendly states for your LLC, and then we can tell you why it makes more sense to open your LLC in your home state.
We will then end the post with a simple trick you can use to reduce your tax liability regardless of which state you are located in.
Note: If you are planning to open an LLC and would like some help streamlining your invoices, contracts, proposals and taxes, try Bonsai. Our all in one software can take the pain away from managing theses tasks. Claim your 7-day free trial today.
The Three Most Business-friendly States to Form an LLC
In Delaware, there is no sales tax which means you get to pay less for every purchase you make for your LLC. And while many states with no sales tax try to offset it by charging higher income, estate, or property taxes, Delaware remains as one of the states with the lowest personal income taxes and annual franchise tax.
The catch is that every business is required to pay an alternative business entity tax of $300 (as of the time of writing) regardless of whether you made any profits.
Also, if you are a business that sells goods or you have employees you will be required to pay gross receipt tax. The amount you pay depends on your business type.
Also worth noting is that Delaware does not tax out-of-state income which could help reduce your state income taxes if the vast majority of your business comes from a different state. I say could because you will still need a foreign LLC registration in the state where you are doing business and you will be subjected to that state’s tax rates. More on this later.
The process of forming an LLC in the state of Delaware is also very prompt and cheaper than a lot of other states. The main LLC costs you incur are the costs of filing Articles of Organization and the cost of operating license for your LLC.
The cost of paying for a registered agent can be avoided because Delaware allows you or a member of your LLC to act as an agent. The only condition is that the chosen person has a physical address in the state.
Also, as a Delaware LLC, you don’t have to file annual reports highlighting all your business activities for the year.
The other reason why Delaware would be a great pick for your LLC is the chancery court. In other states, business matters are handled in common law courts and are often not high on the priority list. Consequently, it can even take years before a case is resolved.
The Delaware Chancery court works differently. Instead of being heard by a jury, the dispute goes through a panel of judges whose area of specialty is business law. The result is quick resolution of disputes.
Lastly, Delaware is a great spot for your LLC if you are looking to remain anonymous. The state does not require that you fill in your personal details when registering the company.
Nevada is another attractive option for small business owners thanks to the many tax breaks it offers. Most notably, Nevada does not charge state income taxes. And since all earnings from LLCs are considered personal income, it means you don’t get to pay business income tax.
Moreover, the state has no corporate taxes, no capital gains tax, no inheritance tax, and no franchise taxes.
However, you will be required to pay commerce tax if your LLC annual earnings exceed $4 million.
Nevada is also a great location if you are looking for privacy. It’s not a requirement that the LLC owner or members reveal their personal details like names during LLC formation. Better yet, Nevada LLCs allow you to appoint a nominee manager which ensures you remain completely anonymous since it’s a requirement that the names of the LLC managers be publicly filed.
The ability to appoint a nominee member is not great for just privacy but also asset protection. Since your name is not in the public record, you are not directly tied to the company and your personal property will be safe in case the business is facing a lawsuit.
Still, on privacy, Nevada doesn't have an information-sharing agreement with outside agencies including the Internal Revenue Service.
Lastly, if you are a Nevada LLC you are not subject to the formal operating requirements like holding annual meetings. You are also not required to have an operating agreement.
Our last choice for most business-friendly states in Wyoming. Reason? Major tax breaks and privacy for Wyoming LLC owners.
Like Nevada, Wyoming does not charge individual income taxes. And because the IRS does not distinguish between the LLCs and their owners, it means you don’t pay taxes on your business income.
Moreover, you are not required to pay franchise taxes. You still have to pay sales tax but the 4% required is lower than most other states.
The initial setup cost for an LLC is also significantly lower in Wyoming as compared to other states. You don’t have to pay an operating license and the state filing fees are about $50.
And if you are looking for privacy, then you will find it in Wyoming as the state does not maintain LLC ownership records publicly. Even better, Wyoming supports a lifetime proxy where you appoint another member of the LLC to represent your share of stock in the business.
Wyoming also offers more solid liability protection than other states even if you are a single-member LLC. The company is a separate legal entity with its own separate federal tax ID number. Even if a member leaves or a new member is added, the company will remain unaffected.
This is unlike most other states that require that the company be dissolved and reformed if there is a change in membership.
The Best State to Form LLC Or Limited Liability Company: Your Home State
When forming an LLC, Delaware, Nevada, and Wyoming may have all these desirable incentives but the truth is none of them will make any sense unless you reside in the said states.
This is because according to the law, you can only do business where your LLC is registered. In this case, you are running a domestic LLC. A domestic LLC is you file in the "home" state where you reside or an LLC in your home state.
If you conduct business outside the state where it was incorporated then it is considered a foreign LLC and you need to register as a foreign LLC in this new state.
For clarity, let’s say you are based in New Jersey. With a personal income tax rate of 3.5-8.97 percent, a corporate tax rate of 6.5-7.5%, and a sales tax rate of over 6%, New Jersey isn’t what you would call a business-friendly state.
So, you decide to open your LLC in Delaware where there is no sales tax and income tax is minimal. The problem becomes you can’t legally conduct business in New Jersey unless you register as a foreign LLC in the state.
And guess what happens when you register as a foreign Limited Liability Company (LLC) in New Jersey? Your LLC becomes subject to the same tax laws you were trying to escape. And as if that’s not bad enough now you are running two LLCs which translates to double the cost and double the effort.
Each year you have to pay filing fees, annual reporting fees, and the required nominal business license fees for both LLCs. You also have to pay for a registered agent in the foreign state because you are not physically located there.
Now, do you see why it does not make sense to register an LLC in your home state instead of outside the state you reside in?
Not only are you not getting the tax breaks that attracted you to the said state but also you end up with extra expenses to cover and extra work in running your business because you now have two LLCs.
What if I’m running an online business
Nothing changes. The business transactions may be happening online but you are working from somewhere, your home maybe.
If you live in California and you have registered your business in Wyoming, you will still need to register your business as a foreign LLC in California where it will be subject to California LLC laws.
Consequences for not registering a Foreign LLC
If registering a company only brings extra hassle, why not just forego the process, right? Well, you can do that but be prepared for the consequences.
Different states have different penalties for businesses found to be doing business without the proper business registration. California, for instance, will require that you pay a $2,000 fine if found operating without necessary registration.
The other danger of not being properly registered in the state you are operating in is if there is a legal incident the state laws will not protect you. You can’t sue individuals or other companies because the state does not recognize you as a legitimate business structure.
The Exception: When to form an out-of-state LLC
There are three instances when it may make sense to register your company in a different state from where you live.
You are running a real estate focused LLC business
All business activities including financial transactions related to the real estate will happen where the property is located. So, if real estate investment is outside your home state, then that’s where you should register your LLC.
You want privacy
If anonymity is critical and outweighs any financial drawbacks, that would be a good reason to form your LLC in our recommended states. The LLC you create in Wyoming, Nevada, or Delaware would then act as the parent to the LLC you register in your home state.
You are a non-US resident but own a business in the US
In this case, Wyoming is the best state to register your LLC because it has the most foreigner friendly-laws.
A simple trick to reduce your tax liability in any state
Now, if your main motivation behind wanting to form your LLC outside your home country is to get a tax break, I have some good news for you.
I have a tip that can help you reduce your tax liability by up to $10,000 without going through the hassle of running two LLCs.
I’m talking about tax deductions. The IRS allows you to deduct business expenses from your business income when filing taxes but, unfortunately, a lot of business owners have no idea of all the deductions they can write off.
So, they end up overpaying taxes every year.
Examples of tax-deductible business expenses
Here are some deductible expenses where you can receive a tax credit or write-off.
If, for example, you decide to take a course that helps maintain or improve the skills needed to run your LLC, you can deduct the cost of the course as an educational expense. Other education expenses you can deduct include tuition, books, research costs, and also transportation and travel costs incurred to get the education.
The IRS allows LLC members to write off expenses such as premiums you paid on a health insurance policy covering medical care or long-term care insurance policy for yourself, your spouse, and dependents.
Business bad debts
A bad debt is money that you are owed but can’t collect. For instance, if you loaned some money to a client or sold goods on credit to customers and you are yet to be paid, the IRS allows you to deduct them during the filing process.
Now, as you might imagine, keeping track of all these deductible expenses is no easy task. First, you have to be knowledgeable about all of them. Then, you have to maintain the necessary receipts to serve as evidence of the expenses.
You can do it manually but intelligent business owners are the ones that understand the importance of automation. And this is where we come in.
We provided an expense tracking software that does all the hard work for you.
Bonsai Tax: We help increase your LLC revenue through tax write-offs
Our software integrates with your business account and credit card then imports and categorizes your transactions so that you never have to guess what a particular expense was for.
It also allows you to scan receipts for proper tracking of transactions made in cash. The receipt scanner is equipped with optical character recognition technology that reads the content on the scanned receipt and inputs the data on your expense report.
Most importantly, Bonsai tax tracks expenses that are deductible in your LLC and automatically writes them off. The tool will then use all this information to estimate your company’s quarterly taxes.
This is a great feature that will help ensure that tax season never catches you financially unprepared. This is also good news for organizations that have an expected tax liability of more than $1000 since the IRS requires that they make quarterly taxes.
Bonsai also comes with other extra features such as an invoicing system that supports automatic payment requests, payment reminders, and the option to add penalties for late payments.
The system supports multiple payment options including credit card, ACH, and PayPal.
The last thing you want is to register your LLC in the wrong state just because you want to save money. We have seen it happen and, unfortunately, the process of redomestication (re-registering your company in your home state) is a nightmare.
It involves unnecessary steps like closing your business bank account to open a new one in your home state, re-registering your new LLC with vendors and suppliers, and updating the IRS
We are not a law firm and we cannot offer legal advice but, hopefully, you now have the information you need to make a decision that you won’t regret later.
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