The Best States to Open an LLC: Pros And Cons To Consider

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Tom Smery

Tom Smery is a certified CPA for over a decade. In his free time, he writes articles to pass on his expert knowledge on taxes and accounting. Thomas has a wide range of deep knowledge on 1099 taxes, and finance topics. You can find him fishing when he is not preparing taxes for his clients or writing about accounting.

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 14-day free trial today.

The Three Most Business-friendly States to Form an LLC

Let's quickly review the three best states to form a Limited Liability Company when you are ready.

Delaware

According to the Delaware Division of Corporations, the state is home to over a million businesses including more than 66% of Fortune 500 companies. And, one main reason these businesses prefer the state is because of the numerous ways it allows them to reduce their tax liability.

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

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.

We still recommend that you create an operating agreement though. It’s critical for the smooth running of your business.

Wyoming

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.

Business expenses

All expenses that are necessary to start and run your business are deductible. These include transportation costs, the cost of raw materials, labor, storage costs, and your LLC startup cost.

Educational expenses

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.

Healthcare deductions

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.

You can try our software for 14 days at no cost.

Conclusion

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.

What Defines a Verbal Contract?

A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.

Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.

Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.

The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.

Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.

When is a Verbal Agreement Legally Binding?

For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:

Offer and acceptance: An offer is made and accepted by another party involved in the agreement;
Consideration: The involved parties must exchange something of value (money, a service, time, etc), this is known as consideration;
Intention and certainty: All parties must fully understand the terms of the contract and intend to make a legally binding agreement freely; and
Capacity: The parties must have the capacity to legally enter into the contract; they're above age and of a stable mindset.

Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.

How strong is a verbal agreement in court?

Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.

If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.

That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.

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When are verbal agreements not enforceable?

There are some types of contracts which must be in writing.

The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:

The sale of real estate or vehicles
Real estate leases lasting longer than one year.
Property transfer following the death of the owner.
The case of a party agreeing to pay debt for someone else.
Any contract that requires more than a year to fulfil.
A contract involving and exceeding a specified amount of money (which varies by state).

Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.

Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.

How are Verbal Contracts Enforced?

Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?

How can you prove an oral contract?

Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!

If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.

Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.

Written vs Verbal Contracts: What's the Verdict?

Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.

So, ultimately, the question is: written or verbal agreements?

Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.

Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.

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Say hello to digital contracts

Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.

There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.

Benefits of written contracts

A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.

Create Professional Contracts with Bonsai

Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.

With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.

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