Best states to form an LLC and how to do it

Choosing the right state for your Limited Liability Company (LLC) can impact your business’s success. Some states provide tax advantages, lower fees, and other business-friendly regulations that help you save money and streamline operations.

This guide explores the best states to form an LLC, highlighting key benefits like tax incentives, legal protections, and costs. Plus, it breaks down the steps to start an LLC, empowering you to make an informed decision and take the next steps in starting your online business.

What is an LLC?

An LLC combines a corporation’s liability protection with the flexibility and simplicity of a sole proprietorship or partnership. Owners (members) typically avoid personal responsibility for the company’s debts or legal obligations.

LLCs also provide tax benefits, allowing owners to choose taxation as a sole proprietorship, partnership, or S-corporation, depending on their tax classification for LLC status. This flexibility, along with fewer formalities than corporations, makes LLCs a top choice for small businesses and entrepreneurs.

Domestic LLC vs. Foreign LLC

As you get started, you may encounter these terms: domestic LLC and foreign LLC. These don’t actually relate to international business but instead define where your LLC registers and operates within the United States.

What is a domestic LLC?

A domestic LLC forms and registers in the state where it primarily operates. For example, if you create an LLC in Texas and conduct business there, it qualifies as a domestic LLC in Texas. Some key characteristics of a domestic LLC include:

• Formed in the state where you plan to conduct business.
• Follows the laws and regulations of that state.
• Does not require additional registration if operating solely in that state.

What is a foreign LLC?

A foreign LLC forms in one state but registers to do business in another. This occurs when a business expands beyond its home state. For example, if you establish an LLC in Delaware but later operate in California, you must register as a foreign LLC in California. Some key characteristics of a foreign LLC include:

• Formed in one state but operates in another.
• Requires registration as a foreign LLC in any state where it conducts business outside its home state.
• Needs additional paperwork and fees, such as a Certificate of Authority and possibly a registered agent in the foreign state.

What Types of Businesses are LLCs Best For?

An LLC offers a flexible business structure with liability protection and tax benefits, which make it an appealing choice for various businesses. Here’s a quick list of types of businesses that could benefit from forming an LCC and why.

Small businesses and startups

• Gives new business owners liability protection without corporate complexities.
• Works well for retail stores, e-commerce, and service providers.

Freelancers and consultants

• Helps independent contractors keep personal and business finances separate.
• Benefits consultants, IT professionals, and business coaches.

Real estate investors and landlords

• Protects personal assets from rental property-related lawsuits.
• Popular among rental property owners and house flippers.

Online businesses and e-commerce

• Shields owners from customer disputes and product liability issues.
• Ideal for dropshipping, online retail, and digital product sellers.

Side hustles and sole proprietors

• Offers liability protection and tax advantages for small ventures.
• Great for content creators, tutors, and home-based businesses.

Pros of forming an LLC

Limited liability protection: Owners (members) are generally not personally responsible for business debts or lawsuits.

Flexible taxation: Can be taxed as a sole proprietorship, partnership, or S-corp, avoiding double taxation.

Less paperwork and compliance: Fewer regulations than corporations; no need for annual shareholder meetings or a board of directors.

Business credibility: An LLC appears more professional than a sole proprietorship, improving trust with clients and investors.

Easy ownership structure: Allows for single-member or multi-member ownership, with fewer restrictions than corporations.

Cons of forming an LLC

State fees and taxes: Some states charge high filing fees or impose annual franchise taxes (e.g., California’s $800 minimum tax).

Self-employment taxes: LLC members must pay self-employment taxes on their share of profits, which can be higher than corporate tax rates.

Limited investment opportunities: LLCs can’t issue stock, making it harder to attract investors compared to corporations.

Varying state laws: LLC rules differ by state, which can complicate compliance if operating in multiple states.

How to Pick the Right State for Your LLC

Choosing the best state to form your LLC involves taxes, legal protections, and operating costs. Many business owners register in their home state, while others prefer Delaware, Nevada, or Wyoming for additional benefits. Here’s how to decide:

1. Consider your home state first

The best state to form your LLC is your home state. It’s usually the simplest and most cost-effective option. You can avoid extra paperwork and fees that come with foreign LLC registrations. But there are certain states which have extremely high fees, which we’ll cover next.

2. Compare annual fees

Some states charge lower filing fees and maintenance costs. For example, Kentucky charges a $40 filing fee, while California has an $800 annual franchise tax.

3. Look at state taxes

States with no income tax or lower corporate taxes help reduce costs. In particular, Wyoming, South Dakota, and Florida offer tax-friendly environments with no state income tax.

4. Check business-friendly laws and protections

Some states might have special regulations that could benefit your business. For example:

• Delaware attracts businesses with strong legal protections and a specialized business court.
• Nevada offers privacy protections and no corporate income tax.

5. Consider if you operate in multiple states

If your business operates in multiple states, you may need to register as a foreign LLC in each. Consider the costs and legal requirements before choosing your LLC’s home state. Also, you might find it helpful to learn about sales tax compliance for multistate businesses.

Best states for LLCs

The best states to form an LLC are Wyoming, Delaware, Nevada, Texas, and Florida. While you can form an LLC in any state, some states offer tax advantages, lower fees, and stronger legal protections.

Wyoming

1. No state income tax: Neither corporate nor personal
2. Low filing fee of $100 and no annual franchise tax
3. Strong privacy protections: No public disclosure of owners

Wyoming is the best state to form an LLC for business owners who value privacy, tax savings, and low fees.

Delaware

1. Business-friendly courts
2. No state income tax on out-of-state businesses
3. Higher investment: It’s easy for corporations and startups to attract investors

Delaware is the best state to form an LLC for entrepreneurs seeking legal protection and venture capital funding. It’s a common choice in tech and SaaS.

Nevada

1. No state income tax: Neither corporate nor personal
2. Strong asset protection laws: Even owners’ personal assets are well protected
3. Privacy: No information-sharing agreement with the IRS

Nevada is the best state to form an LLC for business owners who prioritize privacy and asset protection.

Texas

1. No state income tax: Neither corporate nor personal
2. Good business environment: Business-friendly with a strong economy
3. Efficiency: Lower regulatory burden compared to other states

Texas is the best state to form an LLC for mid-to-large businesses looking for tax advantages in a strong economy.

Florida

1. No state income tax on personal earnings
2. Relatively low filing fee of $125
3. Good business environment: Growing economy and business-friendly policies

Florida is the best state to form an LLC for entrepreneurs wanting low taxes in a high-growth state.

How much does it cost to start an LLC?

The cost of starting an LLC varies from $50 - $1,000, depending on the state’s fees and extra services. Before forming an LLC, review your state’s specific filing fees and ongoing requirements to plan your budget effectively.

LLC Costs and Filing Fees Forming an LLC can involve the following costs:

• Filing fee: Ranges from $40 to $500, with most states around $50 to $150.
• Annual fees: Some states charge annual reports or franchise taxes, ranging from $0 to $800 (e.g., California has an $800 minimum tax).
• Registered agent fee (if needed): Around $100 to $300 per year.
• Operating agreement and EIN: Free or low-cost, but some services charge $50 to $200.
• Sales tax registration: If your business sells products or taxable services, you may need to register for sales tax in your state. In most states, registration is free, but some may charge a small fee or require a deposit depending on your business type.

Cheapest state to form an LLC

The cheapest state to form an LLC is typically Kentucky, with a $40 filing fee and no annual report fee. Other affordable options include Missouri ($50 filing, $0 annual fee) and New Mexico ($50 filing, no annual fees).

However, Wyoming stands out as the best low-cost state overall, with a $100 filing fee, $60 annual fee, no state income tax, and strong asset protection laws. While Delaware and Nevada provide business-friendly environments, they come with higher ongoing costs.

Bottom Line: Choose Kentucky or New Mexico for the lowest startup cost. For low fees, tax benefits, and privacy, Wyoming offers the best long-term value.

Tax classification for LLC

Tax classifications for LLC can vary depending on the type you’ve chosen. By default, the IRS classifies an LLC as a pass-through entity, meaning profits and losses flow directly to the owners' personal tax returns. However, LLCs can choose how they are taxed, offering flexibility based on business needs.

1. Default tax classifications

• Single-member LLC: Taxed as a sole proprietorship, with income reported on the owner's personal tax return via Schedule C.
• Multi-member LLC: Taxed as a partnership, with profits and losses flowing to members via Schedule K-1.

2. Electing Corporate Taxation

S Corporation (S-Corp) election:

• Avoids self-employment taxes on a portion of income.
• Profits/losses still pass through to owners (Form 1120S).
• Requires payroll setup and IRS election via Form 2553.

C Corporation (C-Corp) election:

• LLC pays corporate income tax (21% federal rate).
• Allows reinvestment of profits at lower corporate tax rates.
• Double taxation applies (corporate plus dividend tax).
• Requires IRS election via Form 8832.

How to start an LLC in 8 steps

1. Choose a state. Decide where to register your LLC (typically your home state or a business-friendly state like Wyoming or Delaware)
2. Pick a business name. Ensure it’s unique and complies with state LLC naming rules.
3. Appoint a registered agent. Designate an individual or service to receive legal documents, if that’s necessary.
4. File articles of organization. Submit the LLC formation documents to your state and pay the filing fee.
5. Create an operating agreement (optional but recommended). Outline ownership and management rules.
6. Get an EIN from the IRS. An Employment Identification Number (EIN) is required for taxes, hiring employees, and opening a business bank account. Learn how to register for an EIN.
7. Register for sales tax (if applicable). If your business sells taxable goods or services, most states require a sales tax permit. Registration is usually free, but some states may charge a small fee or deposit.
8. Comply with state requirements. File annual reports, pay fees, and meet tax obligations. Here’s a guide to how US sales tax works.

How long does it take to get an LLC approved?

The LLC approval time depends on the state and filing method. Standard processing takes 1 to 3 weeks, but some states, like Alabama and Kentucky, approve LLCs within 1 to 3 business days. States with higher filing volumes, such as California and New York, may take 4 to 6 weeks unless expedited. Many states offer expedited processing for an extra fee, cutting approval time to 24-72 hours. Online filings usually move faster than paper applications. To speed up approval, check your state’s official website for current processing times or request expedited services.

And that’s it! Now you can take the next steps to building your business. If you find yourself worrying about sales tax, you can outsource sales tax compliance with a tax automation software like Quaderno.

Thanks to Rikki Justin Go from FormPros for sharing their expertise and writing this article for us!