What is the best state to start an LLC?

What is the best state to set up your LLC?

If you are looking to create an LLC, you are probably also wondering what state you should form the limited liability company. In this handy guide, we will try to answer these questions for you.

The best state to form an LLC really depends on your specific business needs, goals, and preferences.

If you are forming an LLC, you are mainly concerned with limiting your personal liability for whatever activity your business does. You don’t want to lose your house in the rare event your business is sued.

Are you in a high risk business, meaning, are you likely to be sued? Or are you in a low risk business where you aren’t concerned with litigation? Do you value privacy more than convenience?

For most people, the TLDR answer is to form their LLC in their home state.

It’s just easier and cheaper since your registered agent can be you. If you have an LLC in another state, you’ll have to pay a registered agent in that state who can accept service in the event your LLC is sued.

But if you are in a high risk business, value privacy more than convenience, or are trying to employ clever asset protection strategies, you may want to consider a state other than the one where your businesses’ principal office is located.

Here are some considerations to help you decide:

Home State:

If you conduct business primarily in one state, it’s often simplest and most cost-effective to form your LLC in that state.

For example, my law office, Kervin Law, LLC was formed in my home state of Louisiana. It’s easier and because it’s a law firm, the bar rules probably prefer it that way.

Business-Friendly States:

Some states are known for their business-friendly regulations and tax policies. Delaware, Nevada, and Wyoming are often cited as such states. Delaware is particularly popular for larger corporations due to its well-established corporate law.

Also, in my experience, Texas can be a good state as well since they make it harder to look up the LLC’s owners.

Tax Considerations:

Consider the tax implications of forming your LLC in different states. Some states have no income tax, while others may have lower or higher rates. You might want to consult with a tax professional to determine the best option for your specific situation.
Legal and Regulatory Environment:

Each state has its own legal and regulatory environment. Some states may be more or less stringent in terms of regulations and reporting requirements.

Costs:

The cost of forming and maintaining an LLC can vary from state to state. Some states have higher filing fees and annual fees than others.

Privacy:

If privacy is a concern, some states allow for greater anonymity in terms of disclosing members and managers. Delaware, for example, doesn’t require the disclosure of the names of members in the formation documents.

Location of Business Operations:

If your business operates in multiple states, you might consider forming the LLC in the state where you have a physical presence or where most of your business activities take place.

Professional Advice:

It’s often wise to seek advice from legal and financial professionals who can help you navigate the specific requirements and implications of forming an LLC in different states.

Keep in mind that there is no one-size-fits-all answer, and the best state for forming an LLC depends on your unique circumstances. Before making a decision, it’s advisable to research and, if necessary, consult with professionals who can provide guidance based on your specific business needs.

Is an LLC the same as a corporation?

No, an LLC (Limited Liability Company) is not the same as a corporation, but they are both types of business entities. Here are some key differences between an LLC and a corporation:

Ownership Structure:
- LLC: Owners of an LLC are called members. An LLC can have a single member or multiple members, and the members’ ownership interests are typically expressed in percentage terms.
- Corporation: Owners of a corporation are called shareholders. A corporation can have a large number of shareholders, and ownership is represented by shares of stock.
Management Structure:
- LLC: The management structure of an LLC can be flexible. It can be member-managed, where all members participate in decision-making, or manager-managed, where members appoint one or more managers to run the business.
- Corporation: Corporations have a more rigid management structure. Shareholders elect a board of directors, and the board appoints officers who are responsible for the day-to-day operations of the company.
Taxation:
- LLC: By default, an LLC is treated as a “pass-through” entity for tax purposes. This means that the profits and losses of the business are passed through to the individual members, and the business itself does not pay taxes. Members report their share of profits or losses on their personal tax returns.
- Corporation: Corporations are subject to “double taxation.” The corporation pays taxes on its profits, and shareholders also pay taxes on any dividends received. However, certain types of corporations, such as S corporations, can elect to be treated as pass-through entities for tax purposes.
Formalities:
- LLC: Generally, LLCs have fewer formalities and administrative requirements compared to corporations. There is often more flexibility in terms of record-keeping and meetings.
- Corporation: Corporations are typically subject to more formalities, such as regular board meetings, shareholder meetings, and maintaining detailed corporate records.
Limited Liability:
- LLC: Like a corporation, one of the main advantages of an LLC is that it provides limited liability protection to its members. This means that the personal assets of the members are generally protected from the business’s debts and liabilities.
- Corporation: Shareholders in a corporation also benefit from limited liability protection.

When choosing between an LLC and a corporation, it’s important to consider the specific needs and goals of your business, as well as factors such as management preferences, taxation, and regulatory requirements. Consulting with legal and financial professionals can help you make an informed decision based on your individual circumstances.

What about LLC filing fees?

Filing fees for forming an LLC typically range from as low as $50 to a few hundred dollars. Some states may have additional fees for expedited processing or other services. It’s important to note that these fees are related to the state-level filing, and there may be additional costs associated with legal and professional services.

What states have better LLC privacy laws?

Delaware is often considered one of the states with favorable LLC privacy laws. The state offers a high degree of privacy for LLC owners. When forming an LLC in Delaware, members’ and managers’ names are not required to be listed in the public formation documents, providing a level of anonymity. Instead, Delaware requires the listing of an authorized person, typically the person forming the LLC or a registered agent, in the formation documents.

Nevada is another state that is often mentioned for its privacy-friendly LLC laws. Similar to Delaware, Nevada allows the use of nominee officers and directors, providing an additional layer of privacy.

It’s important to note that while Delaware and Nevada are frequently cited for their privacy laws, the specific privacy features can change, and the effectiveness of these features may vary depending on individual circumstances and changes in state regulations. Additionally, the level of privacy may be subject to legal and regulatory changes, so it’s advisable to consult with legal professionals to ensure you have the most accurate and current information. Keep in mind that privacy should be just one factor considered when choosing the state for your LLC, and it’s essential to weigh it against other factors such as taxes, fees, and business regulations.

What are the differences in taxes between an LLC and a corporation?

For federal tax purposes, the IRS does not distinguish between LLCs based on the state in which they are formed. Instead, the IRS provides default tax classifications for LLCs, and the LLC can choose its tax treatment based on its structure.

By default, a single-member LLC is treated as a “disregarded entity,” meaning it is taxed like a sole proprietorship, and the owner reports business income and expenses on their personal tax return. For multiple-member LLCs, the default tax classification is as a partnership, with the income and expenses flowing through to the individual members’ tax returns.

However, LLCs have the option to elect a different tax classification. They can choose to be taxed as a corporation by filing Form 8832, Entity Classification Election, with the IRS. Alternatively, an LLC eligible for partnership taxation can elect to be taxed as an S corporation by filing Form 2553, Election by a Small Business Corporation.

It’s important to note that while the IRS treats LLCs similarly regardless of the state of formation for federal tax purposes, state tax laws may vary. State tax authorities may have different rules and requirements for LLCs, and state income tax rates can differ. Therefore, it’s crucial for LLC owners to be aware of and comply with both federal and state tax laws applicable to their specific circumstances. Consulting with a tax professional can help ensure that an LLC is properly structured and complies with all relevant tax regulations.

All states do not tax LLCs the same way. State tax laws can vary significantly, and each state has its own rules regarding the taxation of LLCs. Here are some key points to consider:

Income Tax:

States may have different income tax rates and structures. Some states have a flat income tax rate, while others have a progressive tax system with different rates for different income levels.
Franchise Tax or Annual Fees:

Many states impose an annual fee or franchise tax on LLCs for the privilege of doing business in the state. The amount of this fee can vary widely between states.

Sales Tax:

If your LLC sells goods or services, you may be subject to state sales tax. Sales tax rates and regulations differ among states.

Property Tax:

Property tax on business assets can vary by state. Some states assess property tax on business personal property, while others do not.

Other Taxes and Fees:

States may have other taxes, fees, or assessments that could apply to LLCs, depending on the nature of the business and the state’s tax laws.

State-Specific Deductions and Credits:

State tax laws may offer specific deductions, credits, or incentives that can affect the overall tax liability of an LLC. These can vary widely from state to state.

LLC owners need to be aware of the tax laws in the specific state where they are conducting business. Consulting with a tax professional who is familiar with the tax laws of the relevant state can help ensure compliance and optimize the LLC’s tax strategy.

Additionally, staying informed about any changes in state tax laws is crucial for maintaining accurate and up-to-date financial records for your LLC.