Best states to form an LLC in 2024 Tax and filing fee

Once you’ve determined that forming an LLC is the ideal business structure, the next step is selecting the best state for its establishment. While you might assume filing in your home state is the only option, it’s not always the case, especially if you reside in a state with high filing fees like California. The decision on whether to establish your LLC locally or in another state hinges on your business type and anticipated income. This guide will walk you through the decision-making process, dispelling common misconceptions and addressing frequently asked questions.

Overview of the LLC Structure

Entrepreneurs often opt to establish an LLC due to its tax advantages, protection against personal liability, and adaptable management framework. Unlike corporations, which face double taxation, LLCs are categorized as pass-through entities by the IRS. This means the company itself is not taxed, with income passing through to members who then pay self-employment taxes.

Domestic LLC vs. Foreign LLC

When entrepreneurs opt to formally establish an LLC and file the necessary documentation, typically known as the articles of organization, within the state where they operate, they create a “domestic LLC.” However, states aim to maintain comprehensive records of businesses operating within their boundaries, even if the company is headquartered in another state. Consequently, upon forming a domestic LLC in one state, a business may seek to expand its operations into additional states. In each new state, the LLC must register as a “foreign LLC” with the relevant state agency.

Contrary to common belief, a foreign LLC is not a company formed outside of the United States or by a non-U.S. citizen. Rather, it refers to an LLC formed in a different state but engaging in business across state borders, not internationally.

To clarify, establishing a foreign LLC in another state is not necessary solely because a company sells products to customers in that state. However, if the company sets up a physical presence, such as a store, office space, or storage facility, in that state, it must establish a foreign LLC there. Common reasons for starting a foreign LLC include establishing a physical presence, hiring employees, holding regular company meetings, and obtaining a business license to conduct activities in the new state.

Which is the Best State to Form an LLC?

When small businesses consider ways to reduce taxes and startup and operating costs, they might be drawn to “business-friendly” states with low filing and annual fees or no income tax. However, simply choosing a state based on these factors might not necessarily result in cost savings.

Despite the temptation to minimize taxes or lower fees, if there are no plans to physically relocate the business to another state, the optimal choice for forming an LLC is typically the current state of operation. Taxation-wise, income earned in each state requires tax payments. Thus, even if the LLC is established in a state without income tax, if the business operates in a state with income tax, taxes must still be paid there.

No # 1Choice: Home State

If you’re planning to keep your business in one place and have no plans to move it elsewhere, forming your LLC in that state is usually the best choice. This state is often referred to as the “home state,” where most of your business activities will take place, where you’ll make money, and where company meetings will happen. Usually, this means forming the LLC where the member or members live. However, if there are multiple members living in different states, things can get a bit more complicated. For instance, if four friends from different states start a store in California, then California would be the right state for their LLC. But if each friend wants to open a store in their own state, they’ll need to register a foreign LLC in each of those states. If you want to know more about starting an LLC in your state, you can check out our guides specific to each state at the end of this article.

No # 2 Choice: Wyoming

If you’re considering moving to kickstart your new venture, Wyoming stands out as an excellent option. It earned its stripes by becoming the first state to legalize LLCs back in 1977. What’s more, Wyoming boasts no state income tax, keeps its sales tax rate low at just 4%, and charges a modest $100 for LLC filing fees.

In terms of privacy, Wyoming’s laws are top-notch. While other states publish the contact and member details of every registered business, Wyoming allows for anonymity in this regard. Despite being the least populated state, Wyoming still presents ample opportunities for business growth, with potential customers eager to benefit from what your enterprise has to offer.

No # 3 Choice: Delaware

Delaware is an excellent option for forming your LLC if you’re considering potential future upgrades to a corporation. Similar to Wyoming, Delaware offers privacy protections for LLC members, safeguarding their information from public disclosure.
Filing your organization documents with the state costs $90 for domestic LLCs and $200 for foreign LLCs. Additionally, there’s a $300 state tax fee per year, but no annual reports are required for compliance.
We chose Delaware as our third option because it’s an ideal state for LLCs looking to transition to corporations, known as incorporating. While there are no specific laws favoring LLCs, Delaware stands out due to its favorable corporate tax laws, making it the preferred choice for incorporation. This preference is evidenced by the fact that 66.8% of all Fortune 500 companies select Delaware as their state of incorporation.

Key Factors to Consider When Selecting a State for LLC Formation

Opting to establish your LLC in the location of your business operations is the most practical and cost-efficient decision. Forming an LLC in a state where only a portion of your business is conducted necessitates registering as a foreign LLC in the remaining state, leading to increased fees and potentially double franchise taxes. Conversely, if you’re considering starting afresh to expand your business, seek out states with low start-up costs, including minimal filing and licensing fees and no state income tax.

FAQs About LLC

Mit bester Qualität sind 1:1 Schweizer Breitling Replik-Uhren es wert, sie zu besitzen!

This Post Has 37 Comments

Leave a Reply