Best States to Form an LLC

Once you've decided to start a limited liability company (LLC) or incorporate your business, one of your core decisions will be choosing where to incorporate. LLCs are creations of the state, and each state has different laws and regulations that can significantly impact your business. Factors such as taxation, fees and legal protections can vary widely from state to state, making some states more appealing and favorable than others for forming an LLC. Benzinga explores the best state to form an LLC, highlighting the key factors to consider when making such a vital decision.

Why are Some States Better Suited for Forming an LLC?

As with any other legal entity operating within its borders, an LLC is subject to the well-defined rules and regulations of the state in which it is formed. Each state has its own set of laws and guidelines that govern the formation and operation of LLCs, ranging from registration and reporting requirements to tax obligations and legal liabilities. Some states offer lower fees, taxes and less stringent regulations, making forming or operating an LLC easier. Other states have more complex legal requirements and higher costs associated with starting and running an LLC, making them a less attractive option for business owners. 

For instance, most business owners go for a Wyoming LLC thanks to the state's low filing and annual reporting fees, low tax and enhanced privacy. Others may prefer a Delaware LLC because, aside from its enhanced privacy protections and low filing fees, the state is renowned for its overall business-friendly climate encompassing the availability of resources, networking opportunities, strong entrepreneurial culture and access to capital. Some states have stronger legal protections for LLCs and their owners, which can offer added peace of mind and security. 

For example, Nevada is known for its strong privacy protections and favorable liability laws for LLCs. Understanding the laws and regulations guiding LLC formation and operation and how the law differs from state to state makes it easier to choose the best state for your LLC

6 Best States to Form an LLC

Choosing where to incorporate your business can significantly impact your business's long-term success. Here are some states to consider.  

Your Home State

Best for: Savings, compliance and simplicity 

Some states offer more rewarding business benefits and are top choices for business owners looking to start an LLC. For instance, Wyoming and Nevada boast zero corporate income tax, among other core benefits, and may seem like excellent choices to maximize tax benefits. However, regardless of perceived benefits, incorporating in your home state may be the best option. The most obvious reason is to avoid the double business expenses arising from maintaining two LLCs — a domestic LLC in your state of incorporation and a foreign LLC in your state of operation. 

Any tax savings you may enjoy from your state of incorporation will most likely be offset by the taxes you're required to pay in your state of operation. If you factor in the double filing, double annual reporting fees and maintaining two registered agents in both states, the chances of saving money become unrealistic. In fact, you'll potentially incur more in both the short- and long-term, which will be problematic for small businesses or startups without solid capital.

Besides lower maintenance costs, forming an LLC in your state of residence offers several other advantages, including easier compliance with state laws and access to local business incentives. Additionally, conducting business in your home state can help you establish a local presence and build relationships with suppliers, customers and other business owners.

Pros:

• Convenience and ease of formation 
• Lower fees or business expenses 
• Familiarity with state laws
• Access to local business resources 
• No need to register as a foreign entity 

Cons: 

• Increased personal liability 
• No privacy protection (depending on the state)
• Possibly higher taxes or extra fees
• Legal complexity 
• Higher filing fees (depending on the state)

Wyoming

Best for: Low fees, low taxes and enhanced privacy

Wyoming was the first state to draft the LLC statute in 1977; it remains a top choice among medium and small business owners looking to incorporate, thanks to its affordable fees. Its initial filing fee of $100 and the annual reporting fee of $60 are some of the lowest among states. In addition, the state does not impose strict reporting requirements. The state ranked #1 in the 2023 business tax climate index, which is understandable since businesses pay zero franchise, personal and corporate income tax. 

The state does not impose inventory, occupation and value-added taxes. Sales tax applies, but the state ranks 44th in the lowest end, only higher than Alaska and Hawaii. Wyoming's lifetime proxy offers more efficient privacy protection than other anonymous LLC states. The lifetime proxy law enables you to designate another individual or entity to act on your behalf while you retain control. There are no stringent formalities or compliance requirements, and corporate regulations favor businesses. The filing process is also straightforward, and you can file online.

Pros:

• No franchise, personal and corporate income taxes
• Low sales taxes
• Low filing, annual reporting and maintenance fees
• Enhanced privacy protection via lifetime proxy
• Flexible compliance and reporting requirements 

Cons: 

• Member’s exit may lead to dissolution. 
• Non-payment of the annual fee can lead to the LLC's permanent shutdown.
• Asset protection isn’t guaranteed for out-of-state business lawsuits.

Delaware

Best for: Privacy, legal access and overall business-friendly climate 

Delaware (or the Diamond State) is renowned for its overall business-friendly climate, making it one of the favorite destinations for businesses looking for a state to call home. According to the state's Annual Reporting Statistics, 247,003 LLCs were formed in 2021 — up 36.93% from 2020 (180,376). Over 66% of Fortune 500 companies are incorporated in Delaware. 

There are many outstanding reasons why it makes sense to incorporate in Delaware. For starters, the initial filing fee is low. The filing process is hassle-free, straightforward and optimized to get you running immediately. Online and same-day filing are available. The state doesn't impose corporate income taxes for businesses operating outside the state. Gross receipts and franchise taxes apply but are relatively lower than in other states. There are no VAT, state property and sales taxes. Delaware's favorable corporate laws are unlike any other state. 

Business or corporate issues are easily mitigated via its well-established and prestigious judicial system — the Delaware Court of Chancery — with unparalleled knowledge and competence in corporate and business laws. So should your LLC run into legal issues, you can easily access judges with the finest expertise in business laws. Delaware is also one of the few states offering enhanced privacy protection — the so-called anonymous LLC states. Others include Wyoming, New Mexico and Nevada. LLC owners or members, shareholders, directors and officers needn't be state residents. The registered agent can be named in all of these roles.

Pros:

• Corporate or business-friendly state laws
• Low filing fees, gross receipts and franchise taxes
• Enhanced privacy protection 
• Established and experienced legal system.

Cons: 

• Dual registration is needed for businesses operating out of state.
• Requires two registered agents — one for each state. 
• Expenses may double for out-of-state LLC.
• Relatively high annual reporting fees — $300.
• Stringent formalities, reporting requirements, and ongoing compliance.

Nevada

Best for: Tax benefits and enhanced privacy 

Nevada is another excellent LLC state and a top choice for business owners seeking a tax-friendly destination to incorporate. The reason is that, like Wyoming, Nevada does not impose franchise, personal and corporate income taxes. It imposes no state income taxes, capital gains or inheritance taxes. Commerce tax applies to businesses with gross revenue above $4 million. Nevada is also one of the best states regarding personal privacy protections. It is one of the anonymous LLC states, meaning your details and that of other members are kept hidden in public registration filing.

The state has no information-sharing agreements with the Internal Revenue Service (IRS). Running or maintaining the LLC is easy since the state does not mandate annual meetings or operating agreements. And compared to other states, the registration process is highly simplified, requiring only a few steps. However, Nevada's initial filing fees are considerably high at $425, and so is the annual reporting fee at $350 ($200 for business license renewal + $150 for yearly list filing). 

Pros: 

• Excellent tax benefits — no personal income, franchise, state income and corporate taxes
• Requires no annual meetings and operating agreements 
• Strong privacy protection for business owners
• No information-sharing agreements with the IRS
• Assets protection for members and managers 

Cons: 

• High filing fees
• High annual reporting fees
• Commerce tax may apply

Montana

Best for: Pricing and tax-savings 

Montana might be your best option if you're looking for a highly affordable state to start an LLC. In recent years, the "Big Sky Country" has enjoyed impressive attention as an excellent hub for starting a small business. This designation is reflected in its #1 ranking for small business launches and record-breaking new ventures in 2021. Montana offers one of the lowest filing fees in the country, starting at $70, and its annual reporting fee is also incredibly affordable at just $20. 

While many states don't impose a franchise tax, what sets New Mexico apart is that it also doesn't impose sales tax, making it a unique choice for those seeking to start an LLC with minimal tax obligations. Personal and corporate income taxes apply. Like most competitors, Montana doesn't mandate annual meetings or an operating agreement. LLC registration is also effortless. However, Montana is not an anonymous LLC, meaning ownership information is publicly accessible. 

Pros: 

• Low filing and annual reporting fees 
• No sales tax
• No franchise tax
• Favorable business laws
• Graduated individual income tax rates

Cons: 

• No personal privacy for LLC owners
• Higher corporate income tax rate than some other states

New Mexico

Best for: Excellent pricing and enhanced privacy 

New Mexico offers numerous benefits to businesses, making it one of the favorite hubs for small business owners. For starters, it is one of the anonymous LLC states, meaning the state guarantees ownership privacy to a great extent. However, its highly affordable fee structure makes the "Land of Enchantment" stand out as an ideal state for forming an LLC. The state charges the lowest filing fee at only $50 and does not impose annual reporting fees, making it an attractive option for small business owners looking to start their venture without breaking the bank. 

LLCs are subject to an annual $50 franchise tax paid along with the state income tax. The sales tax is paid as gross receipts, ranging from 5% to 9.3125%. Personal and corporate income taxes may also apply. New Mexico has a streamlined and efficient business formation process that makes it easy for LLCs to get up and running quickly. The state's Secretary of State website provides all the necessary forms and information to form an LLC, and you can complete the process online. This streamlined process means LLCs can start operating in New Mexico with minimal hassle or delay.

Pros: 

• Lowest filing fees
• No annual fees
• Enhanced privacy protection 
• Streamlined application processes 

Cons: 

• Franchise and state income tax applies. 
• Personal income tax rates are relatively high.
• Gross receipts tax also applies. 

Domestic LLC vs. Foreign LLC

LLCs can be domestic or foreign, and while they're similar, their physical presence sets them apart. A domestic LLC is an LLC that operates within its state of formation. That is, it conducts business in the state where it is registered or incorporated and is subject to the laws and regulations of that state. In contrast, a foreign LLC is registered in one state but operates in another. Foreign LLCs operate outside their state of formation. For instance, if you live and conduct your business in Delaware, any LLC you formed there would be considered a domestic LLC because you do business in that state.

However, if you register or form an LLC in Delaware but conduct your business in Florida, your business would be considered a foreign LLC in Florida. Foreign LLCs are subject to the laws and regulations of both the state of formation and the states where they conduct business. Domestic LLCs are typically entitled to the full range of legal protections and benefits offered by the state in which they are formed, including liability protections and tax advantages. On the other hand, foreign LLCs may be subject to different legal requirements. They may not be entitled to the same level of protection as domestic LLCs.

While foreign LLCs offer the advantage of allowing businesses to operate in multiple states without forming separate LLCs, they come with high costs. For starters, it involves creating two separate entities since you must also complete the required paperwork needed to start a new LLC in the state where your LLC is foreign in addition to your domestic LLC state. That means two sets of filing fees, two sets of annual reporting fees and a registered agent in both states. The implication is that your business expenses will double. Suppose you incorporate in one state and knowingly or unknowingly fail to report your LLC as foreign in the state where you conduct business. In that case, you might be subject to stiff penalties and heavy fines, or your business activities will be restricted. The consequences vary among states. 

Unlock Your Businesses Benefits by Choosing the Best State for Your LLC

Whether your priorities are enhanced privacy and liability protection or minimizing business expenses through low filing, annual reporting fees and low taxes, your state of incorporation determines the benefits you enjoy from your LLC. With so many excellent options available, finding the ideal state to form your LLC can be a rewarding experience with the potential for significant cost savings and other benefits. By carefully researching and exploring each state's laws, regulations, fees and business climate, among other factors, you can make a well-informed decision that meets your core needs as an LLC owner and set your business on the path of success. And then, you can start the process of establishing your business.

Frequently Asked Questions