Forming a limited liability company (LLC) is a smart way to structure your business.
As a business structure, the LLC provides you with lots of good options for how the business is organized. It also provides the owners with optimal tax and liability protection.
However, when an owner decides to use an LLC as its business structure, there are many important considerations to address. One of the most critical is where to file the LLC paperwork.
The choice of where to be registered as a legal entity should depend on many factors. They include the tax laws in the state, the filing fees and the general business climate within the state.
It’s important to note that you do not need to have your business located within the state of your primary LLC filing. However, you will be required to file in your home state in addition to the state of your formal status.
What Is an LLC?
A limited liability company is one of the most popular business structures for small- and medium-sized businesses. Many people consider them a hybrid business type, because it combines some of the most distinguishing features of corporations and simpler structures, such as a sole proprietorship or partnership.
Businesses can choose to file as an LLC in whatever state they prefer. The rules governing LLCs differ greatly from state to state. There are some standard principles that apply to LLCs no matter in which state they are recorded. Those factors include:
- Owners have liability protection from having to repay debts incurred by the company or liabilities from legal decisions against it
- Entities and individuals many be members of an LLC, with the exception of banks and insurance firms
- LLCs do not directly pay tax liabilities
- Profits and losses may be passed through to members, who record those financials on their individual tax returns
- LLCs must file articles of organization in the state in which they are registered
Here are some of the main benefits of an LLC structure:
- Liability Limits. Many business owners choose to form an LLC because of the broad liability protections the structure offers. If the business fails or is sued, the owners’ personal assets are protected and cannot be pursued in court filings or bankruptcy cases.
- Taxes. By default, LLCs are taxed as a sole proprietorship (if the business is a single-member (owner) LLC) or a partnership (if there are multiple members). In such cases, the LLC acts as a pass-through from a tax perspective. The LLC income is passed to the members. The tax rules also eliminate the “double taxation” dilemma that is common with other corporate tax situations. However, LLCs can also choose to be taxed as a corporation, either as an S-corp or a C-corp. S-corp structures act as a pass-through (though not all LLCs can select this option). For C-corp tax status, the LLC is considered a taxable entity and pays corporate income taxes
- Simplicity. LLCs are far simpler to run than other corporations. There are no obligations to have a board of directors or hold annual shareholder meetings. Depending on the state where the LLC is formed, you may have to complete annual reports, but in general these reports are far less detailed than other corporate filing mandates
The Top 5 States for LLC Filings
As noted above, every state has its own requirements and rules related to LLCs. Those rules and laws can help inform in which state you decide to file your LLC paperwork.
For the purposes of this article, we will evaluate the states based on the following criteria:
- Individual income tax rates
- Sales and local tax rates
- LLC filing fees
- LLC annual fees
We will also explore the nuances that make each state here a good choice.
- Individual income tax rates: 2.2% to 6.6%
- Sales and local tax rates: None
- LLC filing fees: $90
- LLC annual fees: $300
According to a recent report from the Delaware Division of Corporations, nearly two-thirds (66.8 percent) of Fortune 500 companies have selected Delaware for their incorporation status.
The state is known for its business-friendly laws and courts. In addition, it is one of only four states that is an anonymous LLC state, wherein LLC owners have stronger privacy protections than those in other states. That means that owners that set up a Delaware LLC do not need to disclose their identities or any other information about the others owners (if selecting anonymous business type).
It is one of the few states where you only need to file the name of a designated contact person and a Delaware registered agent. Registered agents are designees that can accept information, including that related to state filings and lawsuits. Typically, registered agents are located in a separate location from the business and act as a repository for this paperwork.
Delaware is considered a favorable state for entrepreneurs. If a lawsuit is filed against a business registered there, it is usually resolved faster than in other states. The Court of Chancery, which handles business cases in the state, is considered favorable for businesses. However, if your LLC does not actually do business in Delaware, it’s unlikely that your lawsuit will be filed there.
If you operate in a state other than Delaware, you will also need to file as a foreign LLC in your home state. That applies for any state in which you file your primary LLC.
- Individual income tax rates: None
- Sales and average local tax rates: 8.23 percent
- LLC filing fees: $425
- LLC annual fees: $350
Establishing your LLC in Nevada is a popular choice given the lack of individual income taxes. That’s a good option if you operate your LLC as a pass-through entity. That can make up for the relatively high filing fees for an LLC in the state.
There are also no corporate taxes collected in Nevada and no franchise taxes. Instead, businesses will need to pay a tax on gross receipts for goods and services sold. However, those tax rates don’t really matter if your LLC does business in other states, as any income you earn in those states will be taxed at those states’ tax rates.
Nevada also offers similar privacy protections as those available in Delaware. Note, however, that LLCs in Nevada do need to file an annual list of members and managers.
- Individual income tax rates: None
- Sales and average local tax rates: 5.22%
- LLC filing fees: $100
- LLC annual fees: Starting at $60
Wyoming wins props on several fronts. It has no individual income tax and a legal system known to be friendly to businesses. Its LLC fees are also among the lowest in the nation.
Like Nevada, there are also no corporate income or franchise taxes.
Its privacy guidelines include a lifetime proxy rule. This means that someone can be appointed to represent your shares or stocks indefinitely, giving you privacy and anonymity. It also offers a low sales tax rate and minimal reporting requirements.
- Individual income tax rates: None
- Sales and average local tax rates: 1.76%
- LLC filing fees: $250
- LLC annual fees: $100
Alaska has very few taxes, including no individual income tax and no state sales tax. However, local cities and towns are able to charge their own local sales tax, and many do.
5. Your Home State
There’s no place like home. Even in states like California and Massachusetts, which have high fees or taxes, your home state may be the best option available.
There is the convenience of doing business in your home state. In addition, in most cases, you will need to register as a foreign LLC in your home state regardless. If you do any business in your home state other than that in which you file, you will have to pay two filing fees, complete paperwork and have a registered agent in both.
If you form your LLC in your home state, you do not need to worry about filing as a foreign LLC anywhere else.
The Worst 5 States for LLC Filings
As noted above, taxes pay a major role in where businesses determine where to file as an LLC. While we’ve already explored five of the best states for LLC filings, here are five of the worst, based on the Tax Foundation’s State Business Tax Climate Index.
The index ranks all the states on the following tax rates:
- Corporate taxes
- Individual income taxes
- Sales taxes
- Property taxes
- Unemployment taxes
Based on those rankings, here are the 5 worst states to consider filing as an LLC.
1. New Jersey
- Corporate taxes rank: 49
- Individual income taxes rank: 50
- Sales taxes rank: 42
- Property taxes rank: 47
- Unemployment taxes rank: 30
- Corporate taxes rank: 28
- Individual income taxes rank: 49
- Sales taxes rank: 45
- Property taxes rank: 16
- Unemployment taxes rank: 22
3. New York
- Corporate taxes rank: 13
- Individual income taxes rank: 48
- Sales taxes rank: 43
- Property taxes rank: 46
- Unemployment taxes rank: 38
- Corporate taxes rank: 34
- Individual income taxes rank: 40
- Sales taxes rank: 46
- Property taxes rank: 29
- Unemployment taxes rank: 23
- Corporate taxes rank: 27
- Individual income taxes rank: 43
- Sales taxes rank: 26
- Property taxes rank: 50
- Unemployment taxes rank: 21
An LLC is a powerfully compelling choice for your business type. Its flexibility in taxation and liability protections make it one of the most popular entities. Knowing some of the differences in rules and regulations can help you determine, if you choose to file as an LLC, in which state is best to file.