Are you starting a business this year? If you are, we would like to congratulate you. This article will help you decide the best state for LLCs so that you know where to file. And how to file your LLC. Keep reading.
Starting a business comes with a lot of decisions that can make or break your entrepreneurial ventures. If you’re launching your business as an LLC, one of these decisions is the state where you’ll operate.
Starting an LLC in any state gives you the protections of a C-corp and the operating freedom of a sole proprietorship. However, some states are more LLC-friendly than others.
Which states are the best ones to operate your LLC in? We’re here to answer this question and more.
Read on to find out the best states for LLCs. By the end of this article, you’ll be on your way to starting your LLC in 2023!
But First, Some Considerations
Launching your business will come with a set of considerations. These should guide your decisions as you get your LLC off the ground.
Here is a list of things to take into account when choosing a state to operate your LLC in.
One of the first questions you need to ask yourself is where you want to operate. This answer determines when you register your LLC and which state your LLC will be in.
With your LLC’s operations concentrated in just one state, you’ll streamline everything from taxation to registration. Operating in just one state also makes fulfilling compliance requirements simpler, adding ease to you and potentially your other LLC members.
LLCs have the advantage of pass-through taxation benefits, regardless of what state they’re in. Nevertheless, you’ll still have some tax obligations, whether they’re in the form of personal income tax or other business taxes.
Taxation will vary from state to state, so that’s another thing to take into account when you choose your LLC’s location.
Ease of Forming an LLC
Formation processes can vary significantly from state to state. Some states have straightforward and quick procedures, like Delaware and Kentucky. By comparison, others may involve more paperwork and processing time. If you don’t fancy the red tape and long processes, steer clear of states like California, New York, and New Jersey.
Annual Compliance Requirements
Different states have varying annual reporting and compliance requirements. Be aware of what’s expected in your chosen state, as this can impact your administrative workload and costs.
Formation fees, annual fees, and other costs can differ significantly from state to state. Depending on the Secretary of State’s LLC formation fees, starting an LLC can be expensive or affordable. When choosing a state, make your decision based on your timeline and budget.
The Top 10 Best States for LLCs
Now that we’re clear on what to consider before forming your LLC, let’s talk about the best states to form your LLC in.
These states offer some of the best legal protections and LLC tax benefits of any state. Also, these states happen to have straightforward formation requirements, making LLC formation easy and hassle-free the same way we do.
First, let’s start with a state that’s a bit closer to home — literally.
1. Your Home State
As a startup entrepreneur, you may be looking for ways to cut costs and streamline your LLC formation. Nevertheless, when you’re starting a business, the best state for LLC formation may be your home state.
Let’s start with your formation costs. Forming your LLC in a state like New Mexico can be a practical choice as the state’s LLC registration fee costs only $50. However, if you have to pack up, move, and grow roots in the state just to start an LLC, your state’s higher LLC registration fee won’t look too expensive.
If you’re already a resident of a state, it can make more sense to just form your LLC domestically.
Another reason to start your LLC in your home state is to take advantage of tax benefits. States encourage entrepreneurial activity within their borders, meaning they encourage aspiring LLC owners to form domestic LLCs.
By forming a domestic LLC, you operate solely in your state. This means you only pay personal income tax for one business instead of two if you were to live in one state and operate your LLC in another state.
PRO TIP: UNLESS A CPA OR LAWYER IS TELLING TO OTHERISE, USE YOUR HOME STATE. OTHERWISE, YOU WILL PAY FEES FOR BOTH YOUR HOME STATE AND YOUR LLC STATE.
But, there are some states with great LLC advantages particularly if you own real estate. These are some great options
Besides enjoying Vegas, there are many reasons to consider Nevada, especially if you’re thinking of forming an LLC.
Nevada stands out for its lack of state income tax, making it an attractive option for those looking to minimize their tax liability. The state also provides robust privacy protections. When you register your LLC in Nevada, the Secretary of State will not require the disclosure of member information on public records.
Nevada’s laws also offer strong asset protection. With these laws in effect, your personal assets will remain free from business liabilities.
However, it’s important to note that Nevada has an annual business license fee, which can be substantial for larger companies — but not if you’re operating as an LLC, of course.
Delaware has long been considered the go-to state for businesses big and small. It offers a robust legal framework with well-established business laws and a dedicated business court known as the Delaware Court of Chancery.
Many Fortune 500 companies choose Delaware as their headquarters due to its business-friendly environment. Privacy is also a key feature, as Delaware doesn’t require the public disclosure of member information.
Delaware also has some of the lowest LLC formation fees of any state. As of 2023, the registration fee to form an LLC in Delaware is just $90.
Are you starting an LLC in Florida? Brace yourself for some good news.
Of any state, Florida remains one of the top LLC-friendly states due to its pro-LLC tax conditions and income tax breaks. Florida is one of the few states that doesn’t have a state individual income tax, so you can expect to pay just the sales tax of 2%.
Besides its low taxes, Florida also attracts LLC starters for its strategic location. its geographical location offers access to Latin American markets. The tourism industry can also benefit businesses in hospitality and entertainment.
The only downside we can think of is the added insurance requirements for businesses. Florida lies in an area prone to hurricanes, meaning you’ll need added coverage like property and flood insurance to cover losses.
Wyoming is gaining recognition for its minimal regulations and affordability. It doesn’t impose state income tax on LLCs or their owners, making it tax-friendly. The state’s annual fees for LLCs are also among the lowest in the country, giving LLC owners more reason to set up shop in the state.
Wyoming also allows for anonymous LLC ownership, ensuring member information remains confidential. This means that little to no information sharing happens between the state’s Secretary of State and government agencies like the IRS.
However, here’s one thing to consider.
Wyoming requires LLCs to maintain a registered agent with a physical address within the state. While this won’t always be a deal-breaker for those with brick-and-mortar establishments, it can be a limitation for fully remote businesses.
For this reason, Wyoming may not be the best state to consider if you’re operating an online coaching business.
The Lone Star State is renowned for its robust economy and business-friendly environment. It doesn’t impose state income tax on individuals or LLCs, making it tax-efficient. The state’s thriving economy offers diverse opportunities for businesses of all sizes.
Texas boasts streamlined regulations and a pro-business culture. However, competition can be stiff in major cities like Houston and Austin, and specific local regulations and taxes may vary.
7. New Hampshire
Like Florida, New Hampshire imposes no personal income tax, making it one of the most affordable states to operate an LLC in. New Hampshire also boasts some of the lowest administrative and formation fees of any state, at no more than $100.
What truly sets New Hampshire apart from the other states on this list is its state-funded loan program for startups. Those looking to set up shop in the state can apply for state loans to get their LLCs off the ground. This program makes New Hampshire an excellent option for LLC owners with limited capital to start operations.
While remote, Alaska offers unique advantages for certain businesses. It doesn’t impose state income tax or state sales tax. This means more tax savings on your part.
Alaska also allows for private LLC ownership as the state’s Secretary of State keeps member information confidential. Besides business confidentiality, Alaska boasts a strategic location that can be beneficial for businesses with international shipping or online operations.
Of course, the state’s extreme climate can pose logistical challenges for certain businesses, especially those reliant on transportation. Also, despite the simplicity of the LLC registration process, registering your LLC in the state costs $250 as of 2023.
9. South Dakota
According to Forbes’s latest business ranking report, South Dakota is emerging as an attractive destination for LLC formation. It lacks a state income tax, making it tax-friendly for businesses.
The state also has a reputation for being business-friendly, with minimal regulations and a supportive atmosphere for entrepreneurs. The low costs — including low fees and overhead — make it an affordable option.
10. New Mexico
New Mexico boasts a unique combination of advantages for LLC formation, making it an appealing choice for certain business owners. One of its standout features is the lowest LLC filing fee at just $50. New Mexico also sets itself apart by imposing no annual reporting requirements and providing enhanced privacy protections.
With that said, you’ll need to reside in the state or operate primarily in it to take advantage of these benefits. Also, you may have to engage the services of a registered agent when you form your LLC.
Filing Your LLC
Different states can vary in their LLC filing procedures. For the most part, the following steps will be part of the LLC registration process, regardless of where you choose to form your LLC.
1. Name Your LLC
Your LLC needs a name, and it’s got to be unique and catchy. Check your chosen state’s naming rules and ensure your name isn’t already taken. Don’t forget to add “LLC” or some variation to the end of your business name to keep it official.
2. Appoint a Registered Agent
Most states will require you to have a registered agent. This person or entity is your LLC’s point of contact with the state and is responsible for receiving legal documents and official correspondence. They should have a physical address in the state where you’re forming your LLC.
3. File Articles of Organization
Prepare to fill out some serious paperwork. In most states, you must file “Articles of Organization,” where you officially register your LLC with the state.
You’ll need to provide basic info like your business name, address, and the name of your registered agent. Pay the filing fee (prices vary by state), and you’re officially on the map.
4. Create an Operating Agreement
For some reason, this is an often overlooked step. An operating agreement outlines how your LLC will run, including roles, responsibilities, and decision-making processes. It’s an internal document, but it’s handy to have in case of legal disputes or misunderstandings down the road.
Drafting one may require the services of a notary. However, at DraftedLegal, we offer legal templates that include easy-to-fill operating agreements.
Buy our operating agreement template to trim time and notary fees off your LLC registration.
5. Get an EIN
An EIN — or Employer Identification Number — is like a social security number for your LLC. You’ll need it for tax purposes, opening a business bank account, and hiring employees if you plan to expand. You can get one from the IRS for free, and it’s usually a quick online process.
6. Pay Your State Fees
Remember those filing fees from Step 4? It’s time to pay up.
Different states have different fees, so check your state’s specific requirements and deadlines to ensure you stay in good standing.
Once you’ve performed all of the above steps, congratulations! You’re officially an LLC owner!
Start Your LLC in 2023 With DraftedLegal
Selecting the best state for your LLC is a pivotal decision in your entrepreneurial journey. It’s a choice that can impact your taxes, legal protections, and overall business success.
Registering your LLC requires having the right paperwork in order, regardless of state. Whether you choose Delaware, Nevada, Wyoming, Texas, Florida, New York, Alaska, South Dakota, or any other state, our pre-drafted LLC startup legal templates and expert guidance will streamline the process for you.
Start your LLC in 2023 with confidence, and let DraftedLegal be your trusted partner on this exciting journey.