Best State to Register an LLC

A limited liability company (LLC) is a US business structure that combines elements of corporations and partnerships. It offers limited liability protection, meaning the owners’ personal assets are shielded from business debts and lawsuits. Unlike a corporation, an LLC isn’t required to have a formal management structure like a board of directors. An LLC is managed by its members (member-managed) or by appointed managers (manager-managed).

When forming an LLC, one of the first crucial decisions you’ll face is where to register it. Each US state has its own benefits, regulations, and tax obligations that can impact your LLC’s operation and profitability. From the business-friendly environments of Delaware and Wyoming to the tax advantages of Nevada, the state you incorporate in can affect your business’s legal liability, financial health, and more.

Whether you’re a US-based entrepreneur or an international entrepreneur looking to enter the US market, choosing the right state for your LLC can affect your long-term success. Below, we’ll explain what each state offers for LLC formation and how to choose the best state for your business.

Which Business Types Are Best Suited for an LLC?

According to the US Census Bureau, over 430,000 new businesses were formed in June 2024. While LLCs are suitable for many businesses, they may not be the best choice for all. Businesses seeking significant venture capital funding or planning to go public might find a corporation more advantageous. The following business types are more likely to benefit from the features of an LLC.

Professional Services: Consultants, freelancers, accountants, lawyers, and other professionals often choose LLCs for personal liability protection, separating personal assets from business debts and liabilities.
Small Businesses: Many small businesses choose LLCs for their simplicity and pass-through taxation, where profits and losses are passed directly to the owners’ personal tax returns, avoiding double taxation.
Real Estate: Real estate investors and property management companies often use LLCs to hold properties. This provides liability protection and potential tax advantages.
Startups: Startups with moderate to high growth potential may prefer LLCs as they offer flexibility in ownership structure and profit distribution, making them attractive to potential investors.
Family Businesses: LLCs can be a good choice for family businesses, as they allow for flexible ownership and management arrangements among family members while protecting personal assets.
High-Risk Businesses: Businesses with a higher risk of liability, such as construction or manufacturing, can benefit from the liability protection an LLC provides.

Advantages and Disadvantages of Forming an LLC

Forming an LLC has its advantages and disadvantages. Here’s a breakdown of the pros and cons.

Advantages:

Limited Liability Protection: Members are not personally liable for the company’s debts or liabilities.
Pass-Through Taxation: LLCs avoid double taxation by passing profits and losses directly to members’ personal tax returns.
Flexibility: LLCs offer flexibility in management structure, profit distribution, and ownership arrangements.
Simplicity: LLCs are generally easier and less expensive to form and maintain than corporations.
Credibility: Having a business name that includes “LLC” can denote credibility and professionalism to customers, partners, and suppliers.

Disadvantages:

Limited Lifespan: In some states, LLCs have a limited lifespan and may need to be dissolved if a member leaves or dies.
Self-Employment Taxes: Members actively involved in the business are considered self-employed and must pay self-employment taxes.
Limited Growth Potential: LLCs may not be as attractive to venture capitalists or angel investors as corporations, which can limit their growth potential.
Potential for Personal Liability: In rare cases, courts can “pierce the corporate veil” and hold members personally liable if they fail to maintain separation between personal and business assets or engage in fraudulent activities.

LLC Taxation Basics

The taxation of an LLC depends on the number of members (owners) and the chosen tax classification. When choosing a tax classification for your LLC, it’s best to consult with a tax professional regarding your specific circumstances and goals, as your classification can significantly affect your overall tax burden and financial situation.

Single-Member LLCs

IRS Designation: By default, the IRS treats single-member LLCs as disregarded entities, meaning business income and expenses are reported on the owner’s personal income tax return (Form 1040, Schedule C).
Self-Employment Taxes: The owner pays self-employment taxes on the LLC’s profits.
Changing Tax Status: The owner can elect to have the LLC taxed as an S corporation or C corporation by filing the appropriate forms with the IRS.

Multi-Member LLCs

IRS Designation: By default, multi-member LLCs are taxed as partnerships. The LLC files an informational return (Form 1065) to report income and losses to the IRS, but the business itself doesn’t pay income tax. Each member reports their share of the income and losses (based on their ownership percentage and documented on a Schedule K-1 issued annually) on their personal tax returns.
Self-Employment Taxes: Each member pays self-employment taxes on their share of the LLC’s profits.
Changing Tax Status: Multi-member LLCs can elect to be taxed as an S corporation or C corporation by filing the necessary forms with the IRS.

Alternative Tax Classifications

S Corporation: Electing to be taxed as an S corporation offers potential tax benefits by allowing owners to receive a salary and dividends, potentially reducing self-employment taxes.
C Corporation: Choosing to be taxed as a C corporation means being subject to double taxation. The corporation will pay income tax on its profits, and shareholders will also pay taxes on dividends received.

How to Choose the Right State for Your LLC

When choosing which state to register your LLC, you should consult with a business attorney or tax professional who understands the nuances of state-specific LLC laws and can provide tailored advice. In addition to professional advice, consider the following factors when determining which state best suits your business needs.

Physical Presence: If your business has a storefront, office, or primary business operations in a particular state, registering your LLC in that state makes sense as you’ll need to comply with local laws and tax requirements regardless of where the LLC is formally established.
State Taxes: Consider the state’s tax environment. Some states, like Texas, Florida, and Nevada, have no personal income tax, which can be beneficial depending on your LLC’s tax structure.
State-Specific Laws: Each state has its own set of laws and regulations governing various aspects of LLCs, such as liability protection, reporting requirements, and governance. Some states, such as Delaware and Nevada, are popular for their business-friendly laws and well-established legal precedents for protecting LLC members.
Costs: Each state will have initial formation fees, annual reporting fees, franchise taxes, and other costs associated with maintaining an LLC. These fees vary widely between states.
Investor Considerations: If you’re seeking investment, certain states might be more attractive to investors. For example, many investors favor Delaware because of its predictable legal system and extensive body of corporate law.
Privacy: Some states, such as Wyoming and Nevada, have stronger privacy protections for LLC owners and don’t require disclosure of member information in public records.
Future Business Needs: Consider your business’s scalability and future needs. If you plan to expand to multiple states, you might consider a state with a legal environment that facilitates easier expansion.
Convenience and Familiarity: Registering your LLC in your home state can offer the benefits of convenience and familiarity with local laws and practices. This can also simplify operations if most of your business activities and banking are local.

Top States for LLCs

Several states offer LLCs a favorable business environment, legal protections, and tax policies. Here are some of the top states for LLCs.

Delaware: Delaware is known for its advanced and flexible business laws, especially in corporate law. Many large corporations and LLCs favor Delaware due to its well-established Court of Chancery, which specializes in resolving business disputes and offers swift resolutions to corporate disputes. Delaware has no state corporate income tax for Delaware entities operating out of state and doesn’t require LLC members to list their names publicly. It also has a structure that allows for separate “series” within an LLC.
Wyoming: Wyoming has strong asset protection and privacy laws, including charging order protection for LLC members and the option for anonymous LLC ownership through a trust. It was the first state to establish LLCs and continues to be a pro-business jurisdiction with a low regulatory burden. Wyoming has no state personal or corporate income tax, no franchise tax, and low fees for business operation.
Nevada: Nevada has strong asset protection and privacy laws. It doesn’t require disclosure of LLC members and has few restrictions on LLC management and ownership. Nevada has no state corporate income tax, personal income tax, or franchise tax.
Texas: Texas boasts a large market, a strong economy, and a business-friendly environment with many incentives for small businesses and startups. Texas has no state personal income tax and relatively low business taxes, though it does have a gross-receipts-based franchise tax. LLCs in Texas can be member-managed or manager-managed, and LLC formation has no publication requirement, which can save businesses time and money.
Florida: Florida has a growing economy and a favorable tax structure, with no state personal income tax. Similar to Delaware, it allows for separate series within an LLC. It also has charging order protection for LLC members, shielding personal assets from liability. It’s particularly popular with real estate investors and service-based businesses.
South Dakota: South Dakota has begun to be recognized for its favorable business environment, including minimal legal requirements and strong privacy laws. It has no state personal or corporate income tax, low fees for business formation, and unique trust structures for additional asset protection.
Alaska: Alaska is unique for having no state sales tax, which can be advantageous for businesses doing a significant amount of in-state sales. Other Alaskan tax advantages include no personal income tax or franchise tax. The state’s low population density and abundant natural resources can be a plus for some business types.

Forming an LLC as a Non-Citizen

While non-citizens can form LLCs in the US, the process involves careful planning and adherence to legal and tax obligations. To help navigate this process, consider speaking to legal and financial professionals familiar with both US and international business law. Here’s a quick rundown of how the process of forming an LLC differs from US citizens.

Identification Requirements: As non-citizens lack a Social Security Number (SSN) to obtain an Employer Identification Number (EIN), they must apply for an EIN by filing IRS Form SS-4 (and following up with the IRS by phone as needed).
Banking Challenges: Opening a bank account for the LLC tends to be more complicated for non-citizens. Most US banks require account openers to be present in person and provide proof of a US address, which can be difficult for non-residents. Non-citizens may need to travel to the US to satisfy these requirements.
Registered Agent Requirements: While both citizens and non-citizens need a registered agent for their LLC, non-citizens lacking a physical US address will often need to use a registered agent service instead of handling this role internally.
Tax Obligations: Non-citizens may face more complex and potentially costly tax obligations. They are subject to US taxes on income earned from the LLC and may also have to report and pay taxes in their home country. Non-citizens also need to comply with tax laws such as the Foreign Account Tax Compliance Act (FATCA).
Ownership and Management: There are no citizenship or residency requirements to be a member of an LLC, but the presence of foreign members can impact an LLC’s eligibility for certain tax classifications. For instance, S corporations can only have US citizens or permanent residents as shareholders.
Compliance and Disclosure: Non-citizens may have additional compliance and disclosure requirements. For instance, if the LLC is owned by a foreign entity, it may need to file Form 5472 to report transactions between the LLC and its foreign owner.
Visa Status: Non-citizens who wish to actively manage their LLC in the US must maintain appropriate visa status.