Choosing the right state for your limited liability company (LLC) is an important decision for you to make, and you should carefully consider your options.
By default, you should generally plan to form your LLC in the state where you live and do business. This is particularly true if your LLC will have an office or storefront in your home state, or if the vast majority of your business income will be generated from sales or services in your home state. If you are buying real estate through your LLC, you should strongly consider setting up your LLC in the state where you will own the real property.
There are some situations in which it may be beneficial to form your LLC in another state, and we will discuss that further below (along with some popular options such as Delaware, Nevada, and Wyoming). However, before you consider filing in a state other than your home state, just remember the following:
"Taxes are paid where the money is made" - This is an old adage that remains true, but many people believe they can avoid taxes in their home state by filing their LLC in a more tax-friendly state. Maybe you live and work in New York but are considering forming your LLC in Wyoming. Just remember, regardless of where you form your LLC, if your business makes its money in New York you will pay New York taxes. There are of course exceptions, and you should speak to your CPA if your primary reason for picking one state over another is tax savings.
Local Registration Requirements - If you form your LLC in another state, but do business in your home state, you still have to register your LLC to do business in your home state. For example, if you live in New York but set up your LLC in Wyoming, you have to make initial and annual filings in Wyoming and pay the associated fees. But if your Wyoming LLC is actually doing business in New York, you will also have to register your out-of-state LLC to do business in New York. This means you’ll have to make initial and annual filings with the State of New York and pay fees there as well!
Still, there are situations when you should consider forming your business in another state. Businesses that generate revenue from all over the country and don’t necessarily have home offices or storefronts – such as online businesses, traveling consultants and service providers, etc. – should consider the tax, filing, compliance, and other factors that may make filing in other states more appealing. Some of the more popular options are:
Delaware – Delaware continues to be the most popular option for entrepreneurs starting a new LLC. It is a business-friendly state with some notable advantages. To begin with, Delaware’s initial and annual filing fees are low compared to many other states. In addition, Delaware does not tax out-of-state income, meaning that if you form your LLC in Delaware but do a significant amount of business elsewhere, Delaware will not tax those earnings at the state level. The Delaware Chancery Court is another big plus for businesses concerned about disputes. The Chancery Court focuses entirely on business matters, meaning Delaware arguably has a more sophisticated and fast-tracked business dispute judicial process, with judges well versed in business law (in other states, judges hear all types of civil disputes and may not be as well versed in applicable business law). You may also want to consider Delaware if you are planning to raise investment capital. Delaware is still seen as a corporate business haven, and many potential investors will want you to have your LLC registered there.
Nevada and Wyoming – In recent years, Nevada and Wyoming have been gaining popularity as pro-business states. Neither state charges business income or franchise taxes, though both have small annual filing fees. In addition, their LLC formation costs are relatively low and their processing times are very fast (Wyoming processes the filing immediately).