Summary: It’s best to form your LLC in your home state because that is where your LLC will conduct business. Even running an online business means you still conduct business in your home state. Forming an LLC in Delaware, Nevada, or Wyoming usually ends up costing a lot more. More headaches, too.
There are 4 exceptions to this:
We see this all over the internet:
“Nevada has no corporate income tax.”
“Wyoming LLCs are the most affordable.”
“Delaware is the best state to start an LLC!”
To be honest with you, it’s mostly bullshit. And doesn’t apply to the vast majority of LLC owners.
The disadvantages of forming an LLC outside of your home state far outweigh the perceived “advantages”.
Let us explain.
Domestic LLC vs. Foreign LLC
If you form an LLC in the state where you reside (aka your “home state”), this is known as a Domestic LLC.
If you form an LLC outside of your home state, you’ll be required to register that out-of-state LLC as a Foreign LLC in your home state.
- Related article: Difference Between a Domestic LLC and a Foreign LLC
For example, if you form an LLC in Nevada (but you don’t live there), then you’ll be required to register that Nevada LLC in your home state (as a Foreign LLC) in order to do business in your home state.
- You now have 2 LLC filings (one in Nevada and one in your home state).
- You have to pay 2 State filing fees.
- You will be required to pay for a Registered Agent in order to use their address for your Nevada LLC.
- You have to pay 2 Annual Report fees.
Note: We used Nevada above as an example, but the same applies to any out-of-state LLC.
In short, this can easily add up to DOUBLE the cost and DOUBLE the headaches since you have to maintain 2 LLC filings.
States Charge Fines and Penalties
All state governments enforce their rules that require an LLC to be registered as a Foreign LLC if it is transacting business in their state. Enforcement can include fines, penalties, interest, court costs, and having the LLC’s ability to transact business completely put on hold.
Some states have higher fines than others, but all states have statutes which spell out the consequences of an LLC illegally transacting business in their state.
In some states, the fines can be a few hundred dollars per year. In other states, the fines can be thousands of dollars per year.
Take for example the Connecticut Secretary of State. In conjunction with the Attorney General, they collected $1.3 million from companies that were illegally doing business in Connecticut (not registered as foreign entities). Some companies were only fined a few hundred dollars, however most companies were charged a lot more. The average fine was $4,600 and the highest fine was $30,795.
As per Section 34-275a of the Connecticut LLC Act, if your out-of-state LLC conducts business in Connecticut but fails to register as a foreign LLC within 90 days:
- The state imposes a $300 per month penalty.
- Your out-of-state LLC owes income taxes and fees for all the years (and partial years) it failed to register. And the individual who owns the LLC must pay income taxes for the LLC on their state income tax form.
- Your out-of-state LLC is also charged interest and penalties for not paying the taxes and fees it should have paid.
- The penalties are levied by the Secretary of State, but if necessary, the Attorney General will sue your out-of-state LLC to recover all the amounts due.
- The Attorney General can also issue an injunction preventing your out-of-state LLC from doing any more business.
- While your out-of-state LLC can defend itself in a lawsuit, it cannot sue another party in Connecticut.
- Your out-of-state LLC won’t be able transact business in Connecticut until all civil penalties are paid (including interest and court costs) and the LLC properly registers as a foreign LLC.
If you want to form your LLC in one state and then register that LLC as a foreign LLC in the state(s) where it’s transacting business, then this whole thing may not be a big deal.
However, a lot of small business owners don’t want to pay for an LLC filing in multiple states since it requires multiple filing fees, multiple annual report fees (and potentially other annual requirements), in addition to maintaining a Registered Agent in multiple states.
Taxes Are Paid Where Money Is Made
Many people are misled into forming an LLC in other states to take advantage of “savings on state income taxes”.
This is simply not true.
In this example, if you formed a Nevada LLC and that LLC is doing business in your home state (not in Nevada), you’ll still need to pay taxes in your home state because that is where you are making money.
A helpful saying to remember is:
“Taxes are paid where money is made.”
Again, your Foreign LLC will need to pay taxes in your home state since that is where you are operating and doing business.
Even worse, you may owe additional taxes and fees in Nevada.
So why do so many websites talk about Nevada LLCs?
Again, most of the benefits of forming an LLC outside your “home state” are a far stretch from the truth.
Both the states and the companies promoting those states stand to gain financially by LLCs being created within THAT state’s borders.
For example, if 40,000 LLCs are formed each year in Nevada, that’s approximately $3 million dollars in annual revenue for the state.
And that is just for the state of Nevada alone.
It doesn’t include the tens of millions of dollars made by the companies promoting Nevada as “the place” to form your LLC.
The funny thing is, compared to how much Nevada is “hyped up”, there really aren’t that many LLCs formed there each year.
There are far more LLCs formed in states that aren’t “hyped-up”.
Furthermore, Nevada companies rank the highest in fraudulent activity.
Look – don’t get us wrong, if you live in Nevada and you form an LLC in Nevada, there is nothing wrong with that.
But if you don’t live in Nevada, again, it is much better to form your LLC in your home state.
So what about a Wyoming LLC?
Although there is far less fraudulent activity in Wyoming compared to Nevada, this state is also hyped up.
Again, the disadvantages of forming an LLC outside of your home state far outweigh the perceived “advantages” and are not worth the extra hassle, time, and money.
In fact, it will cost you a lot more in the long run.
Forming your LLC where you live is your best bet.
Before we discuss forming an LLC in your home state, let’s talk about the first state to ratify the United States Constitution.
Although small in a geographical sense, Delaware is quite large in terms of business activity.
Over 50% of U.S. publicly traded corporations and 60% of the Fortune 500 companies are incorporated in Delaware.
But, did you see the two words we underlined above?
“Corporations” and “incorporated“.
You’ll notice these statistics say nothing about LLCs.
The fact is that Delaware may be a good state to form a company in – if your business operates as a Corporation.
Meaning, Delaware is best suited for publicly traded companies that sell shares on the stock market (like Microsoft, Apple, IBM, Chase, Coca-Cola), or companies that have multiple investors, or need to raise venture capital.
But, most of our readers don’t fall into that category.
If you form an LLC in Delaware (but don’t live there), you will still need to:
- Register your Delaware LLC as a Foreign LLC in your home state
- Pay annually for a Registered Agent, and
- Pay the Annual Reporting fees in both states every year
However, if you do live in Delaware (or your LLC in transacting business in Delaware), then you can form your LLC in Delaware.
Home State vs. “Magical States”
Again, forming your LLC outside of your home state is just not worth the hassle and cost.
This goes for Nevada, Wyoming, Delaware, and any other “magical” state.
Attorneys Alexander J. Davie & Dana Shultz agree: most of these states are just hyped up. The best state to form an LLC is your home state.
We get lots of questions like this: “My business is 100% online. Where should I form an LLC?”
The answer in this case is still an LLC in your home state. Do you think by just being “online” that you can get around corporate law and tax law? That’s not how it works.
Many people run their online business from their home (or coffee shops and co-working spaces in town). That’s where you’re legally doing business. And that’s where you should form your LLC. It’s not a matter of where your customers are located (if you sell online); it’s a matter of where you are primarily (or repeatedly) running the business from.
Even if you travel often or run a location-independent business, the states don’t really care. You’ll need to pick a state where you have the greatest “connection”. This is most likely your home state, your state of residency, where you have your driver’s license, and where you pay state taxes.
My Customers are all Over the Country/World
A lot of people are confused about the legal definition of “doing business”. They think it’s about where the customers are.
It’s not. It’s about where you are running and operating the business from.
You should form your LLC where you’re running the business and working from.
And just because you have customers or clients located in a few states doesn’t mean you need to register your LLC as a Foreign LLC in that state.
Issues with Seller’s Permits
Many LLC University® readers write to us about the issues they face after forming their LLC in the wrong state. We recently received this comment:
“I live in California. I got some bad advice and made the mistake of registering my LLC in Utah back in June. Then I realized that I also needed to register in California as a Foreign LLC since I need a sellers permit for wholesale purchases.“
If you need a Seller’s Permit (aka Reseller’s Permit or Resale Certificate), you’re likely going to run into similar issues.
What really stinks about this situation is how much time and money has already been invested. In our example above, this reader now has to 1) register his Utah LLC as a Foreign LLC in California, 2) dissolve his Utah LLC and form a California LLC, or 3) Re-domicile (also known as conversion or re-domestication) his Utah LLC to California… which isn’t the easiest process.
Then he has to sort out bank accounts, address updates, IRS updates, and all the other registrations that are in place with the Utah LLC.
You’re also likely to run into similar issues if you have to register your LLC with your state’s Department of Revenue (ex: sales tax registration), but your LLC is formed in another state.
Form an LLC in Your Home State
This is the least expensive, easiest to set up, and the best long-term strategy for your LLC.
The reason why is that most people are running their business (regardless of where they form their LLC) from their home state.
Our friends at Northwest Registered Agent say it best:
“We get a lot of people these days coming up with some pretty goofy ideas. We always try to send them in the right direction before they go off and set up their 5-LLC-asset-protection-strategy to protect their new taco stand idea.”
If you are primarily running your business from home or from locations in your home state, you are most likely transacting business in that state. And that’s the state where you should form your LLC (or register your out-of-state LLC as a foreign LLC).
Now yes, it’s possible to reside in North Carolina, for example, but have a factory and employees located in Virginia. In this situation, your LLC is most certainly transacting business in Virginia. However, it’s likely that your LLC is also transacting business in North Carolina if you are working from home to run your business activities in Virginia.
Another helpful way of determining your home state (if it’s not clear) is to imagine yourself in a state tax audit. Where would the court determine you are throughout most of the year? Where are most of your ties? For most people, this will most likely be the state where your LLC is also transacting business.
How would you answer the following questions:
- What state are you a resident of?
- Where do you pay rent?
- Where do you own homes?
- Where is your bank account?
- Where is your driver’s license?
- Where do you file a state tax return?
- If you have other licenses/permits, in what state are they held?
- Where are you registered to vote?
- What states were you in for more than 183 days?
- Where is your doctor?
- Where is your dentist?
- Where is your health insurance?
- Where do your kids go to school?
- Where is your church?
- Where does your family wait for you while you’re traveling?
- Where do you most frequently return to after traveling?
- Where is your main office?
- Where is your gym?
- Where is your country club, group, or regular local meetings?
- Where are your cars registered?
- In what state is your car insurance?
- Where are your pets?
- Where is your veterinarian?
- Where is your safe deposit box?
- Where do you receive most of your mail?
- Where are financial statements and bills sent?
- From where do your social media posts’ originate?
- Where are most of your toll records?
- Where do the calls/text on your cell phone originate? (records have been subpoenaed)
Now not all the things above mean an LLC is transacting business in that state. It’s more so for people who think they are just doing business online, or doing business from “anywhere”. If you were being audited for your personal income taxes, the state where the court determines that you’re a resident is most likely the same state where your LLC is transacting business.
We hope this information is helpful to you.
We hope it cleared up a lot of the hype and misinformation about which state is best to form your LLC.
Now, there are some exceptions.
There are four basic exceptions regarding which state is best to start an LLC:
If you live in California, you’ll likely be doing business in California no matter where you form your LLC. So you’ll need to form an LLC in California or register your out-of-state limited liability company as a foreign LLC.
Non-U.S. Citizens and non-U.S. Residents
Note: There are no citizenship or residency requirements to form an LLC in any US state. Non-US residents can form LLCs in the USA.
If you are a non-US citizen or a non-US resident, it comes down to how the business is run.
If you’re going to have an office, employees, or physical presence in the USA, then you should form your LLC in that state. This is the state where the LLC will be transacting business.
If your business will have no physical presence in the USA, then you can choose any state.
The type of US taxes and state taxes you pay will depend on how your business makes money. There isn’t a simple answer for what the “best state” is for the lowest taxes for non-US residents/citizens. It all comes down to the type of business you have. And this isn’t something we can answer for you. You’ll need to speak with an accountant familiar with non-resident alien taxation and the 60+ US tax treaties.
Having said that, while you can pick any state to form your LLC in (if there is no physical presence), how you obtain an EIN and open a bank account are different. And foreign-owned Single-Member LLCs have an additional filing requirement with the IRS (Form 5472). Related to all that, you’ll find these articles helpful:
- How to get an EIN for LLC without an SSN
- How a non-US resident can open an LLC bank account
- Form 5472 and foreign-owned Single-Member LLC
Real Estate Limited Liability Company
As we mentioned earlier, when operating a business, it’s best to form your LLC in your home state (since that is where most LLCs are transacting business).
This is not the case for real estate LLCs.
Of course, if you are investing in real estate in the state where you live, then yes, it makes sense to form your LLC in your home state.
But if you are investing in real estate located in another state, it is best to form your LLC there.
Your LLC is doing business in that state if you’re generating rental income, buying and selling, wholesaling, or basically any method where you’re making money from your real estate investments.
If you were to purchase property out of state with an LLC that was formed in your home state, you would run into the same issue that we mentioned earlier.
You will be required to register the Domestic LLC in your home state as a Foreign LLC in the state where you are purchasing the property.
Which means that you now have to pay filing fees in both states, pay for a Registered Agent in the foreign state, pay annual fees in both states, and deal with the headaches of unnecessarily managing 2 LLCs.
In summary, it is best to form your LLC in the state where you are buying property since that is the state where your LLC is transacting business.
Wyoming Holding Company
If you’re buying a lot of property – or property in multiple states –, some real estate investors will set up a Wyoming LLC holding company. And then that LLC will own other LLCs located in the states where the properties are located.
Said another way, real estate investors often form a parent LLC in Wyoming, then the Wyoming LLC owns a child LLC set up in the property state.
If you’re considering starting a holding company, you should speak with an attorney or accountant about this.
Best State to Start an LLC FAQs
Will an LLC save money on corporate income taxes?
No, forming an LLC won’t prevent you from having to pay corporate income taxes. This is because LLCs don’t have corporate income taxes at all.
Said another way, the term “LLC” stands for Limited Liability Company, not Limited Liability Corporation. So LLCs don’t have corporate income taxes to pay, because LLCs aren’t Corporations.
Instead, LLCs have what’s called “pass-through taxation”.
Pass-through taxation means that the tax-paying responsibility passes through the business structure (the LLC) to the business owner(s). The business owner(s) then pay taxes on any business income generated by the LLC on their individual income taxes (Form 1040).
Note: The only exception is for LLC owners who choose to have their LLC taxed as a C-Corporation. However, this is rare.
Which state is the cheapest to open an LLC?
The cheapest state to open an LLC is Montana.
That said, you should only open an LLC in Montana if you live in that state, or do business there.
While Montana may seem like a business friendly state due to their tax laws, those tax advantages only apply if you live there or do business there. Otherwise, you’ll have to register your LLC twice: once as a domestic LLC in Montana, and again as a foreign LLC where you live/do business.
That means you will also have to pay annual fees in both states. And you may have to pay for 2 Registered Agents.
The costs add up quickly and you end up spending more money on your business instead of saving money.
What’s the best state for a non-resident LLC?
If you’re a non-US resident or non-US citizen (and you don’t have US employees or an office, store, or warehouse in the US), you can form your LLC in any state. Popular options are Wyoming and Delaware. However, we personally recommend Ohio because it’s more affordable (there’s no Annual Report) and the paperwork is very simple. We don’t think the “reputation” of Delaware is that important, or worth the extra cost.
- Wyoming LLC Non-Resident costs: State fee is $100. Annual Report is $60 per year.
- Delaware LLC Non-Resident costs: State fee is $90. Annual Report is $300 per year.
- Ohio LLC Non-Resident costs: State fee is $99. There is no Annual Report.
If you have a physical location in the US (like an office, storefront, or warehouse) or you have employees in the US, it’s best to form your LLC in the state where you’re “transacting business”. For most, this is where there physical location is, or where most of their employees are located.