You are permitted to form an LLC in any U.S. state regardless of where you reside or where you intend to do business. Though some states offer more advantages to LLC owners, there are two negatives to creating an LLC in other states: you must register as a foreign LLC in each state you intend to conduct business, and you must designate a registered agent in the state in which you started your LLC.
There are two states commonly touted as the best for LLC formation: Delaware and Nevada.
The biggest advantage to forming a Delaware LLC is Delaware’s Chancery Court. This is a special court in the state responsible for adjudicating business matters. This means that your cases will be heard more quickly and that you will appear before a judge with a lot of experience in business law.
Delaware has a reputation as being the go-to state for incorporation and LLC creation. In fact, Delaware has more companies than people. This reputation is as a result of Delaware’s commitment to business. The State Division of Corporations is responsive and friendly to business owners, and charges some of the lowest fees in the country for its services.
If anonymity is important to you, Delaware permits private filings in which the LLC’s members do not need to disclose their identities. Delaware’s LLC laws are also some of the most fair and flexible in the nation, especially with regard to the freedom of contract. Almost any provision you place in your Operating Agreement will be upheld by Delaware courts.
Nevada is quickly establishing itself as a haven for LLCs as well. In addition to affording business owners a similar level of privacy as offered in Delaware — insofar as members need not disclose their identities — Nevada also charges very low annual fees to its LLCs. The tax advantages in Nevada — mostly due to influence from Las Vegas — mean you won’t pay business income tax, capital gains tax, state corporation tax, inheritance tax, or franchise fees.
The tax advantage is not particularly pronounced in pass-through LLCs, which include single-member LLCs are LLCs that elect to be taxed as partnerships. The reason is that as a pass-through tax entity, the LLC’s members claim the LLC income directly on their own personal tax return. As a result, you will pay income tax to your state of residence regardless of the LLC’s location. LLCs that elect to be taxed as corporations can reap these tax advantages, however.
Your Own State
The truth for most small LLC owners is that the state in which you personally reside is probably the best home for your LLC. Unless you plan to operate in multiple states or grow to become a public company, you will probably save more money and time by forming in your own state. Additionally, you will avoid the initial added steps of finding a resident to act as your agent and registering as a foreign LLC.
Despite Delaware and Nevada being regularly touted as the “best states for LLC formation,” they should not be the default choices for all business owners. Do not choose your state of formation based on what you have been told is better. Unless you have a specific, strong reason for registering out of state, your home state is probably your best bet.