By finding the best LLC service for you, we earn an affiliate commission to keep the lights on. Here’s how.

Best State to Form an LLCPeople move out of state for all sorts of reasons – jobs, family, enticing cities, or just on a whim. But perhaps you’re considering a move for a different reason: starting an LLC.

Because the LLC is a fairly new business model, their legalities and regulations vary from state to state and, in all honesty, some states are simply more inviting than others.

Lots of entrepreneurs ask us where the best state to register an LLC is, but there’s a lot of moving parts to this question. Depending on where your company is located and what line of business you’re in, the answer could vary drastically.

Consider this guide your roadmap, a digital tour of America’s most (and least) LLC-friendly states. By the end, you’ll have a good sense of whether you should form an LLC in your home state or another location.

 

What is an LLC?

On one side you have sole proprietorships and general partnerships, which have no legal structure.

On the other side are corporations, which are structurally complex and require a lot of legal paperwork. In the middle? That’s where you’ll find the LLC. It’s a flexible business structure that’s relatively easy to form and offers enticing protections.

The most common reason to form an LLC is for its personal asset protection. If your LLC is sued, creditors are limited to pursuing your business assets – personal possessions like your house, car, and bank accounts are off-limits. If you own a sole proprietorship or a general partnership, on the other hand, creditors can take anything they’d like.

The actual formation process is much less expensive and complicated for an LLC than a corporation, and ongoing maintenance is simpler as well. As an added bonus, the LLC offers flexibility in its tax structure too. By default, LLCs are taxed like sole proprietorships or general partnerships, where owners report income on their personal tax returns rather than a separate corporate return.

If you’d rather have your company taxed like an S corporation or C corporation, you can, although this means it will be subject to “double taxation” where your profits are taxed on both your corporate and personal returns.

 

Domestic LLC vs Foreign LLC

The first question to ask when deciding where to form your business is, “Am I forming a domestic or foreign LLC?” The difference is pretty straightforward: A domestic LLC is one that’s formed in the same state as your company’s primary business location, whereas a foreign LLC is formed in any other state.

If you don’t already have a domestic LLC, forming a foreign LLC is a bit of a hassle. If you want to form an LLC in a state other than your own while also doing business in your home state, you’ll need to complete your formation in the state of your choice and also register as a foreign LLC in your home state. In this case, say hello to double the formation costs and twice as many ongoing compliance fees.

Even so, you might be tempted to form your LLC in a state other than your own because, quite simply, some states are more LLC-friendly than others. We typically advise entrepreneurs to form businesses in their current state, but if you’re determined to go elsewhere, we’ve outlined the most and least favorable states for LLCs.

 

Which States Have a Favorable Business Climate?

If you’re set on forming your LLC out of state, you’ll want to make sure you choose a good one, because some states are objectively better options than others.

We dug into each state’s business tax rates, formation fees, and ongoing compliance costs to determine which states have the most LLC-friendly environments. Form your business in one of these states for a productive first step on your entrepreneurial journey.

Here are a few of our top choices:

Wyoming: It’s not hard to see why Wyoming is a popular choice – they don’t charge income taxes on businesses or individuals. This state also has an extremely low sales tax rate, just 4%.

And if you value your privacy, Wyoming lets you designate a lifetime proxy, a representative who votes on company business for you, keeping your identity private. The cherry on top: Wyoming has a relatively low $100 formation fee, and a $50 minimum annual report fee.

Delaware: While Delaware is primarily popular for corporations, this state still has some unique advantages that make it an interesting option for LLCs as well. You can form an LLC for just $90 in Delaware, and they don’t charge taxes on out-of-state income.

Their $300 annual tax, however, is a little bit on the high side. Aside from costs, the main reason for Delaware’s popularity is the Chancery Court, a business-only court system. If your business is sued, you can usually count on a quicker hearing than most other states, and your judge will likely be a true expert on business law. You might not see this as a priority right now, but you’ll appreciate it if your LLC gets caught up in a legal dispute.

Nevada: Nevada is an increasingly popular choice for LLC formations, thanks in large part to the fact that they have no business taxes or income taxes. Like Wyoming, Nevada also allows entrepreneurs a high degree of privacy, as they permit LLC owners to maintain anonymity with any business filing. On top of that, Nevada’s $75 LLC formation fee is fairly low, although their $150 annual report and $200 business license fee are slightly higher for annual expenses.

Other Options

Wyoming, Delaware, and Nevada are our favorites, but there are plenty of other business-friendly states where you can form and maintain LLCs at reasonable rates. Here are a couple of the states that we think are strong options, but fall short of our top three for one reason or another:

Oregon: There’s no sales tax in Oregon, which is always attractive for businesses. Their $100 startup fees and $100 annual reports aren’t especially cheap, but they won’t put a major dent in your budget either.

South Dakota: There’s no business tax or individual income tax here, which can obviously keep your costs down. And while South Dakota’s $150 formation fee isn’t the cheapest available, their annual reports cost just $50.

 

Which States Have Difficult Business Climates?

Some states make life easier for LLC owners, but there are states on the other end of the spectrum too, states you’ll probably want to avoid.

Unless, of course, you already live there, in which case you may still want to stick around. For most people located outside these states, though, there’s really no reason to test the waters on these pricey options.

New Jersey: The Garden State has a high corporate tax rate of 9%, and their individual income tax rate ranges from 3.5% to 11.8% for wealthy individuals. And let’s not forget their high 6.625% sales tax. New Jersey’s startup ($125) and annual report ($50) fees are pretty reasonable, but this isn’t enough to overcome the state’s high tax rates.

California: While their formation fee of $70 is super-reasonable, California has some of the highest franchise tax rates in the nation. Every business is required to pay a minimum of $800 annually. On top of that, California’s corporate tax rate is a high 8.84%, and their individual income tax rate goes all the way up to 13.3%, the highest in America. Throw in their 7.25% sales tax, and it’s clear that this is not an inviting state for LLCs.

 

Conclusion

Be careful not to overthink the question of where to form your LLC. Most often, going with your home state is usually the right move, especially if you have a physical office or retail store there.

But if you and your business have the flexibility to move elsewhere, or you’re planning on expanding to other states in the future, now you know which ones have the most LLC-friendly climates.

And remember, when you’re looking to form an LLC in any state, an online incorporation service can be a huge help in navigating the process!