Finding the Best LLC State: a Guide to Choosing the Right One

Selecting the state where you create your LLC might seem like a momentous choice, but it doesn't need to be stressful. Whether you're new to business or an experienced pro, picking the right state for your limited liability company can lay the groundwork for triumph.

Every state has something unique to offer, whether it's tax breaks, reasonable regulations, or simply lots of customers nearby. We'll walk you through all the significant factors so that you can decide what's essential and what to choose when forming an LLC.

If you're ready to make an informed decision about incorporation, let's get started by looking at why location matters.

What Is an LLC, and How Does It Work?

An LLC, or Limited Liability Company, is a type of business organization that offers some advantages of both corporations and sole proprietorships. With an LLC, owners (known as members) generally can't be held personally responsible for any debts or lawsuits against the business.

It means that your house and car are safe from those types of claims in most cases. This feature makes LLCs popular with everyone, from tech start-ups to family-owned businesses to rental property moguls.

But here's where it gets interesting: An LLC also offers a lot of flexibility. You can divvy up ownership, profits, and management however you see fit—as long as you follow state rules for creating and running this type of company.

Whether you're starting a side hustle selling homemade pet treats or launching SpaceX's 10,000th rocket, running an LLC lets you run things your way. It is protecting your assets from any problems that might crop up with the business itself.

In other words? Think of an LLC as sort of like if a corporation ate a sole proprietorship—the tasty parts got absorbed, but there was no indigestion later on.

LLC Tax Basics

When it comes to taxes, LLCs keep things simple and straightforward. As a pass-through entity, an LLC doesn't pay taxes at the business level. Instead, the owners directly receive their share of the profits and include it on their individual tax returns.

This means you avoid the dreaded "double taxation" that some corporations face—where both the business and the owners get taxed separately. You'll pay personal state income tax on what you earn.

LLCs also have some flexibility. While it's not common, an LLC can choose to be taxed as a corporation if it fits their financial strategy better.

But for most small business owners, the pass-through setup keeps things easy and more tax-efficient. So, if you're looking for a tax-friendly business structure that won't complicate your financial life, an LLC could be your go-to choice.

Factors to Consider When Choosing an LLC State

When it comes to forming an LLC, the state you choose can have a significant impact on your business. That's because each state has its own taxes, rules, and benefits for LLCs – and what works well for one company might not make sense for yours.

Here are some essential things to think about when deciding where to form your LLC:

Business-Friendly Laws and Regulations

One thing to consider first is how business-friendly the laws and regulations of a state are. Some states have developed reputations for being particularly supportive of LLCs.

Delaware and Nevada are two examples. Delaware has a Court of Chancery that deals only with business law matters. It offers a streamlined legal process that business owners appreciate.

Nevada, on the other hand, does not make public the names of LLC owners – something many people like due to privacy concerns.

If having a robust legal structure in place for your company or protection from possible lawsuits is essential, these may be good options for you.

State Income Taxes and Franchise Taxes

When it comes to taxes, they can make a big difference in any business—and each state handles things differently. Some states (such as Wyoming and South Dakota) don't ding you for state income taxes, which could be attractive if you're a business owner who wants to keep more money in your pocket.

Others do have them: California and Texas are examples. But these places may sock businesses with franchise taxes or fees every year that don't exist everywhere else.

For instance, if you form an LLC in The Golden State, there's a minimum franchise tax regardless of whether your company made anything during the year. It is a cost that can add up over time.

Texas doesn't levy corporate income tax either. Instead, it imposes something called a "margin tax" on businesses' gross receipts—which might hurt high-revenue enterprises.

Consider both your firm's size and expectations for revenue when thinking about this expense—as well as whether you'll be reinvesting profits back into the company or taking them home.

Registered Agent Service Requirements

In order for a limited liability company to operate legally, it needs someone to accept legal documents on its behalf. However, different states have different rules about who can be this person, known as a registered agent.

Some states are more relaxed than others. In certain places, you can do the job yourself. In others, you'll need to hire a professional service.

Wyoming has few requirements, meaning less paperwork and lower costs compared to New York, for example, where strict rules could mean spending more time and money.

If your business crosses state lines or you'd instead not make your home address public information, picking a state with flexible, registered agent requirements might work to your advantage.

Personal Assets Protection

One of the top reasons for creating an LLC is personal asset protection. However, not every state provides the same level of protection.

For instance, states such as Delaware and Nevada have strong safeguards in place. They bar creditors from going after owners' homes or cars to cover business debts. This is particularly crucial for people in high-liability sectors or anyone looking to mitigate their individual risk.

Wyoming also scores well for asset protection within our framework. While it may not have the same robustness as Nevada or Delaware law, we believe that Wyoming provides better-than-average security against legal claims compared to other states.

LLC Owners' Residency and Citizenship Status

While most states permit individuals who don't live there to create an LLC, the rules and procedures can differ significantly. If you're starting a business from outside the U.S. or have partners who live in multiple countries or states, you'll want to avoid states with strict citizenship or residency requirements.

Nevada and Delaware are once again popular picks because they don't impose such conditions on LLC owners. This makes them more attractive options for a broader range of people who want to start different types of businesses.

However, be aware that other states may ask for extra paperwork—or have different requirements altogether—that could make life complicated down the line.

Future Business Needs and Growth Potential

Whilst your company may be small now, it will not necessarily remain so. When selecting the state in which to form your LLC, you should bear in mind your long-term objectives.

If rapid expansion is on the cards, states such as Delaware come with advantages that enable you to run and grow your business in a flexible manner.

One example of this is the ability to have complex ownership structures, which are useful if there are plans to bring investors on board further down the line.

Conversely, if you have a particular industry in mind for development, then it might be worth looking into states that are known for fostering that sector specifically.

California is an excellent choice for tech start-ups. Despite higher taxes here, entrepreneurs can tap into an unrivaled ecosystem of talent resources and capital networks.

Forming an LLC in Your Home State Vs. Another State

Should you form your LLC in the state where you live—or choose a different state, one known for its business-friendly regulations? There are good reasons to go either way. The right choice depends on your resources, goals, and needs.

Here's what to consider when deciding between forming an LLC in your home state vs. another state:

Pros and Cons of Forming an LLC in Your Home State

Pros: Simplicity, Convenience, and Cost-Effectiveness

If you set up an LLC in your own state, it will be easier. You already know the local rules there – you do not have to learn another state's regulations. Also, doing things like filling in forms, paying fees, and finding a registered agent is often simpler and quicker if you stay where you are.

Here is an example to help explain things further: Texas does not have a state income tax. So, if you live there and form your LLC there, too (rather than creating one in a different state), things stay simple – which can also mean keeping costs down once the business is booming.

You will not have to pay extra fees on top of regular filing expenses or worry about taxes owed out-of-state (these two factors alone could save several hundred dollars!).

Nor must you hire someone else (known as a registered agent) to represent your company in states other than where it's based. This saves money for ongoing fees as well as headaches down the road.

Cons: May Not Offer the Best Tax Environment Or Business-Friendly Laws

However, it may not be the best option to form an LLC in your home state. When it comes to tax climate and business-friendly laws, not all states are created equal.

For instance, if you live in California—where compliance requirements and franchise taxes can be steep—the cost of doing business could add up fast. For one thing, California LLCs must pay an annual minimum franchise tax of $800, which is much higher than in many other states.

This means that while going with your home state to form an LLC might seem convenient, sometimes it's not the savviest financial move—mainly if regulations there are burdensome on small businesses or start-ups.

Pros and Cons of Forming an LLC in Another State

Pros: May Offer a More Favorable Tax Environment Or Business-Friendly Laws

If you want advantageous tax conditions or relaxed business regulations, it can be worth creating an LLC in a state other than your own. Some states, such as Nevada, Wyoming, and Delaware, are famous for LLC formation because they offer a more business-friendly climate.

Delaware is one example: there's no state sales tax here, plus the state provides strong legal protections for business owners.

Meanwhile, Wyoming doesn't levy a state income tax on anyone – something to bear in mind if you're planning to set up shop somewhere that does impose this. The Equality State also excels at keeping things private: it doesn't require LLCs to disclose members' names.

These factors make a lot of sense if you're trying to create structures that will attract investors or complex ownership arrangements.

Delaware has become the go-to choice for many prominent corporations across America and smaller tech start-ups, too. One reason behind this popularity is a specialized court – officially called the Court of Chancery – which deals with business disputes efficiently (and often confidentially).

Cons: May Require Additional Fees, Paperwork, and Compliance Requirements

However, there are difficulties associated with creating an LLC in another state. One issue is that you will have to pay for a registered agent in that state, which can be expensive.

Furthermore, if you plan on conducting business in your home state as well, you will likely need to file for a foreign LLC status there, too. This means more paperwork and more obligations to satisfy.

For instance, suppose you live in New York but set up an LLC in Delaware because you like the way it handles small businesses.

In that case, you would still have to register as a foreign LLC back home—paying additional fees and keeping up with two sets of rules and regulations, which could eventually become both bothersome and expensive.

Top States for LLCs

Now that you know some basics about LCC and the pros and cons of forming it in your versus another state, let's analyze the top options:

Your Home State

Despite what some advice on the internet may suggest, forming an LLC in the state where you live is usually best. Even if your state has relatively high taxes or fees—such as Illinois or New York—it often still makes sense to form there.

When you create an LLC in your home state, it's known as a "domestic LLC." For example, if you live in New York and form an LLC there, New York will treat it as a domestic business.

But if you were to form your LLC in Wyoming instead because that state has low fees, then as far as New York is concerned, your LLC would be considered a foreign one.

Why is this important? If you're conducting business in your home state, you must register your Wyoming LLC as a foreign LLC in that state. This means you'll have twice as much paperwork and double the fees, plus you'll need to have two registered agents.

And about those potential tax benefits people talk about? They only count for money made in Wyoming. Anything you earn while working in another state will still get taxed there.

Sticking with your home state keeps things simple and saves you from headaches or unnecessary expenses.

Delaware

Pros:

Delaware is well-known for being a business-friendly haven – particularly if you're a corporation. According to the Delaware Division of Corporations' 2023 Annual Report, a staggering 67. 6% of all Fortune 500 companies are incorporated there.

Why? This is in large part because of Delaware's General Corporation Law, which is widely regarded as the most advanced and flexible business statute of its kind, and the state's internationally renowned Court of Chancery.

The Chancery Court specializes in business law and has shaped much of modern U.S. corporate case law.

Delaware offers anonymity to LLC owners, too. It is one of only four states providing strong privacy protections for those behind limited liability companies, the others being Nevada, Wyoming, and New Mexico.

But be aware: while these advantages do exist for LLCs, they are primarily benefits enjoyed by corporations here.

Cons:

LLCs are not considered corporations as they do not fall under Delaware's General Corporation Law. Instead, they are governed by the Limited Liability Company Act.

While the Court of Chancery is advantageous for businesses incorporated in Delaware — with more experience handling corporate suits than most state courts — only lawsuits against incorporated companies can be heard there.

Privacy remains critical but isn't absolute. Banks and the IRS will still require your identity. And suppose you primarily do business outside of Delaware but have a DE LLC. In that case, you'll need to register as a foreign LLC in your home state — which might make your information public anyway.

If you live or have operations only in Delaware, this doesn't matter. There's no additional cost beyond what you've already paid. However, these benefits may not outweigh everyone else's added upfront and ongoing fees.

Wyoming

Pros:

Because Wyoming has no state income tax, corporate tax, or franchise tax, it is considered one of the best places in the United States to set up an LLC and save money on taxes.

In fact, according to the Tax Foundation's State Business Tax Climate Index for 2024, Wyoming has the most business-friendly tax system of all 50 states.

Wyoming also scores highly in privacy protections. It is one of only a handful of states that provides extra safeguards for LLC owners who wish to remain anonymous.

For example, people setting up companies there can arrange for someone else to vote for their shares, meaning their names don't appear in public filings as a result.

Cons:

However, there are reasons why you might not want to form an LLC in Wyoming if it isn't your home state. The tax advantages only apply to money you make in Wyoming.

If your business doesn't operate there, you won't get the benefit of paying state taxes. Your home state will tax any money you earn as usual.

On privacy, while Wyoming has solid protections for LLC owners who register their companies there, those "safeguards" do not automatically apply elsewhere.

It may still make sense to set up a shop in Wyoming if either your operations or residence are located there exclusively. But for everyone else, the hassle outweighs the benefits.

Nevada

Pros:

Like Wyoming, Nevada ranks high on lists of the best states to form an LLC—and it's not just because it boasts Sin City.

Nevada does not levy personal or corporate income taxes on businesses, nor does it impose franchise taxes (although there is a gross receipts tax to consider). This can be attractive for owners who are looking to minimize their outlay.

On top of this tax advantage, Nevada also provides strong privacy protections for LLCs – meaning a level of confidentiality that many entrepreneurs appreciate.

However, while the state does require LLCs to file an annual list of members and managers, fees for doing so tend to be higher here than in other states.

Cons:

But there are reasons why Nevada might not be the best choice if you don't live there. The state's low taxes are only good for money made in Nevada. If your LLC makes money in other states, their tax rules apply – so you won't save anything by having a Nevada base.

Nevada does let you register an LLC with lots of privacy, but this doesn't cover what your business gets up to outside state borders. If you're trading elsewhere, too, you may have to declare yourself a foreign LLC – which can mean making information about your business public.

Setting up there makes sense if you live and do business solely in Nevada. For others, however, the drawbacks cancel out any potential benefits.

Alaska

Pros:

If you're an entrepreneur who wants to form an LLC in a place with lots of room and an exceptional business atmosphere, consider Alaska—it might catch your interest.

The state's nickname is "The Last Frontier." When you see photos of Alaska's rugged loveliness and wide-open spaces, you understand why.

One more reason people who live or do business here love forming an LLC in Alaska. There's no personal income tax (meaning taxes taken from your paycheck), and sales taxes are low compared to other places. That can save Alaskans a lot of money.

Another good reason is that Alaska has strong rules that help protect what belongs to your company. This is called "asset protection" by lawyers.

Cons:

However, there are also some downsides to opening an LLC in Alaska. For example, suppose you want to keep your identity as a private member of an LLC. In that case, this isn't possible in Alaska. So, if anonymity is important to you, there might be better choices.

Another factor to consider is that Alaska is remote and has the lowest population density of any state. These factors can make recruiting and keeping staff difficult. If you need a large number of employees now or in the future, this may prove challenging.

If you like doing things differently and are attracted by Alaska's tax advantages over other states, it could still be worth setting up an LLC there.

But think hard about whether convenience and privacy issues will cause you problems later on once your business is up and running successfully.

South Dakota

Pros:

If you want to start an LLC (limited liability company), South Dakota is one of the best places to do it – and its popularity is growing. The state combines low costs with a business-friendly approach.

One primary reason for this is taxes. South Dakota does not levy personal or corporate income tax at all. This makes it attractive for any type of business, including an LLC.

Another perk is that South Dakota has a relatively cheap annual reporting fee, meaning you won't break the bank by keeping your company compliant while it's up and running.

The cost of setting up an LLC is also close to the average for America, at $150. So, new business owners aren't hit too hard financially, either.

Cons:

However, South Dakota does not offer the option for fully anonymous LLCs. While there are ways to protect member privacy, such as setting up an anonymous LLC as a member of another, this adds complexity and extra costs.

In addition, like Wyoming and Alaska, South Dakota has a low population density. This can be a challenge if your business needs a steady influx of talent, partners, or customers, as the pool from which to draw is smaller.

South Dakota is great for entrepreneurs seeking a tax-friendly, low-cost environment. However, the trade-offs in terms of privacy and access to resources should be weighed.

Conclusion

If you want to start an LLC, picking the right state is essential. It's not just about taxes or privacy. You need to find somewhere that works for your business.

Your home state might be the easiest, but Delaware, Wyoming, Nevada, or South Dakota might suit you better. Consider where your company is based, whether you plan on growing, and what rules you'll need to follow.

Ultimately, the top state for your LLC will be whichever one lets you focus on running your business instead of dealing with lots of red tape. But take your time deciding. You want to give yourself every chance at success – trust us!

Frequently Asked Questions

What Is the Best State in Which to Form an LLC?

While it can be convenient and cost-effective to choose your home state as your business's legal base, there are situations where another state may suit you better.

Does My LLC Need to Pay Personal State Income Tax If I Register It in a Different State?

Sure, you pay individual state revenue tax based on where you live and make money, not wherever your LLC is registered.

Will My LLC Have to Pay Corporate Income Taxes in the State Where It's Registered?

If your state imposes corporate income tax, your LLC may have to pay taxes. However, since LLCs are usually pass-through entities for tax purposes, the owners will report any income on their personal tax returns and pay taxes at that level.

Where Do I Pay Income Taxes If My LLC Operates in Multiple States?

You need to pay state income taxes in any state where your LLC has earned money. Depending on your business, you might have to file tax returns in more than one state.