June 20, 2019 | Last Updated on: October 30, 2023
Updated September 30, 2020
Registering a Limited Liability Company (LLC) is a pivotal step many entrepreneurs take toward building an idea into a business. However, registering an LLC costs money that young businesses would often rather save. One way to reduce LLC registration costs is to file in a state with lower fees. With few exceptions an LLC must be registered in the same state it does business. However, if your business can be flexible on address, here is where you can save some money.
An LLC is a business structure in which the business remains unincorporated. In other words, the business functions as a pass-through entity, in which income flows through the business to the owners and investors as personal income. In fact, pass-through entities are by far the most popular business structures in the United States. According to a report by the Tax Foundation, approximately 94% of U.S. businesses are pass-through entities.
One of the main advantages of an LLC is the owner’s liability. As the owner of an LLC, your liability is limited solely to the amount you have invested in the company, which protects your personal assets and property. The reduction in personal liability surrounding the business and its operations is one of the most appealing aspects of limited liability companies.
While the tax structure, tax rates, and required IRS filings are standardized nationwide on the federal level, states structure their internal operations differently. As a result, different states can have more advantageous structures. Some states may have higher personal state income tax rates, while some may have no personal income tax at all. Some state laws also require higher fees and more frequent filings.
For some small business owners who prefer privacy, some states don’t require that business owners be listed in the public record. At the end of the day, some states are just more pro-business than others. However, if you are looking to move and open up a business, state tax rates and LLC fees are definitely something you should consider as you make your decision.
No need to leave a cliffhanger – just acknowledge this fact and move the relevant section speaking to this after this section.
No, you shouldn’t. You should file your LLC wherever you are planning on conducting business. Over the years, states have made a lot of money from offering low fees to LLCs. Business owners, fooled by advertisements and articles by registered agents, continue to think they’ll be able to save money by filing their LLC in a different state. This is almost never true.
Filing in a different state will always incur additional fees. First, you’ll have to file as a foreign LLC in the state that you are conducting business in. This will incur additional fees for your business right away. States then require you to have a registered agent within the state as a foreign LLC, so you’ll have to pay another annual fee to a registered agent. At the end of the day, the real winners from you filing in a state other than your home state are: the state in which you file and the registered agents, who are now receiving double the fees.
A whole slew of additional issues can arise. LLC tax implications can be confusing before adding in unnecessary variables. Filing in a separate state can make them a mess. Which state should you pay taxes in? Will your state offer you a tax credit so that you don’t have to pay taxes twice?
To best understand the implications that come from operating in a different state from which you have filed for your LLC, you should seek out a qualified tax professional.
The only time you should consider filing in a different state is if you are operating your business in multiple states. Again, before doing this, you should seek out an accountant who can help you figure out what will work best for your individual situation, since it will depend on where you are planning on operating your business.
The process to register a Limited Liability Company is typically very similar from state to state. After deciding on a name you will have to file Articles of Organization, also known as a Certificate of Formation, in the state you are filing within.
The state you choose will typically be the state that you live in. For many years, various states have advertised their pro-business laws and the benefits of forming an LLC in their state. However, at the end of the day, it is almost always best to form your LLC in the state you plan to conduct business within.
You should be prepared to pay filing fees of around $100 in order to form your LLC. While most states keep the fee at a level near that price, some states do require more, such as California, which charges a fee of $800.
Additionally, most states require that you have a registered agent assigned to your business. A registered agent is a third party, located within the same state where you are filing, that will serve as a means for the state to communicate notices to you, such as correspondence from the Secretary of State office, official tax forms, and notices of lawsuits.
Some states will also require that your business send out a notice of formation to local communities by publishing in a newspaper or other local media engine. You’ll want to research the exact requirements of the state you are filing in before beginning any processes.
Before you start conducting business, you will also want to make an LLC operating agreement. While most states will not require that you file this with them, it is important to have for internal purposes, especially if the business is not a single member LLC (i.e. where it will be owned and run by more than one person).
The operating agreement will be a crucial aspect of solving or navigating the many business matters that can and will arise as you operate your LLC. This will help prevent any issues down the road, should members disagree on how to operate the business.
Your operating agreement should include:
Lastly, you’ll want to familiarize yourself with any of the rules and regulations surrounding LLCs in the state you are filing within. This means understanding any annual fees or franchise taxes you may owe, any annual reports you’ll need to file, and any other processes that may be required to keep your LLC in good standing after it is formed. Make sure to write all this information down and set reminders for due dates. This way you can ensure you won’t have to pay late fees or, worst case scenario, lose your LLC because you forgot to pay annual dues.
A lot of it revolves around the product you are selling, the clientele in the state, and ultimately where you live. For example, you probably would not want to sell surfboards in Wyoming just because Wyoming has some of the most pro-business state laws on the books.
That said, if you are planning on running a business in multiple states, or are currently looking to relocate, understanding which states are the most business-friendly states could certainly be helpful. Ultimately, the biggest factors impacting LLCs on a state-by-state basis are formation fees, annual fees, and state income tax rates.
Wyoming is a particularly friendly state when it comes to businesses. It is often regarded as the best state to form an LLC in. The state has no personal income tax or corporate income tax and the sales tax is a low 4.0%. This makes operating an LLC particularly advantageous here. Wyoming also has very minimal reporting obligations and limited fees surrounding LLCs. The annual franchise tax in the state is only $50.
Wyoming is not the only state without personal income tax or corporate income tax. Nevada also benefits from having neither of these, making it another business-friendly state. The fees for forming an LLC in the state are on the high side though, with the total cost of formation being $425 and annual filing fees being $350. However, the lack of personal income tax in the state should more than make up for these fees.
Delaware has long been heralded as the choice place for an LLC formation. In fact, according to the Delaware Division of Corporations 2012 Report, 64% of the 2012 Fortune 500 companies were formed in Delaware. The fee for formation is $75. LLCs are also assessed an annual flat tax of $300. The maximum income tax rate is 6.60% for those who make more than $60,000.
Florida is another pro-business state. They have no personal income tax rate and a 5.50% corporate income tax rate, making choosing a limited liability company to conduct business a superior choice. They also are experiencing a booming economy, driven by their tourism industry, with GDP hitting the $1 trillion mark in July, 2018, making it the 17th largest economy in the world. Filing fees are $125 and annual fees are $138.75.
South Dakota falls in the same category as Wyoming and Nevada with no state personal income tax and no corporate income tax. Articles of organization for forming an LLC in South Dakota incur a filing fee of $150 and annual fees are $50.
New Hampshire is another pro-business state for LLCs. While they have a corporate tax rate of 7.90%, they have no personal income tax. They charge a standard $100 for a Certificate of Formation; annual fees are also minimal, with a $1 fee being assessed upon submission of a required annual report.
Now that we have discussed some of the best, most pro-business states, we’ll go over some of the least business-friendly states.
California is definitely one of the least LLC-friendly states. The franchise tax in the state alone is $800, and businesses that have annual income exceeding $250,000 are subject to additional fees. Individual income tax rates in the state can also be as high as 13.30%.
Despite the cheap filing fees, which are only $50, Iowa’s individual income tax rate of 8.98% makes it another state that isn’t very friendly to LLCs, especially with so many states having minimal or no individual income tax at all.
The Big Apple may be known as the preeminent place for all things business, including Wall Street, but it also isn’t very pro-business when it comes to its fees and taxes. Tax rates in New York start at 4.0% and can exceed 8.0% in the top bracket. As for the annual fees, they’re based on the prior year’s gross income and can be as high as $4,500. For most businesses, however, they’ll fall between $175 and $1,500.
Louisiana has a personal income tax rate of 2% to 6%. The 6% kicks in once you’ve made $50,000 or more. On the bright side, fees in the state are limited, so you’ll pay $100 for the formation of the LLC and $30 in annual fees.
Vermont’s LLC filing fees are very reasonable. It’s $125 for the Articles of Organization and then $25 annually thereafter. However, income taxes are particularly high in this state: Rates range from 3.5% to as high as 9.4%. Most taxpayers will find themselves being taxed between 7% and 8.9%.
One of the most important aspects of setting up a limited liability company is opening a business bank account. This can’t be stressed enough. Oftentimes business owners forget this step and start using their personal bank account for transferring funds, paying bills, and attending to daily business matters.
The whole point of forming an LLC in the first place is to limit any and all liability to both your personal assets and to the business entity itself. By commingling your personal and business finances you can put your liability protection at risk. This could lead to you losing a lot more than just your business investment should the business have to file for bankruptcy.
Remember, your LLC is a separate entity from you. Legally, your personal and business finances must also be kept separate.
Registering a small business can be a daunting process. Choosing a business structure is almost always the first step. Limited liability companies are a great option because of the liability protection they provide the owners, along with the pass-through tax structure.
Some are states that are more pro-business than others and may have lower LLC registration fees. Fees alone should not impact your decision on where to register your LLC unless you are planning to conduct business in more than one state. As always, make sure to do plenty of research and seek out qualified professionals who can advise you on your individual situation before embarking on the formation of your own LLC.
For more help determining financial options for your business registration get started with Biz2Credit’s biz analyzer or begin your application for small business funding.
