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You’ve probably heard it from a friend, or noticed it being discussed in an online ad – opting for the most productive state to set up a limited liability company (LLC) is something you should study carefully. In fact, that’s probably why you’re here and read our consultant on how to opt for the most productive state to set up an LLC.
Then you’ve come to the right place. Because it turns out that there is an undeniable rule of thumb that you can apply to the most productive state to establish your LLC. Here’s what you want to know.
An LLC or limited liability company is a type of business entity that provides benefits such as legal coverage of non-public assets and taxes transferred through a separate entity. Between their reduced non-public liability (if eliminated) and their undeniable tax structure, LLCs are now one of the most popular types of company formation in the United States, according to the IRS. There are clever reasons for this popularity.
SARLs offer corporations many advantages:
As with corporations, LLCs offer limited liability coverage to their owners (or “members,” in LLC terminology). This means that the owners’ non-public assets come from the LLC’s creditors and any lawsuits filed against the LLC.
For source income tax purposes, LLCs are automatically taxed either as a sole proprietorship (in the case of single-member LLCs) or as a partnership (in the case of multi-member LLCs).
When taxed as a sole proprietorship or partnership, LLCs function as an intermediary entity for tax purposes, meaning that the LLC’s source of income is passed on to the members, who then report that source of income on their non-public tax returns.
However, LLCs can also choose to pay taxes as S-corp or C-corp. An S-corp is also an intermediary entity, however, there are restrictions on which limited liability corporations can decide on S-corp status. LLCs taxed as C-Corporations are considered taxable entities in their own right and will have to pay corporate taxes.
Unlike businesses, SARLs are much easier to manage. For example, they are not required to hold shareholder meetings or have a board of directors. Depending on the state in which an LLC is incorporated, you may want to meet the annual filing requirements. In general, however, those requirements are much less than the filing requirements for businesses.
They’re also there for training. You can do it yourself, use an LLC service, or hire a business attorney to do it for you.
For most people, the resolution to establish an LLC marks an exciting time in their lives. After all, you’re about to embark on anything that can replace your life. You have done your research and know that an LLC is the ultimate solution. productive option for your new business. And, of course, you need to make all the right resolutions, right from the start.
So, how do you find the right state to start your LLC?Here’s an undeniable rule:
Start your LLC wherever you are. In other words, the state of your home (i. e. , the state you live in) will likely be the most productive position to establish your LLC. For what? As seen below in our discussion of the most productive states to start your LLC, setting up your LLC in your local state is often the simplest and most cost-effective way to start your LLC, despite all appearances. contrary.
Exceptions to this general rule. As with everything in life, and especially when it comes to legal rules, there are exceptions to this general rule. Here are a few:
If you’re not sure if any of those exceptions apply to you, consult with an experienced business attorney who can help you make the right decision.
Best for: Ease, simplicity and cost-effectiveness
Despite everything you’ve heard online or from well-meaning friends, in most cases, the most productive state to start your LLC is your home state (i. e. , the state you live in). This will likely be true even if you live in a state with high fees or taxes (e. g. , California or Massachusetts).
Here’s why:
Domestic and foreign SARLs. In LLC terminology, a state will consider an LLC to be a domestic LLC if the LLC was created in that state. So, if you live in Massachusetts and set up your LLC there, Massachusetts will make your LLC a domestic LLC.
It indicates that LLCs created in some other state are foreign LLCs, i. e. , the LLC is foreign to the state because it was not created in that state. So, in our Massachusetts example, if you live in Massachusetts and make the decision to set up your LLC in Nevada because you’ve heard that it’s the most productive state to set up an LLC, Massachusetts will make your LLC a foreign LLC.
Why it’s a problem. Now, if your LLC doesn’t do any business in Massachusetts, you probably won’t have any problems, but that’s probably not the case. You would have possibly chosen Nevada to start your LLC because there is no source of income taxes there, but chances are you’re still doing business in Massachusetts because, after all, that’s where you live.
And that’s when it becomes a problem. Because you also do business in Massachusetts, you’ll want to register your out-of-state LLC (because you chose to start it in Nevada) in Massachusetts as a foreign LLC.
The end result?
But what about tax savings? As far as taxes are concerned, Nevada does not impose any source of income taxes, source of income taxes, corporate taxes, or franchise taxes. But here’s the problem: these non-tax benefits only apply to the source of income your LLC earns. Any cash you earn in Massachusetts will still be taxable under Massachusetts tax laws.
As you can see, in most cases, it’s more productive to start your LLC in your state of residence, even if your state of residence has higher fees or reporting or higher tax needs, or is less business-friendly than any of the “Most Productive States to Form an LLC” below.
Best for: General usability and privacy
Delaware is well known for being the most business-friendly state. According to the Delaware Division of Corporations’ 2021 annual report, 66. 8% of all Fortune 500 corporations are incorporated in Delaware.
Some of the reasons given in the report on the popularity of the Delaware registry include:
The report notes that Delaware’s General Corporation Law “is widely regarded as the most complex and flexible company formation law in the country,” while the Court of Chancery is “a unique, century-old commercial court that has drafted the most popular cases on U. S. corporations. ” law. “
Delaware is also an “anonymous LLC” state, which means it is one of 4 states (Nevada, Wyoming, and New Mexico are the others) that offer LLC owners stricter privacy protections.
But here’s why Delaware’s business-friendly environment is important when it comes to setting up an LLC, if Delaware is your home state:
SARLs are companies. As you can see, those statistics and main points obviously imply Delaware’s popularity among businesses. But SARLs are companies. This means that the General Companies Law applies to LLCs. In fact, LLCs are covered by the State Limited Liability Company Act.
What about the benefits of the Court of Chancery?As the Delaware Annual Report indicates, the Court of Chancery is known to be in favor of settling lawsuits involving corporations. However, a lawsuit that your LLC might be involved in will only be heard in Delaware if the lawsuit was filed in Delaware. If your LLC rarely does business in Delaware, the chances of that happening are unlikely.
Isn’t anonymity a smart thing? While LLCs’ enhanced privacy coverages in Delaware have benefits, this coverage is guaranteed. For example, you’ll still want to disclose your identity to banks to open an account for your LLC, as well as the IRS.
Also, if you operate your business in your home state, you’ll want to register your Delaware LLC there as a foreign LLC, and filing will most likely be a matter of public record.
Of course, if you live in Delaware or operate your business only in Delaware, this would be the most productive state to set up your LLC.
Best for: low taxes, privacy
Wyoming taxes income, whether private or corporate, and there is also no franchise tax. In fact, it ranks number one in the Tax Foundation’s 2022 State Business Climate Index.
Also, as mentioned above, Wyoming is one of the 4 states with enhanced privacy protections for LLCs. It also allows you to designate the user as a proxy to vote on your behalf on issues that require the consent of the LLC’s members.
But here’s why Wyoming’s low taxes and privacy are important when it comes to setting up an LLC, if Wyoming is rarely your home state:
Isn’t Wyoming’s tax regime advantageous for LLCs?While the absence of a source of income tax or franchise taxes is for LLCs doing business in Wyoming, if you have only established your LLC in Wyoming and are not doing any business there, you do not get tax benefits. And even if you were doing business there, as well as in your home state or other states, only the source of income you earn in Wyoming would be included in the Wyoming Source of Income Tax Exemption scheme.
What about privacy protections? As with creating an LLC in Delaware, it is true that your LLC would possibly have more privacy protections in Wyoming, however, you will only get those privacy protections when you register with Wyoming LLC.
Of course, if you live in Wyoming or operate your business only in Wyoming, this would be the most productive state to establish your LLC.
Best for: low taxes, privacy
Nevada is another state that is listed on the online lists of the “Best States to Start LLCs. “Like Wyoming, the state does not impose any source of income taxes, either on Americans or corporations, nor does it impose franchise taxes, but it does impose a tax on gross receipts.
It is also one of the states that provides the most privacy protection to LLCs. However, LLCs are required to register an annual list of Nevada members and officers. In addition, the state has higher filing fees than many other states.
But here’s why Nevada’s low-tax environment and privacy are important when it comes to setting up an LLC, if Nevada is rarely your home state:
On those low taxes. As is the case in Wyoming, Nevada’s low taxes may not make much of a difference if your LLC also does business in other states, as any source of income your LLC earns in some other state will be taxable under that state’s tax laws.
What about those privacy protections? Like other states that offer privacy protections, only your LLC registration in Nevada has this protection. If you’re doing business in any other state, you’ll want to register your LLC created in Nevada as a foreign LLC, which means that your LLC’s data will likely be in the public domain at most.
Of course, if you live in Nevada or operate your business only in Nevada, this would be the most productive state to establish your LLC.
Best for: Lower fees, no annual reporting requirements, confidentiality
New Mexico offers a trio of advantages:
But here’s why this trio of benefits presents through New Mexico an advantage when it comes to setting up an LLC, if New Mexico is your home state:
Low filing fees and no reporting requirements are great, but. . . Despite the benefits you get from setting up your LLC in New Mexico, you should only register your LLC there if it’s your home state or if you’re just doing business. In New México. México. De otherwise, you still want to pay the initial filing fee and hire a registered agent in New Mexico.
What about privacy? Everything said about privacy in Delaware, Wyoming, and Nevada also applies to New Mexico.
Of course, if you live in New Mexico or operate your business only in New Mexico, this would be the most productive state to establish your LLC.
Setting up an LLC in your local state is less confusing and more cost-effective than setting up your LLC in some other state since you don’t have to manage two sets of LLC registrations. But if you’re not sure which state is most productive for your LLC, consult with an experienced business attorney who can help you make the right decision.
If you register your application online, you may be able to set up your LLC in two to four business days. Otherwise, mailed LLC documents occasionally take two to several weeks to process.
Yes, you can do this in a state other than the one in which you established your LLC. However, if you’re doing business in the state you’re in, you’ll want to register there as a foreign LLC.
Yes, your LLC will want a registered agent (sometimes called a legal agent) in the state in which you operate.
The answer to whether or not you want a business license to operate legally in your state will depend on your state of operation and the industry in which you operate. For example, some states require all corporations to have a business license, while others only require a license for certain industries. Learn more about what it takes to get a business license.
Belle Wong is a freelancer specializing in small business, private finance, banking, and technology/SAAS. He spends his free time testing the newest productivity apps and writing his most recent novel. Connect with Belle on LinkedIn or Twitter.