As you can see, in the majority of cases you’re better off starting your LLC in your home state, even if your home state has higher fees or reporting requirements or higher taxes, or is less business-friendly than any of the “best states to form an LLC” runner-ups below.
2. Delaware
Best for: Overall business-friendliness, privacy
Delaware is well known for being the most business-friendly state for corporations. According to the Delaware Division of Corporations 2021 Annual Report, 66.8% of all Fortune 500 companies are incorporated in Delaware.
Among the reasons stated in the report for Delaware’s popularity for business registrations are:
- Delaware’s General Corporation Law
- Delaware’s Court of Chancery
The report notes that Delaware’s General Corporation Law is “widely regarded as the most advanced and flexible business formation statute in the nation” while the Court of Chancery is “a unique, centuries-old business court that has written most of the modern U.S. corporation case law.”
Delaware is also an “anonymous LLC” state, meaning it’s one of the four states (Nevada, Wyoming and New Mexico are the others) that offers LLC owners stronger privacy protections.
But here’s why Delaware’s business-friendly environment isn’t a factor when it comes to forming an LLC, if Delaware isn’t your home state:
LLCs aren’t corporations. As you can see, these statistics and details clearly point to Delaware’s popularity among corporations. But LLCs aren’t corporations. This means the General Corporation Law doesn’t apply to LLCs—in fact, LLCs are covered by the state’s Limited Liability Company Act.
What about the benefits of the Court of Chancery? As the Delaware Annual Report indicates, the Court of Chancery is well known as being favorable for hearing business-related lawsuits. However, a lawsuit your LLC may be involved in will only be heard in Delaware if the suit was brought in Delaware. If your LLC isn’t actually doing business in Delaware, the chances of this are unlikely.
Isn’t anonymity a good thing? While there are advantages to the enhanced LLC privacy protections in Delaware, this protection isn’t guaranteed. For example, you’d still have to disclose your identity to banks to open an account for your LLC, and to the IRS as well.
Additionally, if you’re operating your business in your home state, you’d have to register your Delaware-formed LLC there as a foreign LLC, and chances are that filing will be a matter of public record.
Of course, if you reside in Delaware, or you operate your business solely in Delaware, then it would likely be the best state to form your LLC.
3. Wyoming
Best for: Low taxes, privacy
Wyoming doesn’t tax income, either personal or corporate, and it also doesn’t have a franchise tax. In fact, it ranks number one in the Tax Foundation’s 2022 State Business Tax Climate Index.
Additionally, as mentioned above, Wyoming is one of the four states with enhanced privacy protection for LLCs. It also allows you to appoint another person as your proxy, to vote on your behalf in matters requiring the consent of the LLC’s members.
But here’s why Wyoming’s low taxes and privacy protection aren’t a factor when it comes to forming an LLC, if Wyoming isn’t your home state:
Isn’t Wyoming’s tax regime beneficial for LLCs? While the lack of income taxes or franchise taxes would be beneficial for LLCs that do business in Wyoming, if you only formed your LLC in Wyoming and don’t actually do any business there, you won’t see any tax benefit. And even if you did do business there, as well as in your home state or other states, only the income you make in Wyoming would fall within Wyoming’s no-income-tax regime.
What about the privacy protections? As with forming an LLC in Delaware, it’s true that your LLC can take advantage of more privacy protections in Wyoming, but you’ll only have these privacy protections over your Wyoming LLC registration.
Of course, if you reside in Wyoming, or you operate your business solely in Wyoming, then it would likely be the best state to form your LLC.
4. Nevada
Best for: Low taxes, privacy
Nevada is another state that makes it onto the “best state to form LLCs” lists online. Similar to Wyoming, the state doesn’t impose any income taxes, either personal or corporate, nor does it levy franchise taxes, although it does have a gross receipts tax.
It’s also one of the states that offers more privacy protections for LLCs. However, LLCs are required to file an annual list of members and managers in Nevada. Additionally, the state has higher filing fees when compared to many other states.
But here’s why Nevada’s low-tax environment and privacy protections aren’t a factor when it comes to forming an LLC, if Nevada isn’t your home state:
About those low taxes. As is the case with Wyoming, Nevada’s low taxes won’t make much difference if your LLC is also doing business in other states, since any income your LLC earns in another state will be taxed under that state’s tax laws.
And those privacy protections? Similar to the other states that offer privacy protections, it’s only your LLC registration in Nevada that gets access to this protection. If you do business in any other state, you’ll have to register your Nevada-formed LLC as a foreign LLC, which means your LLC’s information will most likely be a matter of public record.
Of course, if you reside in Nevada, or you operate your business solely in Nevada, then it would likely be the best state to form your LLC.
5. New Mexico
Best for: Lowest fees, no annual reporting requirements, privacy
New Mexico offers a trifecta of benefits:
- The lowest LLC filing fees (along with Arizona and Mississippi)
- No annual reporting requirements
- Enhanced privacy protections
But here’s why this trifecta of benefits New Mexico offers isn’t a factor when it comes to forming an LLC, if New Mexico isn’t your home state:
Low filing fees and no reporting requirements are great, but … Despite the benefits you gain from forming your LLC in New Mexico, it’s still only beneficial to register your LLC there if it’s your home state, or if you’re doing business only in New Mexico. Otherwise, you still have to pay the initial filing fee and hire a registered agent in New Mexico.
And the privacy? Everything we’ve said about the privacy protections in Delaware, Wyoming and Nevada applies to New Mexico, too.
Of course, if you reside in New Mexico, or you operate your business solely in New Mexico, then it would likely be the best state to form your LLC.
Bottom Line
Starting an LLC in your home state is usually less of a headache and more cost-effective than forming your LLC in another state because you don’t have to deal with two sets of LLC registrations. But if you’re not certain about which state is best for your LLC, consult with an experienced business attorney who can help you make the right choice.
