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Factors to consider when choosing a state to form an LLC
Choosing the state of incorporation can be difficult because each state has different fees, taxes, and compliance requirements. It’s natural to want to find a location with the lowest cost and best taxation for your business.
If you’re starting a business this year, here’s a rundown of key factors to consider when deciding which states to incorporate in:
Annual cost and fee
Businesses must pay certain costs and fees to the state government each year in order to maintain their LLC status. Depending on the state, the amount can range from a few hundred to thousands of dollars.
Choose a state where the annual cost is manageable and does not place an undue burden on your business, especially if you are just starting out and have a limited budget.
The following are some of the most significant annual fees:
- Annual report filing fee
Every LLC has to file an annual report to stay in good standing. Some states may require higher or lower fees based on your business scale or industry. For example, Alaska charges a $100 filing fee for domestic LLCs and $200 for foreign LLCs, while Florida charges a $125 filing fee for all LLCs.
When filing your LLC’s annual report, make sure you pay attention to the details so you don’t get penalized for late or missing fees, which increases your cost burden.
- Registered agent fees
In each state where your LLC does business, you must have a registered agent, who is an individual or company that agrees to receive legal documents on your behalf. They must live in the state and be available during regular business hours.
While you can act as your own registered agent, it is usually best to hire a professional service, which costs between $100 and $300 per year.
- Business license and permits fees
Every business needs to have the proper licenses and permits in order to operate legally. The fees for these can vary depending on your business type, size, and location.
A consulting firm in Los Angeles, for example, will have to pay a higher fee for a business license than one in a small town in California. In a big city, the process of getting a business license can also be more complicated, so you should consider the time and cost of getting everything in order before making your decision.
- Accounting cost
When deciding on a state for your LLC, you should consider the cost of accounting and bookkeeping because it has a direct impact on your company’s bottom line.
In certain states like Texas, the cost of accounting is lower than the national average due to the fact that there is no personal income tax levied on individuals or businesses. This can be a significant advantage for LLCs, especially if you have plans to hire accountants.
On the other hand, states like New York have a higher cost of living, which means the hourly rate for accounting services will be higher as well. If you don’t have much money to spare, be sure to choose a state with a lower cost of living so you can save on accounting fees.
One of the most important factors to consider when deciding on a state for your LLC is the tax implications.
Each state has its own corporate income tax rate, which can range from 0% to 12%. You will also have to pay state and federal payroll taxes, as well as sales tax if your business sells products or services.
To gain a better understanding of the tax implications of doing business in each state, consult with an accountant or tax advisor. In the meantime, you can use the criteria below to estimate your tax payment in advance.
- Sales & use tax
A sales tax is a tax imposed by a state or local government on the retail sale of tangible personal property (e.g., clothing, furniture, and cars), and intangible personal property (e.g., stocks, bonds, and services)
Because each state has its own sales tax rules, you will need to research the rates and regulations in each state where your company intends to operate.
Some states exempt LLCs from paying sales tax on the goods and services they sell, while others exempt only businesses with less than a certain amount of sales per year. For example, Florida exempts LLCs from paying sales tax on the first $5,000 in sales, while Texas exempts businesses with annual sales of less than $1.5 million.
- Franchise tax
For the privilege of doing business in the state, some states levy a franchise tax on LLCs, which may be a flat rate or a percentage based on the LLC’s income and assets.
Texas levies a franchise tax of 0.375% of an LLC’s gross receipts, whereas Delaware levies a flat rate of $300 per year, regardless of income.
Not all states have a franchise tax, so you will need to check whether the state you are considering charges this tax.
- Employment taxes
Employers are required to pay federal and state payroll taxes, which include Social Security, Medicare, and unemployment taxes. The amount you will have to pay will depend on the number of employees you have and the tax rates in your state.
Specifically, the Social Security tax rate is 6.2% for employers and 6.2% for employees, while the Medicare tax rate is 1.45% for both employers and employees. The federal unemployment tax rate is 6% on the first $7,000 of wages paid to each employee per year, while state unemployment tax rates range from 0.6% to 5.4%.
If you intend to hire employees for your company, consider the cost of employment taxes when deciding where to form your LLC.
The requirements for LLCs vary by state, with some being more stringent than others. The more requirements LLCs must meet, the more paperwork and fees you must complete.
States such as Wyoming require only an annual report from LLCs, whereas California requires both an annual and a biennial statement of information. In Delaware, however, there is no requirement for an annual statement.
Choosing a state with straightforward compliance requirements can help you save time and money in the long run, as well as reduce the risk of penalties and fines for failing to meet your obligations.
Privacy and asset protection
Some states provide LLC owners with more privacy and asset protection than others. If you form an LLC in Nevada, the Articles of Incorporation must include the names and addresses of the LLC’s members (owners). In Delaware, however, LLC owners can remain anonymous by appointing a registered agent.
If asset protection is your top priority, consider incorporating in a state with strong asset protection laws, such as Alaska, Ohio, or Oklahoma, to protect your personal assets from creditors and lawsuits.
States with a favorable business climate should be at the top of your list because they provide more predictability and stability. Furthermore, a good reputation can help increase the value of your business and attract potential investors, which can help your business operate and grow.
Consider forming an LLC in a state with a well-respected reputation and innovative infrastructures, such as North Carolina, where you’ll be able to conduct business in a competitive environment and have more opportunities for networking and partnership formation, as opposed to a state with a less favorable climate, such as California or Maryland.
All these factors but you’re still unsure? Take our quiz for US Business Entity Selection and make up your mind today!
List of the best places to set up an LLC
After taking into account all of the factors, it’s time to compile a list of the best states to form your LLC.
Delaware is the first state on our list for good reason. Because of its business-friendly laws and regulations, Delaware is popular among business owners, attracting even the most powerful companies such as Apple, Google, and 65% of Fortune 500 companies to incorporate there. Learn more on top 8 Delaware LLC benefits you should get to know
Below you will find some criteria to help you get a better idea of how Delaware ranks among other states.
- Easy LLC formation
Assume that you’re a startup in the US with limited capital, you don’t want to spend too much time and resources on just registering the company. Setting up an LLC in Delaware is a wise choice because the registration process is simple and usually takes a few days, saving you time and money.
The state law also allows non-US residents to start an LLC with ease. You can even form a Delaware LLC online without having to visit the state in person.
- High privacy protection
Your personal information and property are protected under Delaware law. To incorporate and maintain your LLC, you are not required to publicly disclose any member information.
- Tax advantages
Delaware has a very appealing tax system for LLCs, with low corporate income tax rates. LLCs in Delaware are not subject to income tax if they are managed and operated entirely outside of the state. This can be a significant benefit for businesses that want to avoid paying taxes in multiple states.
- Well-respected legal system
The Delaware Court of Chancery is one of the most renowned business courts in the United States, with a long history of resolving business disputes efficiently and fairly. The Delaware court uses judges rather than juries to decide business cases, which distinguishes it from others.
- Ideal for Amazon sellers
Delaware is home to one of the largest Amazon Fulfillment Centers, making it easier for sellers to operate. Forming an LLC for Amazon FBA is the best choice you can make for your business if you want to legitimize your Amazon venture.
- Dual registration
If you want to do business in other states besides Delaware, you will need to register your LLC in those states as a foreign LLC, which means you have to do everything twice. You won’t have to pay taxes there, but you’ll still be required to pay filing fees in both states.
As you will need to comply with the various regulations of each state, this can be a costly and time-consuming process.
- You have to maintain a registered agent
You may need to hire a registered agent in Delaware to assist you with the LLC formation process and ongoing compliance requirements. This can increase the costs of establishing and operating your LLC.
Wyoming is the second state on our list, and it is another good option for businesses looking for a favorable climate. Here are a few of the reasons:
- Low annual costs
The state is considered one of the cheapest states to set up an LLC, with low annual LLC costs. The only required annual fee is a $60 filing fee, which is significantly lower than the average annual fee of $350.
- No state corporate income tax
There is no state corporate income tax, which can be a significant benefit for businesses looking to avoid paying taxes in multiple states.
- Great asset protection laws
Wyoming has laws that provide excellent asset protection for LLCs, protecting your personal assets from any debts or liabilities incurred by your LLC and giving a piece of mind while doing business there.
- Difficult to relocate your business
One of the most common reasons for relocating your LLC is to reduce operating costs or to pursue new opportunities. However, moving your LLC from Wyoming to another state can be a time-consuming and costly process. This is something to think about, especially if you intend to scale your business in the future.
- Not well-known for business
While Wyoming is an excellent business location, it is not as well-known as some of the other states on this list. This may make finding resources and support for your company more difficult.
Florida is the home to more than 60,000 successful businesses, making it a popular choice for those looking to start an LLC. The state offers a number of initiatives that will benefit your business in the long run.
- Incentives for startup growth
The state of Florida encourages startup businesses to grow through a variety of initiatives, including the Qualified Target Industry Tax Refund (QTI), the Capital Investment Tax Credit (CITC), the Worker Training Program (IWT), and others. These incentives are critical for startups as they provide the resources and support needed to scale and succeed.
- Protection against lawsuits
Florida has regulations in place that offers protection against lawsuits for LLC members, which can be a big advantage if you work in industries where lawsuits are common, such as manufacturing, construction, or healthcare.
- Difficult to transfer LLC ownership
There is limited flexibility in an LLC ownership transfer in Florida. Transferring ownership requires a lengthy and complicated process that may not be worth it for some businesses. This is something to consider if you plan to sell your LLC or transfer your ownership in the future.
- High cost
LLCs in Florida are more expensive to create and maintain due to high initial and ongoing costs. The average initial cost to form an LLC in Florida is $250, which is higher than the national average of $100. The state also charges you a $138.75 annual report fee, so m a
Nevada is one of the most sought-after states for businesses of all sizes thanks to its flexible business and tax laws. There are pros and cons to structuring your business as a Nevada LLC, which will be listed below:
- Less tax burden
The tax advantage is the biggest feature of Nevada LLCs. There’s no corporate or personal income tax, which can save your business a lot of money. Additionally, there are no franchise taxes, capital stock taxes, or inventory taxes.
- Favorable business laws
Nevada has very favorable business laws, making it a great place to start and operate your business. For instance, there’s no residency requirement for LLC members or managers, and there’s also no minimum capital requirement.
- Asset protection
Nevada LLCs offer great asset protection for business owners. This means that your personal assets will be protected from any debts or liabilities that your LLC may incur.
- High annual filing fees are required
The state of Nevada imposes a $525 filing fee for LLCs, which is higher than the national average of $100. Additionally, there’s a $75 annual LLC license fee that’s required to keep your business in good standing.
- Business information is publicly available
Another downside of Nevada LLCs is that they are considered public information. This means that anyone can access information about your LLC, such as the names of the members and managers.
A lot of factors may impact your decision when choosing the best state to form your LLC. There are 50 states in the US, and each state offers a unique set of benefits and drawbacks, but overall Delaware has outranked the competition in recent years, recognized as the most business-friendly state with the best tax laws.
Amazon sellers could take advantage of the Delaware LLC structure to create an entity for their business. Doing so could help them save on taxes, protect their personal assets, and establish a professional brand image for your venture.
If you’re ready to form your own LLC, you can get started with BBCIncorp today. Our team of experts can help you choose the best state for your business and walk you through the LLC formation process step-by-step, so you can be sure to have a smooth, effortless experience. Get in touch with us via firstname.lastname@example.org now!
Disclaimer: While BBCIncorp strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact BBCIncorp’s customer services for advice on your specific cases.
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