While it is not a mandatory requirement to incorporate a limited liability company (LLC) for your online business, the benefits far much outweigh conducting business without forming it. Therefore, for an entrepreneur with an online business, or thinking to start one, you should consider forming an LLC.
However, the state in which you file your LLC for your online business really matters. Some states generally outshine the rest when it comes to important formation considerations like business-friendly rules, knowledgeable court, affordability, obtaining bank account, taxation, and enhanced privacy among many others. For that reason, before you form your online business, you need to research the best state to incorporate your business right from your home state to the rest of the 50 states.
So, which is the best state to form LLC for online business in 2021?
Researching the best state to form an online business is the hardest task I have ever done. Thankfully, we managed to pull it through and narrowed your search to only five states in addition to your home state. At the end of this piece, whether you are a US citizen or a non-citizen, you will have all your queries concerning the best state for online business formation addressed. Read on to find out the right state to form your LLC.
Domestic LLC vs Foreign LLC
According to the Legal Information Institute (LII), a business entity is domestic if it is created as any type of entity in the US or under the law of the US or of any state. Consequently, a business created in the US, but in a foreign jurisdiction is still regarded as domestic. However, a business entity is regarded as foreign if it is not domestic!
In simple terms, an LLC is domestic when it operates business in the state in which it was originally registered. Foreign LLC on the other hand is an LLC initially formed to conduct business in one state and then registered to do business in another state.
For example, if you originally formed your LLC and are doing business in Arizona, that will be your domestic LLC. However, if you want to form an LLC in a different state other than the state you originally formed your business (Arizona), that will be a foreign LLC. Though you will be required to file your LLC the same way they register an LLC, your LLC will be regarded as a foreign LLC to that state.
The main advantage of a foreign LLC formation is that you enjoy all the business benefits offered by the foreign state. For example, you are guaranteed protection offered by the foreign state and can even present yourself in their jurisdiction.
On the bad side, as a foreign LLC, you have to pay filing fees, maintain a registered agent and pay annual fees in both states. Not to mention the additional paperwork involved.
With that being said, let’s find out which state to file your LLC.
6 Best States to Form an LLC for Your Online Business
Forming an LLC in Your Home State
If you’re looking for the best state to form your LLC, you need to consider your home state first. Forming a business in your home state comes with a lot of conveniences.
For example, you are guaranteed a smooth process when forming an LLC in your home state or a state where you have a physical presence since you are well familiar with the offices, the state laws, contacts, and the filing procedures. For that reason, you are likely to be more comfortable with the filing process and the initial filing charges than when you form your LLC in another state.
- You only need to pay taxes in your home state.
- Registration is straight forward
- You only need to comply with the law governing business in your home state
Forming an LLC outside your home state can be a bit complicated. There are a lot of factors to consider depending on how the state handles business matters.
However, forming an LLC outside your state may also come with a lot of benefits, particularly when your home state has high tax implications and unfavorable regulations. If that is your case, here are some of the states you can form your LLC with peace of mind.
Delaware is undoubtedly the best state to incorporate an LLC. In 2019 the state had a record-breaking 226,000 new formation. According to the same LLC formation 2019 report, the state still dominates as the state of choice for publicly traded companies, 67.8% of Fortune 500 companies in that year.
In essence, it is loved by many business owners more than their home state due to its business friendly laws. The Delaware LLC Act & Delaware General Corporation Law which are regularly updated by lawyers make Delaware the leading business law development.
As such, their statutes are always used as models for other states. Even better, Delaware has a designated law court, Chancery court, to hear all the lawsuits related to the state business matters.
You can also form LLCs if you need strong Delaware liability protection. You don’t need to worry even when someone sues your company and you lost the case in the process. Your personal assets will not be used as collateral to repay the liabilities. Instead, all the liabilities will be enforced against the LLC properties.
However, there are filing fees and franchise taxes involved. Overall, Delaware is the most business-friendly state and chances are it will be more favorable than your home state.
- A lot of business experience in the state
- Low filing fees and faster filing process
- Court of Chancery with a lot of business experience
- No state sales tax
- Chancery court to here business lawsuits
Nevada legislature has worked tirelessly to turn the state into one of the best to form a business. For a long-term business, take the advantage of their friendly taxation to incorporate LLC in Nevada. There is no personal income, no corporate income, or franchise tax.
Even more, Nevada doesn’t acquire LLCs to hold annual meetings or create an operating agreement. This makes it easier for you to operate your business in Nevada.
Nevada LLC also offers significant asset protection. You will not be held responsible for your company liabilities. And lastly, they don’t participate in info sharing with the IRS. With all these perks, chances are that Nevada could also be a better option for forming an LLC in your home state.
- Nevada does not have federal and state income taxes.
- No tax on capital gains
- No franchise tax flat rate
- Nevada doesn’t share info with IRS
- Nevada LLC does not require an operating agreement or annual meetings.
Wyoming makes it one of the best states to form your LLC for an online business courtesy of their favorable taxation. In addition to low sale taxes, there are no corporate and individual income taxes.
Besides, Wyoming LLC offers exceptionally low filing fees and doesn’t charge office filing and state business licensing fees as well. This is one of the main reasons many business owners prefer forming a business in Wyoming to their home state.
Forming an LLC in Wyoming also comes with liability protection. The company is considered a separate legal entity with its own separate Federal tax ID number. Therefore, the company is responsible for its own debts and your personal assets will never be used to repay for business losses.
Being a separate entity with its own existence and perpetual life, the business can continue even when a member leaves or joins. This is contrary to other states that would require that a business be dissolved and reformed once a member leaves or joins the company.
Lastly, the Wyoming business statute also does a great job to keep you anonymous. There is no report or disclosure of obligations unless in unavoidable circumstances. As such, they don’t maintain LLC ownership records publicly and allow you to appoint some to represent your stock if you want to remain anonymous.
- No state income, corporate and franchise taxes
- Offer lifetime proxy option
- Minimal reporting obligation
- Low sales rate
Florida emerges as one of the best states to form an LLC for online business courtesy of their favorable taxation charges, affordable filing fees, and ease of filing. No minute record, no resolution maintenance required, and you can decide on the maintenance structure.
Florida also guarantees liability protection. However, the owners of single-member LLCs are not offered as much protection as the several members LLCs. For that reason, adding a member to your company guarantees you more protection.
Even more, Florida allows a law firm to be a Professional LLC. Some states such as California don’t allow businesses for which professional license is required like a law firm to operate as an LLC.
The state is tax-friendly and doesn’t impose federal income tax on LLCs. LLC owners report their shares of the company’s profit and losses on their individual tax returns.
- No state income tax
- No taxes from capital gains
- Corporate tax is as low as 5.5%
Alaska’s hassle-free document filings make it one of the best states to incorporate your business. Due to few documents to deal with, their filing fees are pocket-friendly.
Generally, Alaska doesn’t charge both sales and income taxes. However, the state cities have the freedom to handle taxation, and some cities could collect the mentioned taxes.
Alaska also offers a lot of benefits from a tax credit that the state offers. These benefits will vary depending on the type of your business, a project formed an association, and your business has to qualify to benefit from this. Some of the common tax credits include education and new area development.
Even more, the state of Alaska offers a variety of loan programs, including small business economic development, microloan program for women entrepreneurs, and rural development initiative fund.
- No state sales tax
- No income tax
- Tax credit benefits
- Loan program
If You’re a Non-U.S. Citizens and non-U.S. Residents
Generally, there is no non-resident or non-citizen special requirement to form an LLC in any US state. What will determine how you need to pay taxes is the nature of your business. (Find out what is covered in US taxation for foreign entrepreneurs here).
With that being clarified, the best state to form an LLC in the US as a non-US resident or non-US citizen remains your ‘home state’. By home state in this contest, I refer to the state where you are going to have a physical presence in the US, have an office or employees.
However, if your company will not have any physical presence in the US, you can form an LLC in the state of your choice. But you should bear in mind that states have different regulations.
What Happens If Doing Business in a State Without Registering
It is advisable to register your business and make the necessary required filings to keep it in good standing. This will help you avoid the following consequences and penalties:
Inability to initiate lawsuit: In most states, a business cannot initiate lawsuits unless it is registered to operate in that state. For that reason, you need to register a business if you want to do business under that particular state law protection.
Significant delays: If you have been operating an unregistered business in a particular state, there could be a significant delay in the registration process if you eventually decide to register your business in that state. That is why you’re required in some states such as New York to indicate on the application whether you have been doing business prior to registration.
Monetary penalties: If you don’t register your business in a timely way, you are likely to be penalized monetarily by some states. States usually pursue companies that do business in the state without being registered. If you don’t pay taxes, you may end up paying the back taxes from the time the company started operating.
Possible penalties on officers, Registered Agent & Directors: Some states indicate that there could be penalties on directors, officers, and registered agents if their companies transact business without registering.
LLC Taxed As A Corporation
LLCs have tax flexibility advantages over any other structure. By default, LLCs are taxed in the following ways:
A single-member-owned LLC is treated as a disregarded entity and is taxed the same way as a sole proprietorship during which the owner files schedule C for his/her tax return.
A multi-member LLC is treated as a partnership. The partnership file with schedule K-1 for each member’s tax return.
The members are normally considered self-employed and therefore have to pay self-employment taxes towards medicare or social security on their income from LLC.
However, LLC members or members can still choose to be taxed as a corporate (C-corporate or S-corporate). This helps to save on taxation as the LLC members are considered shareholders/employees and not self-employed.
While being taxed as a corporation will generally exempt you from being taxed as self-employed, they are usually subjected to double taxation except for S-corporation. S-corporation owners split their income between distribution and status as employees. Being employees, they are not subject to self-employment taxes. In addition, given that the profits are distributed among the shareholders who report to their individual tax returns, they avoid double taxation.
Hopefully, you now know the state to form your limited liability company (LLC). From our discussion, you need to consider forming an LLC in your home state. If it is not favorable, you should consider forming an LLC outside your home state and we have offered you the best state to form LLC for online business.
If you are looking for an overall business-friendly state, Delaware is the best to form an LLC. The state is home to several businesses including large corporations due to its friendly legal system and therefore guarantee a good business income.
Wyoming has the lowest overall taxation and annual filing charge and is the best state to form a long-term business. However, Alaska, Nevada, and Florida are also not far behind when it comes to these benefits. Choose the state to register your LLC and feel free to share with u
On the other hand, if you’re planning to incorporate a long-term business, you may take advantage of Nevada, Wyoming, Alaska, and Florida low taxation charges to form an LLC for your online business. Once you have a state of your choice, feel free to share with us your progress.
Frequently Asked Questions
Yes, you can incorporate an LLC in any state as long as you qualify and comply with the laws of that particular state. However, always consult with your attorney to find out if an out-of-state LLC will be more favorable than forming an LLC in your home state.
It is not a must you form an LLC for your online businesses, but forming one has far-reaching benefits than doing without. You should form your business if you’re interested in liability protection, taxation benefits, business professionalism, among other benefits.
If you want to form your online business the easiest and cheapest way, your home state will serve you better if it has the lowest filing and maintenance as well as favorable taxation. If that is not the case, you can opt for business-friendly states like Delaware, Wyoming, Nevada, among others.
From the viewpoint of asset protection, tax filing consideration, fees, and a friendly legal system, our choice for the best state to incorporate your LLC for real estate is Delaware.
There are several factors to consider when choosing the best state to incorporate online businesses including, taxation, protection, filing charges among others. If these are factors for your home state, you should give it a priority. If your home state is not favorable, consider foreign state formation particularly in Delaware, but Nevada, Alaska, Florida, and Wyoming can also be great options.
Nevada charges around $75 as a state fee when forming an LLC, which sounds very friendly for small business owners. This fee should be filed along with the articles of the organization with the secretary of state.
You should form your LLC in the state of your convenience as a tool to own a property in any other state. However, you will be required to register as a foreign LLC in the state in which you own the property and you have to pay various annual fees and taxes in both states.
According to the Tax Foundation, 2021 State Business Tax Climate Index, the worst state to incorporate a business based on business friendliness is New Jersey. So if you are residing in such states, consider an out-of-state LLC formation.
+ 4 sources
- LII / Legal Information Institute. (2021). 26 CFR § 301.7701-5 – Domestic and foreign business entities. [online] Available at: https://www.law.cornell.edu/cfr/text/26/301.7701-5 [Accessed 9 Aug. 2021].
- Melson, B. (2019). Delaware’s 2019 Corporate Annual Report Just Released. [online] The HBS Blog. Available at: https://www.delawareinc.com/blog/delaware-releases-annual-report-companies-formed/ [Accessed 9 Aug. 2021].
- Myusacorporation.com. (2014). U.S. Taxation for Foreign Entrepreneurs | MyUSACorporation.com. [online] Available at: https://www.myusacorporation.com/articles/taxation-of-foreign-entrepreneurs?gclid=CjwKCAjwr_uCBhAFEiwAX8YJgQZ8BnsPE4rfASAFM6rQbbpqU_Itv5r_6hAAXCpaDuyQ9PYkBOio3xoChNgQAvD_BwE#bm40 [Accessed 9 Aug. 2021].
- Walczak, J. and Cammenga, J. (2020). 2021 State Business Tax Climate Index. [online] Tax Foundation. Available at: https://taxfoundation.org/2021-state-business-tax-climate-index/ [Accessed 9 Aug. 2021].