With entrepreneurship on the rise, people want to indulge in the flexibility, creativity, and freedom of owning a company. But is it that simple? You need people, funds, and accommodating conditions to kick start your startup.
In these circumstances, people often opt for LLCs as a practical and convenient form of business. Read away to find out the best host states to form an LLC.
What is an LLC?
LLC stands for “limited liability company.” This business structure is a popular choice among small businesses because it combines the ease of a partnership with the liability protection of a corporation.
To form an LLC, you must file articles of organization with your state government and pay any required fees. The paperwork generally takes about 30 minutes to complete and costs $50 to $750, depending on your state’s requirements.
Once you create an LLC, the IRS considers it just like any other business entity. So you’re responsible for paying taxes on its profits (or losses). However, since they don’t receive their tax identification number from the IRS as corporations do, individuals who own an LLC can avoid paying self-employment taxes on their earnings if they so choose.
Forming an LLC: Factors to Consider
Before setting up your LLC, let us look at some factors you should consider.
Corporate Tax Rate: This is the rate at which your business will be taxed, and it varies by state.
For example, an LLC formed in California will have to pay an 8.84% corporate tax on their company. However, if you form an LLC in Florida or Texas, your corporate tax rate will only be 5%. Consequently, you’ll be able to save thousands of dollars every year on taxes.
Income Tax Rate: Your personal income will also be taxed at different rates depending on where you live and work.
Suppose we use California again as an example (where citizens pay up to 13% in state income tax). In that case, you may want to consider forming an LLC there if most of your business activities occur outside of California.
Doing so will allow you to spend less money on taxes and give you more freedom when deciding how best to run their companies. Moreover, you won’t have to worry too much about government involvement from both state and local levels.
Filing fees: To form an LLC, you need to file Articles of Organization with the state where you will do business. Moreover, you’ll need to pay a filing fee, which varies from state to state. The same applies to the cost of issuing a certificate of formation.
7 Best States to Form an LLC
Montana is the best state to form an LLC for two reasons: it’s a great place to live and work. If you want to start a business in Montana, there is no sales tax, and the corporate tax is negligible at 6.75%.
You’ll need to file paperwork with the Montana Secretary of State to form your LLC. The same processes apply to both residents and non-residents.
You must file the Articles of Organization with the Secretary of State to register your Montana LLC formally. Moreover, you can also do this online. A non-refundable deposit of $70 is required to file the documents with the Secretary of State.
Moreover, the state’s individual income tax rate ranges from 1-6.9%. Yet, if you want to retire there, your property taxes will be lower than those of many other states at only 0.87%. Besides, Montana has some of the lowest crime rates in America for its low unemployment rate of 3.8%.
So whether you’re looking for an ideal place where your business can flourish or somewhere peaceful enough for retirement, Montana is just right.
With no corporate income tax, many startups choose to form an LLC in Alaska. It also has a low individual income tax rate of 0%. So if you have employees who are paid as shareholders or members of your company (and don’t need to pay corporate taxes), this will save you money in the long run.
The sales tax is also 0%, and municipalities can charge up to 7%—so there’s no need to worry about paying taxes on any products or services sold through your business.
The effective property tax rate is 1.19% on average. But some areas may have slightly higher rates than others depending on where they’re located within the state and what kind of property they own, which could be anywhere from 0%-7%.
Colorado is a great state to form an LLC in because it has the third-lowest startup costs for LLC formation in the US at $85 in filing fees. Additionally, Colorado is appealing to many business owners because it has no personal or corporate tax.
Colorado also offers a wealth of resources and support for entrepreneurs looking to launch their businesses there. It boasts one of the most active angel investor communities in North America and more than 700 incubators and accelerators. These can help you start your company from scratch or scale up an existing one (and all without taking any equity).
Besides, it’s not just startups that benefit from these resources either. Established businesses can take advantage of them when they need help growing their teams or expanding into new markets.
Wyoming can be considered one of the best states to form an LLC. Wyoming boasts low tax rates and a low cost of living, making it an attractive place for business owners. Its Corporate Tax Rate is while its Sales Tax Rate is 4%.
There’s no minimum capital requirement for forming an LLC in Wyoming. However, you must have more than $1,000 in your bank account to file your Articles of Organization with the Secretary of State. The annual franchise tax for a Wyoming LLC is $100 every year (the national average is $800).
5. South Dakota
South Dakota is another great option for forming an LLC. It has very low taxes and no state corporate income tax. The state has a 0% tax rate on all types of business income and a property tax rate of 1.32%.
South Dakota also provides other benefits like its lack of sales tax and 0% income tax on any kind of wages earned via employment by an S corp or limited partnership.
As far as general business costs go in South Dakota, they’re relatively low compared to other places in the U.S. Cities with high populations like New York City or Los Angeles have high local taxes imposed on businesses by local governments, which is not the case in South Dakota.
Delaware is arguably one of the best states to form an LLC because it has the best court system for business-related cases.
The Chancery Court is dedicated exclusively to resolving business disputes and the judges are experts at understanding these types of cases. The court will be able to help you quickly and fairly if you have any legal problems or require any assistance while filing paperwork.
Delaware also makes it very easy to file online by providing an intuitive system that allows you to apply quickly and easily send your documents once the state government officials approve them.
Nevada makes our list too for not imposing corporate, personal, or franchise tax and having an extremely low annual fee. Moreover, Nevada has very few hurdles because it doesn’t need you to hold meetings or approve an Operating Agreement.
In addition, you don’t have to provide any personal information in public filings when filing in Nevada. As a result, you can stay anonymous and fully enjoy the privacy benefits of incorporating an LLC.
The state offers a corporate tax rate and an individual income tax rate of 0%. The sales tax rate is 6.85% (state-wide; locally, it can be as high as 8.27%). Moreover, its unemployment rate stands at 4.7%.
Your own company is like your own child. So it’s no surprise that you would want it to receive the best facilities and grow in the best environment. But due to the varying regulations and facilities across states, it can be difficult to find the best place to set up your LLC.
We hope this article has made the decision easier for you. Now you can use the best practices and facilities offered by the states mentioned above when starting an LLC and nurture it to ensure its success.