Top USA States to Form Your LLC In (Best Ones Revealed)

Are you still confused about which state you should build your LLC? Then, this post is for you!

As a future business owner, one of the most crucial decisions you should make is choosing which state is best to form your LLC. Beware that LLC requirements may vary from state to state. When deciding where to build your LLC, you should consider different factors, such as workforce availability, regulatory burden, taxes, and more.

Forming Your LLC in the Right State, Why So Important?

The liability protection and overall formation process for LLCs are the same nationwide. However, some smaller details can largely impact how easy starting, maintaining or managing an LLC is. It is worth mentioning that the cost to start and run an LLC also vary by location.

For example, the cost to form an LLC in Massachusetts is $500, but in New Mexico, you will need $50 to file LLC formation paperwork. Massachusetts has a $500 annual fee due yearly, while Pennsylvania only requires $70 every ten years.

LLCs and their members are not subject to state income taxes in some states, while others require them to pay a minimum franchise fee and have higher income taxes. Aside from costs, things like compliances requirements and various reports can be a pain in some states compared to others.

Do not expect that everything will run smoothly when forming an LLC in the right location, says Ian from LLCGuys.com. It is easy to follow all necessary requirements for keeping the LLC in good standing. The formation documents will quickly get approved, or the filling process will be quick and easy. You may also imagine that the taxes, annual fees, formation fees, and other costs are low. These things are possible if you are in a perfect world.

However, you have to understand every rule and consequence you may encounter in reality. If not, you have to deal with costly mistakes. For example, Connecticut’s Attorney General and Secretary of State collected more than $1.3 million in fines from companies that illegally operated in the state in 2018. More than 275 companies were penalized, with $30,795 being the largest fine.

Obviously, you want to avoid this scenario. Keep in mind that even if a state seems appealing to form an LLC, it does not necessarily mean that it is the right location for your business.

Top 5 U.S. States to Form an LLC 

If you are considering forming an LLC, below are the best US states to form an LLC and why. We have also included the drawbacks of forming an LLC in a specific state. Let’s start!

1. Wyoming

Individual Income Tax Rate: 0%

Corporate Tax Rate: 0%

Sales Tax Rate: 4.00%

Unemployment Rate: 4.0%

Average Effective Property Rate: 61% (1.19% for national average)

Wyoming is one of the US states with policies that aim to be business-friendly. The state does not impose strict reporting obligations if you are a startup. It does not tax corporate income or personal income and even has no franchise taxes.

The state offers something unique compared to other US states, like the lifetime proxy. With this offering, you can appoint another person you trust to represent your stock or shares in a company on your behalf. In other words, those who plan to form an LLC in Wyoming will benefit from complete anonymity.

The sales tax in this state is very low. In the 2020 Combined State & Average Local Sales Tax Rates, Wyoming is in the 44th place for local tax rates. Alaska and Hawaii are with lower averages than the 46 states imposing a sales tax.

Incorporating a business in Wyoming offers flexibility. The state gives you several options to run your LLC. You have to determine who will be running the day-to-day operations when filing your LLC formation paperwork. However, you do not need to provide the name of the LLC owner as a part of the public record. This means the state is offering privacy protection.

Another reason to form your LLC in Wyoming is that the state government offers different business incentives. Aside from having no franchise tax or state income tax, the fee for annual filing is as low as $100 per year. While the state has a low sales tax of 4% and does not collect personal income tax, there are exceptions for manufacturing equipment.

Pros:

• Lifetime proxy for owner anonymity 
• Few reporting requirements for LLC owners 
• Low sales tax rates 
• No personal or corporate income taxes 
• No franchise taxes 

Cons:

• Asset protection is guaranteed for lawsuits outside the state 
• High administrative costs 
• LLC dissolution, if a member files for bankruptcy or dies
• Fewer benefits for remote businesses 

2. Delaware 

Individual Income Tax Rate: 2.2%

Corporate Tax Rate: 8.7%

Sales Tax Rate: 0%

Unemployment Rate: 4.8%

Average Effective Property Rate: 0.56%

For several years, Delaware has had a reputation for being a business-friendly state. According to the Delaware Division of Corporations, around 68% of Fortune 500 businesses were formed in this state. Even if the report does not necessarily apply to LLCs, it still sends a draw for many organizations to form a business in the state. In 2019, over 165,000 LLCs formed in Delaware, which is higher than corporations with more than 45,000 formed.

For those who don’t feel like reading – here’s a quick video explaining Delaware LLC incorporation process:

That is because the franchise taxes and initial filing fees are lower compared to other states. Aside from that, the state does not impose taxes on out-of-state income; the filing process is very straightforward and lets LLCs start and run quickly.

The Chancery Court is another unique thing about Delaware, which is one of Delaware’s three constitutional courts, alongside the Superior Court and Supreme Court. This court is dedicated to business cases only. In other words, any business-related cases are expected to be resolved quicker than in other courts. Not only that, the judges have more experience and knowledge in business hearings.

When it comes to corporate legal issues, the state opted to use judges instead of juries. If a particular case is heard, it will not be before a jury made of laypeople but a judge with the necessary expertise in corporate law. In return, you are more likely to experience a streamlined, impartial, and fair process.

This US state does not require officers, directors, or shareholders to be residents of the state. You can name a single person in all of these roles. The state also enables you not to include your personal identity in the formation paperwork.

Many banks and investors display strong preferences for corporations in Delaware. Incorporating a business in this state will give you the edge if you are going public or looking for venture capital. The state further offers tax advantages. You can reap several financial benefits from forming an LLC with the business-friendly tax laws. You have to pay state income tax if you formed an LLC in Delaware, even if the headquarter is elsewhere. 

Pros:

• The Chancery Court offers a specialized business legal system 
• Business structure flexibility 
• More business privacy 
• Does not require corporate incomes taxes for foreign LLCs
• Low franchise taxes and filing fees 
• Quick and easy formation process

Cons:

• No flat franchise taxes 
• Multiple legal representatives 
• Two registered agents are required for out-for-state LLCs
• Dual registrations are required for out-of-state LLCs

3. Nevada 

Individual Income Tax Rate: 0%

Corporate Tax Rate: 0%

Sales Tax Rate: 6.8% (8.265% statewide-locally)

Unemployment Rate: 4.7%

Average Effective Property Rate: 0.77%

When it comes to drawing the attention of many business owners wanting to avoid high tax payments, Nevada is one of the excellent options. That is because the state does not impose taxes on a franchise, corporate income, or personal income. The state does not require LLCs to pay annual filing fees and annual license fees for such a thing.

When it comes to privacy, the state delivers enhanced privacy protection. Nevada is one of the few states in the nation that allow complete anonymity for public filings. Therefore, an LLC can remain anonymous in a public registration filing. The state does not even have an information-sharing agreement with the Internal Revenue Services (IRS). Having no income tax department means no single information is being shared.

You will find maintaining your LLC in this state easy since it does not require any operating agreements or annual meetings. The registration process is also quick and easy, with fewer steps than in other states.

Even if you do not intend to run your business in Nevada or live, you can still form an LLC in this state by registering as a foreign entity. Most businesses take advantage of this approach, forming an LLC in one state and operating in another state.

One of the most critical benefits that Nevada offers is the vast range of state taxes freedom for most LLC owners. Forming an LLC in Nevada does not require you to pay the common state-levied taxes, like admissions tax, franchise tax, personal income tax, gift tax, estate tax, unitary tax, or corporate income tax. On the other hand, if you formed the LLC in Nevada but live in another state, you may need to pay taxes to the state.

As you start an LLC in Nevada, all liabilities it incurs remains with the corporation. When you form a business in any state, you are protected against most liabilities; some states come with loopholes that can make you responsible for the damages caused by your business. This state also does not require you to list your LLC’s corporate assets for the state, except for the Federal Government. In return, your assets and privacy are protected further.

Pros:

• No annual meetings or operating agreements are required 
• No information-sharing agreements with the IRS 
• LLC owners and investors are kept anonymous 
• No franchise taxes
• No corporate taxes or personal income taxes 

Cons:

• Gross earning more than $4 million can be a subject to taxes
• Annual filing fees 
• Annual business license fees

4. Alaska 

Individual Income Tax Rate: 0%

Corporate Tax Rate: 9.4%

Sales Tax Rate: 0% (7% for municipalities)

Unemployment Rate: 7.3%

Average Effective Property Rate: 1.19%

Alaska is not only famous for thousands of miles of beautiful terrain and cold weather but also as a top location to form an LLC. This largest state and last to join the Union does not impose a sales tax or state income tax, making it suitable for starters. On the other hand, some cities collect local sales taxes, but they are generally low.

You can also be entitled to specific credits, depending on the industry you belong to. Some of these tax credits include minerals incentives, qualified gas and oil service industry expenditure credits, new area development credits, frontier basin credits, film production credits, etc. However, these require you to operate your LLC within the state in most cases. 

The state offers various loan programs if you are a new business owner. However, like the tax credits, these programs are dedicated to businesses that operate in Alaska with a physical presence. 

Meanwhile, the state fees associated with forming an LLC in the state are fairly less expensive than in other states.

Pros:

• A lot of loan opportunities and tax credits 
• Low LLC filing fees 
• Low local tax rates 
• No states sales taxes 
• No state income taxes 

Cons:

• Physically distant from other US states 
• Local jurisdictions may require sales tax collection 
• The loan opportunities and tax credits are only available for businesses operating physically in Nevada 

5. South Dakota 

Individual Income Tax Rate: 0%

Corporate Tax Rate: 0%

Sales Tax Rate: 4.50%

Unemployment Rate: 3.2%

Average Effective Property Rate: 1.2%

Another state that does not impose state income taxes in South Dakota. When you form an LLC in this state, you will enjoy a 0% corporate incomes tax. With that being said, the state offers an excellent advantage for LLCs that get taxed as corporations.

The state also has other tax advantages, such as no business inventory tax, no inheritance tax, and no personal tax. The filing process is not only easy but also affordable. You can complete it online without the need to deal with strict requirements.

It is worth mentioning that most of the benefits associated with forming an LLC in this state are for companies and state residents operating within the state. If you do not live in South Dakota or operate the business outside the state, you still have to maintain a foreign LLC status.

Pros:

• No business inventory tax 
• 0% corporate tax rates for LLCs that get taxed as corporations 
• No state income taxes
• Different tax advantages for LLC owners living and operating in South Dakota 

Cons:

• Local registered agents required 
• Limited life 

Other Best US States for Form an LLC

Aside from the mentioned US states above, here are other states you may like to consider forming an LLC in:

1. Florida

Individual Income Tax Rate: 0%

Corporate Tax Rate: 5.5%

Sales Tax Rate: 6.00%

Unemployment Rate: 3.8%

Average Effective Property Rate: 1.02%

Here’s a quick video guide on Florida LLCs:

2. Montana 

Individual Income Tax Rate: 1% to 6.9%, depending on income 

Corporate Tax Rate: 6.75%

Sales Tax Rate: 0%

Unemployment Rate: 3.8%

Average Effective Property Rate: 0.87%

3. New Hampshire 

Individual Income Tax Rate: 0% (5% on interest and dividend income)

Corporate Tax Rate: 7.9%

Sales Tax Rate: 0%

Business Enterprise Tax: 0.72%

Unemployment Rate: 2.7%

Average Effective Property Rate: 2.19%

4. Utah 

Individual Income Tax Rate: 5%

Corporate Tax Rate: 5%

Sales Tax Rate: 4.7%

Unemployment Rate: 3.0%

Average Effective Property Rate: 0.67%

5. Oregon 

Individual Income Tax Rate: 5% to 9.99%, depending on income 

Corporate Tax Rate: 6.6% on the first $1 million of incomes and 7.6% on income over $1 million

Sales Tax Rate: 0%

Unemployment Rate: 4.0%

Average Effective Property Rate: 1.27%

6. Indiana

Individual Income Tax Rate: 3.23% plus country tax rates from 0.01% to 0.021%

Corporate Tax Rate: 4.9%

Sales Tax Rate: 7%

Unemployment Rate: 3.3%

Average Effective Property Rate: 0.87%

Least Desirable US States to Form an LLC

Of course, if there is the best state to form an LLC, we also provide you with the states you should avoid.

1. Iowa 

Individual Income Tax Rate: 8.98%

Corporate Tax Rate: 6% to 12% on business income more than $25,000 (highest in the US)

Sales Tax Rate: 6.00%

Unemployment Rate: 2.8%

Average Effective Property Rate: 1.49%

2. Vermont 

Individual Income Tax Rate: 8.95% on income more than $416,650

Corporate Tax Rate: 8.50% for taxable income more than $25,000

Sales Tax Rate: 6% (up to 7% in several municipalities)

Unemployment Rate: 2.8%

Average Effective Property Rate: 1.71%

3. Louisiana 

Individual Income Tax Rate: 6%

Corporate Tax Rate: 4% to 8% for taxable income more than $200,000

Sales Tax Rate: 4.45%

Unemployment Rate: 4.7%

Average Effective Property Rate: 0.51%

4. Maryland 

Individual Income Tax Rate: 5.75% for incomes more than $300,000 (1.75% to 3% additional income tax for some counties)

Corporate Tax Rate: 8.25%

Sales Tax Rate: 6.00%

Unemployment Rate: 4.3%

Average Effective Property Rate: 1.21%

5. Ohio 

Individual Income Tax Rate: 0% for incomes below $10,000 down to $8.178 plus 5% of income more than $213,000

Commercial Activity Tax: 26% for businesses with $1 million or more gross receipts per year

Corporate Tax Rate: 0%

Sales Tax Rate: 5.75% (8% in some municipalities)

Unemployment Rate: 4.5%

Average Effective Property Rate: 1.55%

6. Minnesota 

Individual Income Tax Rate: 5.35% to 9.85% for incomes more than $266,700

Corporate Tax Rate: 9.80%

Sales Tax Rate: 6.875% (8.375% in some municipalities)

Unemployment Rate: 3.1%

Average Effective Property Rate: 1.19%

7. Connecticut 

Individual Income Tax Rate: 3% to 6.99% for incomes more than $500,000

Corporate Tax Rate: 9%

Sales Tax Rate: 6.35%

Unemployment Rate: 4.4%

Average Effective Property Rate: 2%

8. New York 

Individual Income Tax Rate: 4% to 8.82% for incomes more than $1,077,550 (for single), and $2,155,350 or higher (for married filing jointly)

Corporate Tax Rate: 6.50% (0% for qualified manufacturers)

Sales Tax Rate: 4.00% (8.875% sales plus use tax in NYC)

Unemployment Rate: 4.5%

Average Effective Property Rate: 1.65% (0.80% in NYC)

9. California 

Individual Income Tax Rate: 13.3% for taxable incomes more than $1,000,000

Corporate Tax Rate: 8.84%

Sales Tax Rate: 7.25%

Unemployment Rate: 4.2%

Average Effective Property Rate: 0.79%

And here’s a short how-to video explaining California LLC:

10. New Jersey 

Individual Income Tax Rate: 3.5% on income of $35,000 or higher to 8.97% for $500,000 or higher (income more than $5 million is subject to 10.75% tax)

Corporate Tax Rate: 9% (7.5% on net income of $50,001 to $100,000 or 6.5% on net income of $50,000 or less)

Sales Tax Rate: 6.625%

Unemployment Rate: 4.3%

Average Effective Property Rate: 2.4%

Tips for Choosing the Right State to Form Your LLC 

Here are a few tips that will help you choose the right state to form your LLC and maintain it there for a long time:

Tip 1: Look Beyond Low Filing Fees and Annual Fees

A particular state may have higher annual fees and filing fees than other states. However, do not feel discouraged if the states on your list have skyrocketing annual or filing fees. Whether you picked a state with low or high filing and annual fees, it is not the end of your search.

Tip 2: Do Not Move Just to Form an LLC 

If you live in a state with high state franchise fees, high-income taxes, and other expenses, you may think of moving to another state to start an LLC. However, it can be a drastic decision. Beware that there is no guarantee that your LLC will succeed, regardless of which state you form a business. You also need to consider your quality of life and if that state is suitable for your lifestyle or your family’s needs. 

Tip 3: Understand the Compliance Requirements 

Your tasks do not stop after forming your LLC; it is just the first step. You can opt for a state you believe you can religiously comply with. Remember that you have to remain in good standing with the state for as long as your business operates. You have to keep it in mind as your LCC starts to grow.

Tip 4: Don’t Do Everything on Your Own

We recommend consulting with professional LLC formation companies, that can definitely advise you and even form an LLC in any state you wish for you. And the best part — most of them do it for a very attractive price.
One of the best companies out there is called ZenBusiness and you can read their in-depth overview on LLCGuys. ZenBusiness have one of the best ratings among dozens of other companies.

Conclusion 

To sum it up, LLC formation varies from state to state. Some states are favorable to your side, while others deliver some drawbacks that can impact your operations in the future. So, ensure to consult the experts before forming an LLC.