If you are forming a new LLC, you may wonder whether to file in your state of residence or in another state.
This is a question that comes up frequently for online business owners who do not have a physical presence in their state of residence. I’ve created this guide to help you select the best state to form LLC for online business.
Which State is Best for an Online Limited Liability Company?
So, you're starting an online business. That's great. One of the best business structures to conduct business with is an LLC.
An LLC is a business entity that protects your personal assets from the actions of your business. By forming an LLC, you can separate your business and personal assets so that if someone sues your business, they cannot come after your house and car to pay damages or legal fees.
LLC Formation is not hard, but there are some important things to know before you begin. One of the most important things to consider is which state to form your LLC in.
Your Home State, Nevada, Wyoming, Delaware
Some states which are known for being very friendly to LLCs and corporations include Delaware, Nevada, and Wyoming. These three states have the reputation of allowing online business owners to save on filing fees, inheritance tax, annual fees, sales tax and provide more privacy for the owners, just to name a few.
Your Home State. When it comes to business, there is no place like home. You know the rules, regulations, and requirements better than anyone else.
If you're not willing or able to hire a registered agent, forming your LLC in your home state is often the best option because it allows you to act as your own registered agent. It is also the best state to form an LLC if you do most of your business there.
Factors to Consider When Choosing the Best State for LLC Formation
It’s best to consider several factors before choosing the state in which to form your LLC.
You should consider which state your business is primarily located or operates in. If you have a brick-and-mortar business and do not plan on expanding out of state, you will likely want to form an LLC in the state where your business operates.
However, if you have an online business and do not have a physical location in any one state, then you may be able to form an LLC anywhere, depending on the nature of your business.
Initial Filing Fees
You also need to look closely at how much money it will cost you to form an LLC in a particular state and how much annual reporting fees that state charges for renewing the license. The annual fees can be different from one state to another and range from $100 or less in some states.
State Income Tax
One of the most important factors to consider when choosing the best state for forming your LLC is the tax rate that a state charges. The franchise taxes rate can vary from one state to another.
So, check out what percentage of your profits your business would have to pay if you choose to form an LLC in a particular state. You also need to look at other taxes like inheritance tax, property tax, etc., in that state. These taxes can impact your business.
Some states require an LLC to file reports each year, while others don’t have this requirement. If you are looking for a hassle-free environment to manage your business, go for states with low maintenance requirements.
Delaware-Best State for Solving Business Disputes
A Very Business-Friendly Legal Environment
The main reason why Delaware is one of the top choices for LLC formation is that it has a very business-friendly legal environment. The state's court system for businesses is considered to be the best in the country, and the laws governing corporate management and financial transactions are clear and favorable to companies.
It Has Fast LLC Application Processing
Forming a Delaware LLC takes about 3 to 4 days for the state to process your application. Even if you need expedited processing, your application can be approved within 24 hours with an additional fee. This can be extremely useful if you need to get your business up and running immediately.
Doesn’t Tax Out-Of-State Income
Another important benefit of forming a business in Delaware is the "Delaware loophole," which allows owners to avoid paying taxes on any income generated outside of Delaware, i.e., out-of-state revenue. The loophole requires that companies have no physical presence in Delaware and have no employees or officers who are Delaware residents.
It is estimated that 60% of publicly-traded companies in the U.S. are organized in Delaware, and about 40% of Fortune 500 companies have been incorporated in Delaware, including Apple Inc., Ford Motor Company, and Coca-Cola.
Nevada-Best for Privacy Protection
Nevada is known as the corporate haven because it doesn’t require corporations or LLCs to pay business taxes.
It also provides privacy protections for owners who don't want their names listed publicly on company documents or websites. Some states make business owners' names and address public records. If you form an LLC in Nevada, it can reduce the risk of identity theft, stalkers, and other troublemakers finding out your home address.
Wyoming - Has No Business Income Tax
This is the beauty of Wyoming. It is an ideal state to form an LLC because of its business-friendly laws and low tax rates.
Because Wyoming has no income tax and very low sales tax, forming an LLC in Wyoming is a great way to save on business expenses and keep more of your profits.
It's for these reasons that many small businesses, especially online businesses, choose to form their LLC in Wyoming.
Your Home State
The best state in which to register your LLC is the one that suits your particular business needs and where the majority of your clients are located. Many small businesses choose their home state because they are familiar with the requirements and costs and may have a registered agent in that state.
Additionally, if you list your home address as your company's address, you will receive mail delivered by the secretary of state's office to your home rather than having it forwarded to you.
It Costs Less
Doing business in your home state costs less than doing business in other states. Many states require LLCs to register as foreign entities before they can do business there.
It is easier for LLC owners.
Operating within one's home state is often easier for many businesses because it eliminates the need for additional paperwork or filing fees associated with qualifying as a foreign entity in another jurisdiction.
Can I File My LLC in a Different State From Where I Live?
Yes, you can file your LLC in a different state from where you live. Live in California, but are you planning to start your business in New York? No problem. You can form an LLC in either state, and you don't need to be a resident of that state.
When it comes to starting an LLC, location is everything but not necessarily the location of the business owner. There are many reasons why new business owners decide to form LLC in a different state than where they live:
- Your business will be operating in a different state
- You want to take advantage of more favorable franchise taxes, sales tax, elsewhere.
- You want to take advantage of more favorable requirements for forming an LLC such as fewer state filing fees
- You want to incorporate in a state with less regulation of businesses.
Online Business can be Set Up Anywhere
If you have an online store or other business that doesn’t have a physical presence in any state, then you can put it anywhere. But even if your business does have a physical presence, you may still be able to incorporate outside of your home state.
One thing to remember when forming an LLC out of state is that even though your LLC is registered in another state, if your business is actively trading in your home state, then it will most likely be classed as a foreign LLC.
Do You Need an LLC for an Online Business?
There are a lot of online business ideas that can allow you to work from home. The best business idea will depend on your skills and financial situation. You can start an eCommerce store, offer services, or even build a blog.
But regardless of what type of business you start, you need to get legal protection for your new venture. One of the most common options is setting up an LLC.
The biggest benefit of an LLC is that the owners and members are not personally liable for the debts and obligations of the business. Your personal assets (home, car, bank account, etc.) are safe in the event your LLC is sued or can't pay its bills. The protection provided by an LLC is called limited liability.
In addition, if you still have doubts on whether to use an LLC for online business, we'll share with you these trusted formations services and registered agents services that can answer all your questions and help with the matter.
Trusted Business Formation Services
The Nolo website has so many products, services and information that it can be quite a lot to digest if you're only looking for a specific service like LLC formation. Good thing they have an advanced “search” feature and easy-to-access sections to make things easier to find. The Nolo Living Trust removes the need for expensive and time-demanding court attendance, but one single drawback is that Nolo doesn't list a phone number on the website, so there's no way to call them when you need to talk to someone.
There’s a lot to love about Rocket Lawyer. Their Form Builder is simple to use and comes with clever steps to ensure that what you’re doing is valid and legal. Their team is always happy to assist you with your needs, making Rocket Lawyer a fun, customer-friendly, and professional environment. Rocket Lawyer will likely be able to handle any issue that might come up.
Compared to other services, ZenBusiness gives you more value for your money. In such a short amount of time, ZenBusiness is operating like a brand that has decades of experience. They make the entire process straightforward and are not looking to charge you additional services. Also, their ZenBusiness Pay-It-Forward program for women and minority-owned businesses is fantastic.
This company have been responsible for the formation of over a quarter of a million businesses since their inception. IncFile service and professionalism are some of the best in business. The fact that you get a registered agent for a full year at no cost is a huge plus, but being able to form an LLC at no cost (other than your state’s fees) is nothing short of incredible. The free services are included in their starting Silver Package.