Choosing the right state to register your Limited Liability Company (LLC) is a significant decision that shapes your business’s future. An LLC shields your assets from business debts and legal troubles, meaning creditors or lawsuits go after the company’s assets, not yours. 

However, where you set up your LLC can significantly impact your operations, profitability, and long-term success. Each state has different tax rates, filing fees, and regulations, making some more business-friendly than others.

Some states offer strong legal protections, lower costs, or tax benefits that could help your business thrive. The right choice can streamline operations and boost growth, while the wrong one can drain resources and create unnecessary obstacles.

Pick the wrong state, and you might face higher taxes, burdensome regulations, and endless paperwork. Worse, you could pay extra to operate in another state. The best state for your LLC can mean the difference between a thriving business and a costly struggle.

Which Types of Businesses Are Best Suited for LLCs?

Data from the U.S. Census Bureau, as reported by the U.S. Chamber of Commerce, shows that 5.5 million new business applications were filed nationwide in 2023. 

Many entrepreneurs have leveraged the benefits of an LLC to protect their assets, streamline operations, and drive growth. Choosing the best state to form an LLC sets you on the right path, especially if you run a business such as:

• Startups: An LLC allows startups to manage operations, distribute profits, and structure ownership to attract investors. It supports growth while protecting personal assets from business liabilities.
• Small businesses: Many small business owners prefer LLCs because they are easy to manage and offer pass-through taxation. Profits and losses go directly to owners’ tax returns, avoiding double taxation.
• Real estate: LLCs help property managers and real estate investors protect personal assets from lawsuits related to their properties. They also make ownership transfers smoother and more efficient.
• Professional services: Doctors, lawyers, accountants, consultants, and freelancers use LLCs to shield themselves from business debts and malpractice claims while maintaining control over operations.
• High-risk businesses: Industries like construction and manufacturing benefit from LLCs because they offer strong liability protection. This reduces financial risks from lawsuits, workplace accidents, or operational hazards.
• Family businesses: LLCs allow families to structure ownership and management in a way that suits their needs. They provide liability protection while keeping business interests within the family.

Pros and Cons of Forming an LLC

As you find the best state to form an LLC, remember that this business structure comes with advantages and disadvantages, including the following:

Pros

An LLC  provides significant benefits, such as safeguarding personal assets, adaptable tax options, customizable management and ownership structures, flexible profit distribution, and a stronger professional reputation.

• Limited liability protection: Your assets stay protected if the business faces lawsuits or debt since only business assets are at risk.
• Tax flexibility: LLCs are pass-through entities by default, meaning profits and losses go to your tax return. You can also choose taxation as a sole proprietorship, partnership, S corporation, or C corporation.
• Management flexibility: You can implement a management structure tailored to your business development plan, whether by managing the LLC, sharing control with partners, or hiring managers to oversee operations.
• Ownership and profit distribution flexibility: There are no restrictions on the number or type of owners, and profits can be divided based on agreements, not just ownership percentages.
• Credibility boost: Adding “LLC” to your business name enhances professionalism and helps secure client and vendor deals.

Cons

While LLCs offer flexibility and liability protection, they also have drawbacks, including formation and maintenance expenses, potential dissolution if a member departs, difficulty attracting investors, and complicated tax filing requirements:

• Startup and ongoing costs: State filing fees and maintenance costs add to expenses.
• Limited life: Some states require LLC dissolution or reformation if a member leaves or dies.
• Trickier to raise capital: LLCs can’t issue stock, making it harder to attract investors.
• More complex tax returns: Certain tax structures require additional filings.

How To Choose the Best State for Your LLC?

When selecting the best state to form an LLC, you need to consider various factors that can impact the profitability and operations of your business. 

These factors include the LLC’s initial filing, reporting, and business license renewal fees charged by the state and whether the state has strong asset protection and privacy laws. Let’s dig deeper into these factors below:

Formation and Maintenance Costs

When deciding on the best state to form an LLC, one primary consideration is determining the costs associated with establishing and running the business. 

Initial LLC Filing Fees 

When setting up an LLC, you’ll need to cover registration costs and file articles of incorporation to make your business a legal entity. Check the LLC filing fees by state, as these fees aren’t the same everywhere. Some states are far more affordable than others. 

At a $40 initial filing fee, the cheapest state to form an LLC is Kentucky. Conversely, Massachusetts has a hefty $500 fee.

If your company is located in a state other than where it was initially created or where you’re based, you’ll have to register it as a foreign LLC and pay extra filing fees there.

Reporting Fees

Most states require registered LLCs to submit reports and pay the appropriate fees annually, while others mandate filings every two years (biennial), once a decade (decennial), or not at all.

These reports outline your LLC’s activities over the past year, including managing owners and members, the registered agent’s address, and changes since the last filing.

Report filing fees vary by state and may depend on business size or industry factors. For example, Maine requires domestic LLCs to pay an $85 annual report fee, while foreign LLCs must pay $150. Meanwhile, Florida applies a $138.75 fee with a supplemental fee for regular yearly reports to both new state and foreign LLCs.

Business License Renewal Fees

Your business may need to obtain and renew licenses depending on its size, type, location, or activity. You should understand the difference between a business license and a certificate. A certificate proves expertise in a specific field but is rarely required for LLCs, while a business license is often necessary to operate legally in certain states, counties, or towns. 

Some jurisdictions implement strict licensing requirements. For instance, in Chicago, Illinois, restaurants and delis must renew their small retail food business license every two years for $660.

Business-Friendly Laws and Regulations

Evaluate the state where you plan to set up your LLC to ensure its laws and policies align with your business needs. Check for favorable conditions in the following areas:

Asset Protection 

To safeguard your assets from creditors, lawsuits, or business risks, consider forming your LLC in a state with strong asset protection laws. Wyoming is a top choice.

Under Wyoming Statutes (WS) Section 17-29-503, personal creditors cannot take an LLC’s assets to pay an owner or member’s debts. Their only option is a court-issued charging order, which lets them collect only the money distributed to the debtor owner or member. However, they get no ownership or control over the company. 

Privacy

Some states allow you to form an anonymous or confidential LLC, meaning your business can be registered without disclosing members’ names, addresses, or contact details on public records. This protects your image if your company faces negative publicity, keeps operations confidential, and helps prevent excessive marketing or junk emails.

Best States To Form an LLC

Given the abovementioned factors, you can now answer the question: What is the best state to form an LLC? Here are the states that stand out:

Wyoming

Beyond tax savings, Wyoming keeps business costs low with minimal fees. The annual license tax is just $60 for businesses with assets under $300,000. If your assets exceed this amount, the tax remains exceptionally low at only 0.0002% of total asset value. These cost-effective policies ensure long-term financial stability.

Wyoming also prioritizes privacy, which makes it a top choice for LLC owners who value confidentiality. Under WS Section 17-29-201(a), the state does not require the disclosure of LLC members in the Articles of Organization. 

Instead, appointing a registered agent ensures anonymity while protecting business assets from personal creditors and public exposure.

Delaware

Thanks to its well-structured business laws, Delaware is one of the best states in which to form an LLC. The state’s sophisticated legal framework is designed to support businesses, which provides a stable and predictable environment for corporate matters.

A key advantage is Delaware’s Court of Chancery, a specialized court that handles business disputes without juries. Judges with extensive corporate law expertise decide cases based on established case law to ensure faster resolutions and consistent rulings.

Delaware also offers significant tax benefits. State legislation allows national businesses to establish shell companies or subsidiaries to minimize tax obligations. 

Additionally, there is no state income tax on revenue earned outside Delaware. This makes the state attractive for online businesses and companies with customers across multiple states.

South Dakota

Starting a business in South Dakota gives you access to financial support and flexible business structures. The Governor’s Office of Economic Development (GOED) offers financing programs like the South Dakota WORKS, which provides loans for payroll, new construction, and start-up costs to help your business secure the capital it needs.

Among the best states to register an LLC, South Dakota also offers flexibility in ownership, management, and taxation. An LLC can be managed by members, non-members, or both. Moreover, LLC members can set their terms for profit sharing, capital distribution, and risk management, which enables more excellent financial stability and strategic planning.

Forming an LLC as a Non-Citizen or Non-Resident

Suppose you’ve identified the best state to form an LLC, but you’re not a U.S. citizen or resident. The process can be complicated, so you must carefully review the following unique requirements and potential obstacles:

Visa Requirements for Managing an LLC

A valid visa is required for non-citizens intending to actively manage an LLC in the U.S. Certain visas, like the B-1 visa, permit business operations but restrict direct involvement. Understanding visa regulations is critical before forming an LLC.

EIN Application Without an SSN

Non-citizens who lack a Social Security Number (SSN) must obtain an Employer Identification Number (EIN) to operate an LLC. This requires submitting a Form SS-4 from the Internal Revenue Service (IRS) via mail or fax. Sometimes, contacting the IRS by phone may be necessary to complete the process.

Registered Agent Requirements

All LLCs must have a registered agent to receive legal and tax documents. Hiring a registered agent service is often the most practical solution to comply with state regulations for non-citizens without a physical U.S. address.

Challenges in Opening a Business Bank Account

Banking requirements for LLCs can be more complex for non-citizens. Most U.S. banks require applicants to provide proof of a U.S. address and be physically present during the account opening. Traveling to the U.S. may be necessary in many cases, though some international financial institutions provide alternative solutions.

Foreign Ownership and Tax Classification

No citizenship restrictions exist for LLC ownership, but having foreign members may impact tax classification. For example, an LLC electing to be taxed as an S corporation must have only U.S. citizens or permanent residents as shareholders.

Tax Compliance for Foreign Owners

Income earned from an LLC is subject to U.S. taxation, and non-citizens may also have tax obligations in their home country. Additionally, compliance with regulations such as the Foreign Account Tax Compliance Act (FATCA) is required.

Additional Disclosure Requirements

If a foreign entity owns an LLC, IRS Form 5472 may need to be filed to report transactions between the business and its foreign owners. Failure to comply can result in significant penalties.

Tax Basics for LLCs

How an LLC is taxed depends on the number of members and its chosen tax classification. Single-member LLCs, multi-member LLCs, and other classifications follow different tax rules. 

Note that your LLC’s tax classification affects your tax obligations and determines how you can pay yourself as a business owner. Here are the taxation options to consider:

Single-Member LLCs

If you run an LLC alone and haven’t elected corporate taxation, report business income and expenses on your tax return using Form 1040 and Schedule C. You must also pay self-employment taxes directly to the IRS, covering Medicare and Social Security.

Multi-Member LLCs

The business must file an informational return using Form 1065 for an LLC with multiple owners. However, the LLC itself doesn’t pay income taxes. Instead, each member receives a Schedule K-1, which reports their share of income, deductions, and credits. 

Members then use this form when filing personal tax returns. The LLC’s operating agreement determines each member’s percentage of profits and losses.

Electing C Corporation Taxation

An LLC can be taxed as a C corporation by filing Form 8832. This means the IRS treats the business as a separate taxpayer. Instead of passing income and expenses to members’ returns, the LLC files its corporate tax return, and owners are taxed separately.

Electing S Corporation Taxation

An LLC can also elect S corporation taxation to reduce self-employment taxes. When a business elects S corporation status, the owner is treated as an employee and receives a salary subject to self-employment taxes. 

Any remaining profits are paid out as dividends, exempt from self-employment tax. Although the IRS treats it as an S corp, the business remains an LLC.

Steps of Forming an LLC

The exact procedures and requirements for establishing an LLC vary by state, but business owners typically have to go through these steps:

1. Pick a Unique Business Name

Select a name that is not already registered within your state. To verify availability, use the business search database your state’s Secretary of State’s office provides. 

Some states have specific naming guidelines. For instance, California requires LLC names to include “LLC” or an equivalent abbreviation like “Ltd.” Checking state regulations ensures compliance and prevents future legal issues.

2. Assign a Registered Agent

Most states require LLCs to designate a registered agent to receive legal documents, tax forms, and government notices on behalf of the business. This agent can be an individual or a business entity with a physical address in the state where the LLC is registered. 

While you can act as your agent, hiring a third-party service can help manage paperwork efficiently and offer added privacy, particularly for more extensive or growing businesses.

3. Submit Formation Documents

To officially establish your LLC, you must file the Articles of Organization—also called a Certificate of Organization—with your state’s filing office. This document outlines essential details, including your business name, management structure, business purpose, and registered agent’s contact information. 

Filing fees vary by state. Once your documents are approved, the state will issue a certificate confirming your LLC’s legal registration.

4. Draft an Operating Agreement

An Operating Agreement is a vital document that outlines your LLC’s financial and managerial framework. It details ownership percentages, capital contributions, profit distribution, and procedures for adding or removing members. 

While not required in all states, having an Operating Agreement helps avoid disputes by setting clear guidelines for decision-making and responsibilities among members.

5. Handle Other Requirements And Obligations

Once your LLC is officially registered, take additional steps to ensure full compliance. Obtain an Employer Identification Number (EIN) from the IRS for tax purposes. Secure necessary business licenses, set up a business bank account, and explore financing options such as commercial loans.

The Best State To Form an LLC: Recap

While there are benefits inherent in the business structure of an LLC, choosing the right state to establish one is critical. Some impose high fees, creating a financial burden for you. Others provide strong liability protection, privacy, and tax advantages. Wyoming, Delaware, and South Dakota offer the most favorable legal and financial environments.