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Cost Analysis: Calculating the Economic Benefits of Forming an LLC in Different States

One of the most important decisions you’ll ever make about your business is which legal structure to choose.

While some entrepreneurs gravitate toward Sole Proprietorship or incorporation, a majority of small and medium-sized businesses benefit from registering as an LLC.

The LLC, or Limited Liability Company, provides a number of benefits, including economic ones. As you try to maximize those benefits, one question to consider is where to register. You’re free to register your LLC in the state of your choosing, which begs the question: Which state offers the greatest economic advantages?

LLCs Explained

First and foremost, it’s important to know a little bit more about what LLCs actually are.

LLCs have been around since the 1970s, and in that time they have become one of the most popular options for business ownership. The LLC is popular because it combines the personal liability protections of a Corporation with some of the flexibility of a Sole Proprietorship.

One important note is that, when you register your business as an LLC, you’re establishing it as its own legal entity. And as such, you’ll need to make an important decision about exactly where that entity will be based.

Why Choosing Your Home State is Always Best

Just because it is legally permissible to “shop around” for different states, that doesn’t mean it’s advantageous to do so. In fact, with just a couple of rate exceptions, the best state to form an LLC is almost always going to be your home state. Consider just a few of the reasons why.

1) You pay taxes wherever you make money.

First and foremost, whatever state you’re physically located in, that’s where you’ll pay income taxes. If you live in a state that doesn’t have an income tax, like Tennessee or Wyoming, that’s a huge plus: It means you don’t have to declare any of your LLC’s profits on a state tax return.

But what if you live in a place like California, where the income tax is high? Can’t you just register your LLC in Wyoming to avoid paying that state-level tax? Sadly, no. With LLCs, you ultimately pay taxes wherever you set up your operation and generate your income. This is even true if you’re running an e-commerce store or an Internet-based business: You pay your taxes where your business operates, not necessarily where the business was formed or where the customers are.

2) You may end up with double paperwork.

Let’s say you live and conduct business in New York, but you decide to establish your LLC in Delaware. Legally, you’ll need to register as a foreign LLC in New York, which essentially means doubling your paperwork: You’ll have filing and reporting requirements in both New York and in Delaware.

What’s more, you’ll be legally required to maintain a Registered Agent in both states. Hiring a Registered Agent is not astronomically expensive, but it is a cost that can add up. And the more states you register in, the quicker those costs will mount.

3) You’ll also double your fees.

Something else to keep in mind is that, any time you register an LLC, you have to pay the filing fee. The specific amount can vary depending on the state, and may be anywhere from $15 to $300. 

Again, these numbers aren’t massive, but registering your LLC in multiple states means stacking those fees on top of each other. And because you have to pay a registration fee annually, this can become a significant expense.

What About the Corporate Tax Rate?

You may wonder if it might be advantageous to choose your state of registration based on the state-specific corporate tax rate.

The important thing to keep in mind is that you’re not actually starting a Corporation. You’re starting an LLC, and LLCs default to pass-through taxation. That means paying your normal income tax rate, not the corporate tax rate.

Yes, you can opt into corporate tax status if you so choose, but doing so is almost never in your best economic interests. And it usually shouldn’t be a factor in your decision over where to register your LLC.

When Not to Choose Your Home State

We mentioned above that, in isolated scenarios, you may wish to look beyond your home state for LLC registration. Here are some of the unique circumstances in which that might be the case.

Real Estate LLCs

If you’re setting up an LLC to manage a real estate investment, that’s when it might be logical to look beyond your home state; specifically, it makes sense to register where the real estate is, which may or may not be the same state where you live.

Doing Business in Just One State

Say you live in Texas but 100 percent of your customers are in Oklahoma. It might make sense to register your LLC in Oklahoma, assuming you don’t do any business whatsoever in Texas!

You Don’t Have a Home State

If you’re not a US resident and you’re looking to register a business, particularly an online business, then you have the prerogative to shop around. Generally speaking, the states with the most favorable terms for foreign LLCs include Delaware, Nevada, Wyoming, and New Mexico.

Optimize Your Business By Registering as an LLC

Ultimately, registering your business as an LLC can yield any number of benefits, from tax flexibility to administrative ease. And for most business owners, the choice of where to register is pretty simple. Use these guidelines to ensure you’re on the right track with your LLC formation.

Author Bio

Amanda E. Clark  is a contributing writer to LLC University. She has appeared as a subject matter expert on panels about content and social media marketing.