When considering starting a business, everything should be looked into. You need to consider location, legal status, the state in question, government policies, taxes, etc. When you start a business, you are responsible for choosing your business structure, and one structure you can select is a limited liability company, or LLC.
One of the major things to consider while trying to set up your business as a Limited Liability company is which state would be the best option for you. This consideration is very pertinent because the state you choose can make or mar your business.
Unlike other business structures, you can form an LLC in any state, regardless of your physical business presence there. With so many states to choose from, it can be difficult to determine where to establish your LLC for the best results.
It is a fact that various states in the United States present various complexities when it comes to forming an LLC in them. Researchers and entrepreneurs have consistently tried to compare the various modalities for which each state offers their LLC to decide which is most favourable to business formation in the United States.
When it comes to deciding where to form your Limited Liability Company (LLC), like I’ve said before, you need to consider taxes, regulatory burden, workforce availability, and more. Like sole proprietorships or partnerships, an LLC is an unincorporated entity––income from the business flows through to the owners and investors as personal income.
However, like a corporation, an LLC provides limited liability––owner(s) liability is limited to the amount of their investment in the company. In this article we will explore the best states to form an LLC from an overall business climate perspective. Various indices will be used to inform the choices of which states we would see as the best and worst to form a business.
Best States to Form an LLC in the United States
When it comes to considering the best states to form your LLC, you need to take into consideration things like, lifestyle factors such as health care, education, infrastructure, crime rates, weather, etc.
As a popular business structure, LLCs are flexible and combine elements of sole proprietorships or partnerships and corporations. This is why they are so popular. The owners of LLCs are considered members. LLCs can either be:
Single-member or Multi-member, and the owners of an LLC have financial and legal protection similar to corporations but without the double taxation. Another amazing side to the LLC is that owners are not responsible for business debts. If the business owes money and can’t pay, only their business assets are at risk.
LLCs use pass-through-taxation and this basically means that the business itself does not pay taxes. Instead, owners must report business income and pay taxes on their personal tax returns. However, LLCs can elect to be treated and taxed as corporations, it is all in the choice of their management.
Like it has been said, you can actually form an LLC in any state, regardless of where you’re based. Your LLC would then be known as a foreign LLC. A foreign LLC is basically an LLC that is formed in one state but wants to carry out business in another state.
Each state has different laws for LLCs. Some states are more strict, while others are more lenient. Other states might also offer financial advantages and other perks for LLC formation.
With the various indices that will be put in place, let us try to find out which states are coming tops when it comes to the best states to start an LLC in the United States.
When you run a general research, you would mostly find out that Delaware is the most popular choice for forming an LLC, that is apart from your home state. Research has found this state out to be business friendly which is what endears it to the hearts of entrepreneurs.
In fact, you will find that more than 50% of all U.S. publicly-traded companies and roughly 63% of Fortune 500 companies are incorporated in Delaware. In addtion to being business friendly, Delaware also has a simplified filing process to help you get your LLC quickly up and running.
Two other major perks of creating an LLC in Delaware are the low fees and taxes. Delaware does not tax out-of-state income for foreign LLCs. To entice businesses, Delaware also has low filing fees and franchise taxes.
Another important factor is that Delaware has a separate court, called the Chancery Court, that only hears business cases. Because of this, cases involving businesses are resolved more quickly than they would be in other states where they’re thrown on the docket with all other types of cases. The judges are experienced in business matters as well, whereas judges in other states may have little or no background in this area of law before taking the bench.
Some of the advantages you will note with starting a business in Delaware include that the state is; Business-friendly, has a streamlined filing process, has low filing fees, low franchise taxes, no corporate income taxes for foreign LLCs taxed as corporations, etc. Kindly visit Delaware’s website if you need more information on how to create an LLC in the state.
When it comes to the best states to create an LLC in the United States, Nevada is another state that gets good attention, and for good reasons. For one, the state of Nevada does not collect tax on business income, capital gains, or inheritances, which makes it appealing to business owners.
The state does not collect franchise tax either, although there are fees for business licenses and annual filing fees. Yet another endearing fact about forming an LLC in Nevada is that you aren’t required to create an operating agreement or hold annual meetings for your company, which can make running your business simpler.
Additionally, Nevada does not have an information-sharing agreement with the Internal Revenue Service. So, if you’re seeking privacy or anonymity, Nevada may be the state for you, since it allows anonymity in public filings. The processing times for LLC filings in Nevada also are relatively fast. Additionally, the state does not participate in information-sharing with the IRS.
Some of the advantages you will note with starting a business in Nevada include that the state has; No corporate or personal income taxes, No franchise taxes, Anonymity in public filings, No information-sharing agreements with the IRS, No requirements for operating agreement or annual meetings, etc. Is your appetite whetted on forming an LLC in Nevada? Then visit the state’s website.
Another popular state when it comes to starting an LLC in the United States is Wyoming, and this state strives to be as business-friendly as possible. Like Nevada, there are no corporate income, personal income, or franchise taxes in Wyoming.
When you form an LLC in Wyoming, there is no business income tax or franchise tax to pay. Wyoming also offers lifetime proxy, which means you can appoint someone else to represent your stock or shares and vote on your behalf. This allows the legal owner of the shares or stock to remain completely anonymous. This goes to show that this state offers business anonymity to some extents.
In addition to no corporate or individual income taxes, Wyoming also has a low sales tax rate. The advantages of incorporating your business Wyoming include that the state has; Minimal reporting obligations, No corporate or personal income taxes, No franchise taxes, Lifetime proxy option, Low sales tax rate. Ready to start an LLC in Wyoming? Visit Wyoming’s website for more details.
Alaska is also coming up on the heels of the others when it comes to the best states to form an LLC in the United States. As a business owner, you might have never thought about establishing your LLC in Alaska, but, the state has many perks when it comes to forming an LLC in it.
Alaska is a state that has no state income tax or sales tax. However, keep in mind that cities or localities in Alaska are allowed to collect their own rate for city or local sales tax. Some of the advantages you need to note when it comes to forming an LLC in Alaska include that the state has; No state income tax, No state sales tax, Low tax rates in general, etc.
If you are interested in starting your LLC in Alaska, then you need to visit Alaska’s website for additional information.
5. South Dakota
While some entrepreneurs may disagree with me, but South Dakota is a good state to form your LLC. South Dakota also has some advantages when it comes to tax payment for businesses. Like Alaska, South Dakota does not have state income tax. Along with no state income tax, South Dakota also has a 0% corporate tax rate, making it a great place to start an LLC that is taxed as a corporation.
The few advantages to forming an LLC in the state of South Dakota include; No state income tax and No corporate tax rate (for LLCs treated as a corporation) If you want to start your LLC in South Dakota, then you need to go to their website for more details.
Worst States to start an LLC in the United States
SO we have shown you some of the best states to start your LLC in the United States, it will be similarly wise to show you the other side of the coin. So take a look at the worst states you can ever think of starting your LLC in the United States.
One state that has been a torn in the flesh of entrepreneurs is Louisiana, and the major reason for this is their dreaded sales taxes. But in a bid to make things easier for businesses, the state has made some modest moves upward in corporate and unemployment taxes. But that notwithstanding, the state of Louisiana it remains at number 41 for the third straight year, unable to escape the last 10.
Iowa is also another state that is not popular with businesses that want to form an LLC. This is majorly because of the astronomically high taxes on corporate income, individual income and property. But the sales tax ranking is steadily improving, from 21st (2018) to 19th (2019) to 15th (2020).
Currently, Iowa ranks 48th in corporate tax rate, 42nd in individual income tax, 15th in sales tax, 35th in property tax, and 35th in the unemployment insurance tax rank.
The relatively lower corporate tax rate is clearly where the Empire State is trying to be attractive for business, but even that is not enough to endear it to business owners in the United States. For a state that had a comfortable position in the top 10, it is really doing poorly of recent. New York’s unemployment insurance ranking is also slipping.
Currently, New York ranks 13th in corporate tax rate, 48th in individual income tax, 43rd in sales tax, 46th in property tax, and 38th in the unemployment insurance tax rank.
New Jersey is another state you may want to avoid if you are contemplating forming an LLC in the United States. But, if you are looking for a positive here, it is that New Jersey has made substantial improvement in its unemployment tax ranking. But that comes in conjunction with already poor rankings for corporate tax and its income taxes keep getting worse.
Currently, New Jersey ranks 49th in corporate tax rate, 50th in individual income tax, 42nd in sales tax, 47th in property tax, and 30th in the unemployment insurance tax rank.
Vermont has nudged up 3 spots overall, from 47th the last 2 years to 44th this year. Even though it lost ground on corporate taxes, it was countered with an improvement in its income tax ranking. Currently, Vermont ranks 45th in corporate tax rate, 39th in individual income tax, 16th in sales tax, 49th in property tax, and 16th in the unemployment insurance tax rank.
Very little has changed in the Minnesota tax climate over the last 3 years and that means the overall ranking continues to lag. Businesses can expect high corporate and personal taxes to go with the cold weather, that is if things don’t get progressively worse.
Currently, Minnesota ranks 44th in corporate tax rate, 46th in individual income tax, 28th in sales tax, 26th in property tax, and 34th in the unemployment insurance tax rank.
Arkansas has been doing okay when it comes to starting an LLC in the state, but it currently got added to the bottom 10. It even barely escaped the last 2 years with national rankings of 38th and 39th. A further weakening of its position on income taxes, property taxes and unemployment taxes is the reason why this state ranked so low this year.
Currently, Arkansas ranks 34th in corporate tax rate, 40th in individual income tax, 46th in sales tax, 29th in property tax, and 23rd in the unemployment insurance tax rank.
Much like Iowa, Maryland’s overall position in the national rankings is stable. Unlike Iowa, the Terrapin State is moving in the wrong direction beneath the surface, losing significant ground on corporate and property taxes. These are the only things that are working against the state’s LLC ranking.
Currently, Maryland ranks 32nd in corporate tax rate, 45th in individual income tax, 19th in sales tax, 42nd in property tax, and 33rd in the unemployment insurance tax rank.
Best States to start an LLC by Region
According to the United States Tax Foundation’s analysis, taxes can impact job creation and retention, business location, and a company’s profitability. For this reason, if taxes take a larger chunk of the profits your business makes, the only way you can break even is to pass the cost along to your consumers, employees, shareholders or some combination of these.
This is why a state with lower taxes appeals more to businesses, at least so that they can have a level playing ground in their industries. While the physical location of a business may have lost some of its influence in today’s business world, but those launching a small business or startup in the U.S. have definite advantages over those launching anywhere else.
For that reason, we are going to attempt to sort out the best states to start a business in each region of the United States. This would be done using the recommendations of the Small Business Administration and Tax Foundation. So, even if you do not live in the best states to start a business, but you live in any of these regions, just go ahead and start up your business.
a. New Hampshire
New Hampshire is extremely business-friendly and welcoming for entrepreneurs with its abundance of government resources and lack of state sales tax (an endearing attribute). New Hampshire residents also make more money per capita. That suggests businesses might have an easier time selling their products and services.
While it didn’t make the list of top 10 states with the best taxes for small businesses, it does have a large population of college-educated residents, no corporate income tax, and an ever-growing number of tech, energy and medical enterprises filing for business licenses each year. So, the state does have a number of things going in is favour.
c. North Carolina
North Carolina is home to the “The Triangle,” a well-known tech hub, so it’s no surprise that it’s one of the best states to start a business. With the combined low corporate tax rates, low property taxes and low cost of living, North Carolina has a lot to offer entrepreneurs seeking a place to start their business.
Small business owners will find that Utah has low corporate taxes and the nation’s highest percentage of approved small business loans. Similarly to North Carolina, Utah has a large college-educated workforce, so you won’t lack for employable workforce.
With the fourth-highest rate of entrepreneurs in the country, Montana seems to know the value that businesses, both large and small, bring to the state. The workforce’s high percentage of college graduates and lack of a sales tax add to the state’s attractive qualities for business founders. So, do not neglect this state when you want to start a business.
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