Chris Daming, J.D., LL.M.
When you're creating an LLC, you have to choose one state as your "organizing state." It's the state where you'll register your LLC by filing your articles of organization (a.k.a. Certificate of Formation).
While each state has its own rules about forming and operating an LLC, for 90 percent of businesses, the state to form is quite simple -- it's your home state. But, we'll walk you through a step-by-step process to find out what makes the most sense for you and your LLC.
Step 1: See If Your Home State Is The Best Choice
For most, it is. If your business is physically located in one state, your home state, and conducts business mainly in that state, it likely makes sense to file in that state. If you don’t do that, you could have to pay two sets of fees rather than just one.
For example, if your business is located in California, but you’ve heard that you should file your LLC in Delaware, you’d file the certificate of formation in Delaware, hire a registered agent in Delaware, and pay the corresponding fees. But because you’re doing business in California, you’d still need to file for a foreign registration to “do business” in California. By “foreign,” we mean a different state, not a different country.
Worse, often the fees to register your business as a “foreign entity” in your home state are the same or higher than registering your LLC in your home state.
Home States vs. Delaware Examples: Which State is Better?
For example, if you live and work in Georgia and decide to form an LLC in Delaware, you would need to pay $90 in fees to organize in Delaware, pay annual fees in Delaware, pay for a registered agent in Delaware, and pay $225 to Georgia to register as a foreign LLC.
Compare this to if you registered in Georgia (no Delaware registration), where you would pay $100 to register your LLC plus your annual fee ($50 for domestic and foreign LLCs).
Or, if you live and work in Missouri and decide to form an LLC in Delaware, you’ll have the same fees in Delaware and then have to pay $105 to file a foreign registration in Missouri. Compare this to if you registered in only Missouri, where you would pay $50 once, not have to pay Delaware fees initially, and not have to pay ongoing fees because Missouri doesn’t require annual reporting for LLCs.
A "Heavy Legal Content Breather" Video
You're absorbing a lot. Here's a fun example video to break things up for you.
What's My Home State?
Identify your home state by asking the following questions:
- Where do you physically live?
- Where do your employees physically live?
- Does your business have real estate in any particular state?
- Where is most of your business transacted?
- Where do the other owners/members of the LLC physically live?
The state you identify with for most of these questions is probably your home state.
Step 2: See If Privacy or Asset Protection Exceptions Apply
The two most significant exceptions are if you need absolute privacy (i.e., you don’t want anyone to know you own the LLC) or if you want to take extraordinary measures for asset protection and you’re a single-member LLC. This is very rare, so unless this sounds immediately pertinent to your scenario, it usually doesn’t make sense.
But if one of the issues applies, you should consider forming your LLC in Delaware, Nevada, or Wyoming. These states allow you to be completely anonymous with your ownership of the LLC. And they have additional asset protection laws (without getting into the weeds, they ensure something called a “charging order” is available for single-member LLCs).
Step 3: Identify Your Long-Term Plans
If you’re a startup with plans to scale nationally, or seek investors, first you should consider whether an LLC is the right choice. If it is, then Delaware, Nevada, and Wyoming might be good choices.
If one of these exceptions applies, it’s wise to consult with an attorney to get fact-specific advice.
Step 4: Don't Fall For The Tax Trap
A common misconception is that you won't have to pay corporate income taxes if you set up a Delaware LLC or corporation (or Nevada or Wyoming LLC).
While LLCs generally don’t have to pay anything related to corporate tax, even if they did, their taxes are determined by where they’re doing business, not the state they formed their LLC in. In other words, it's your home state that most likely determines what your taxes will be.
Use These Examples to help you Identify Which State is Best for your LLC
The Boutique Shop Example
A boutique shop that mainly sells in one state would probably want to register in that state. They’ll avoid the additional fees and paperwork that go along with the foreign state registration.
The Tech Startup Example
A startup that plans to operate both in their home state and a handful (or more) of other states may want to consider registering in a state other than their home state. See our choice of entity category. You should almost always be a Delaware corporation (as opposed to an LLC).
The Internet-Based Business Example
Internet-based businesses (that don’t want to raise venture capital, have investors, or sell shares) are generally best served by filing in their home state. This is simply because a smaller, internet-based business is similar to a boutique shop when it comes to LLC registration.
Besides these examples, factor in the other points raised (e.g. privacy issues) and determine the best state to file your LLC.
Next Steps
For further guidance or to understand specific state requirements, see your state’s Secretary of State website or search for “[Name of State] LLC requirements.” Once you're ready to form your LLC, use our guide to walk you through each step of the process.