September 17, 2016

What Is The Best State To Form A Single Member LLC?

What state would be the best to form a single member LLC for an internet company?

– Travis, Connecticut

Answer

There are several different issues with the “best state” question for where to form your limited liability company.

1. Taxes : State of Your Personal Residence Is Best

If you are forming a single member LLC to be taxed as a disregarded entity (the most common choice), then the state of your residence (where you pay state taxes) is best.

Forming an LLC in another state will NOT save you on state income taxes, because the profits and losses of the LLC flow through onto your personal tax return.

Unlike a corporation, which pays its own federal and state taxes at the corporate level, an LLC does not. Instead, all the LLC’s profits will flow through to you, and be recorded on your state income tax return.

2. Annual LLC Fees

In pretty much every case, you will pay fewer fees forming your LLC in your home state than in some other state.

The problem with forming an LLC outside your home state is that to legally do business in your home state (e.g. working on your website), you must register in your state as well as a “Foreign LLC”. Yes, it’s a bit confusing: if you live in State X, but form an LLC in State Y, you will need to register your LLC in State Y as a foreign LLC.

As such, by forming an LLC outside of your home state of residence, you are doubling the number of states to which you must pay registration fees.

3. Corporate Law

For most small businesses, the differences in corporate law between states is irrelevant. I know that every article about Delaware discusses the pro-corporate law in Delaware, but unless you’re a large company that can hire expensive lawyers to actually utilize that law, it won’t do you any good.

What it will do is cause you to spend a lot of money forming a Delaware LLC, only to have to register in your home state as a foreign LLC.

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