Forming an LLC can offer a lot of advantages when starting your own business. But, the process can often be confusing, especially when it comes to choosing the state where you will form your LLC.
The first option is to simply form in your home state––-the state where your business is physically located and intends to operate. This will involve filing the necessary paperwork, paying filing fees to your secretary of state, and operating your business under the guidelines and tax regulations of that state.
As a general rule, a small business is best served by forming an LLC in its home state where:
- It is physically located
- The property it owns is located
- Its employees reside
- The majority of its customers come from
- The shareholders have physical addresses
In addition, the following factors are important when choosing the state where you will form your LLC:
- The overall cost to file and maintain an LLC
- The degree of privacy afforded to an LLC under the state's business regulations
- The amount of limited liability and asset protection the state provides for the LLC's shareholders
- Predictability with regard to the resolution of corporate disputes.
- Whether or not your company plans to seek venture capital or go public in the near future
For most small business owners, this means forming an LLC in their home state. But, you can form an LLC in whatever state is best for you, whether you are doing business in that state or not.
Many businesses choose to form in other states, like Delaware because they are considered to have very pro-business environments. Other states are chosen because they are cheaper, more tax friendly, or offer more privacy.
Where should You Form Your LLC?
What follows is a very basic overview of some of the key differences between the most popular states for business formation in the country, namely:
- New Mexico
While, we believe New Mexico's low cost and simplicity make it the best state for a small business owner to form an LLC, each of these states offers its own unique set of advantages. So, the objective is to identify the state that you believe will provide your business with the most advantages based on your unique set of circumstances.
A New Mexico LLC is very easy to set up and provides the same asset protection as LLCs formed in other states, but for a lot less money. In addition, since New Mexico does not require the LLC's members and managers to be listed anywhere, forming in New Mexico will offer your business a great deal of privacy. What's more, New Mexico does not require an LLC to file any annual reports or to pay any annual fees, saving you both time and money. In fact, a New Mexico LLC is the least expensive anonymous LLC in the country.
A Wyoming LLC is popular for the asset protection it provides. Wyoming offers an extremely debtor-friendly environment for business owners seeking asset protection. But this increased level of asset protection is costly. Forming an LLC in Wyoming is twice as expensive as forming one in New Mexico. In addition, Wyoming requires an annual fee of $50 or $100, depending on your sales.
Delaware is the most popular state in which to incorporate because the state offers highly developed corporate case law and its Court of Chancery––a special court in which business disputes are heard. These are the main reasons why large businesses and their investors are typically more comfortable forming in Delaware. However, the higher fees required to form and operate an LLC in Delaware may not be worth it, unless you believe that your company is going to go public in the near future or that it will be seeking a considerable amount of venture capital and investment.
Like a Wyoming LLC, a Nevada LLC is also known for its high level of asset protection. However, Nevada's LLC is one of the nations most expensive LLC to form and maintain, second only to California. Furthermore, it is amongst the worst state to incorporate or form an LLC if you are looking for privacy.
Which of these states is best for you will depend on your particular circumstances. If you are a big business looking to incorporate and seek venture capital, you will benefit from forming in Delaware. If a high level of asset protection is your main concern, then a Wyoming LLC may be right for you. But if you are small or midsize businesses looking to form an LLC simply and inexpensively, then forming a New Mexico LLC is probably the best choice.
Finally, before deciding where to form your LLC, it is important to seek advice from a knowledgeable business law attorney to make sure that you understand the requirements and legal responsibilities you may have to the state in which your LLC is formed, as well as, to any other states in which you will be doing business.