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Where to Form an LLC?
Once you've decided to form an LLC, you need to choose the state for your new business.
A US resident can register their LLC in another state, but it's usually best to form it in their home state for reasons such as:
- A small business likely won't expand significantly
- A US resident can serve as the LLC's registered agent
- A US resident would need to register their LLC, formed in another state, as a foreign entity in their home state, resulting in extra fees and paperwork in both states
Non-residents have no home state, so they can choose any state that meets their needs.
Still, many factors go into deciding where to register an LLC.
Benefits can include compliance requirements, privacy laws, ease of doing business as a non-resident, corporate income tax, sales tax, annual fees, and more.
The value of each benefit depends on your unique situation. Some people prioritize lower taxes, while others value privacy.
Different states have different requirements: some require citizenship, some require an in-state visit, some require publishing in a local newspaper, and some require a minimum capital contribution.
Among the US states, Wyoming and Delaware have become popular choices for non-residents looking to establish an LLC, as they offer significantly more benefits for non-resident members than most other states. These two states are well-known among non-resident entrepreneurs.
Let's take a closer look at these two states and the benefits they offer.
Comparison Between Wyoming and Delaware
State Corporate Tax
LLCs are disregarded entities by default and don't pay state corporate tax; that only applies to corporations.
Wyoming has no state corporate income tax.
In contrast, Delaware has a corporate income tax rate of 8.7% on taxable income, which is applied in addition to the federal corporate tax rate. However, this rate only applies to income generated from business activities conducted within the state of Delaware.
Privacy Protections
Wyoming has strict privacy protections to safeguard the identities of LLC owners and managers, and it does not require the disclosure of members or managers. Wyoming state law allows a registered agent to act as a manager on behalf of the LLC, enabling business owners to maintain anonymity.
In Delaware, LLC formation documents do not need to list the names of members or managers; only the name of the LLC, the registered agent, and the signature of an authorized person are required on the public certificate of formation.
While Delaware offers a significant level of privacy protection, it isn't quite as absolute as Wyoming's. Thus, Wyoming still holds an advantage in this regard.
Annual Tax
The costs to form and maintain an LLC in Wyoming are generally lower than in other states. Wyoming LLCs must file an annual report based on the value of the LLC's assets located in Wyoming, with a fee starting at $60.
In contrast, Delaware LLCs are not required to file an annual report but must pay an annual franchise tax of $300, which is due on June 1 each year.
Legal Framework
Delaware is renowned for its business laws and is very popular among investors, who are well-acquainted with Delaware's legal framework. While both Delaware and Wyoming have strong business-friendly regulations, Delaware holds an advantage with its separate Court of Chancery, which focuses solely on business law. Cases are decided by judges, not juries, who are experts in corporate law. However, small businesses that are unlikely to face high-stakes litigation may not benefit significantly from this system.
Sales Tax
Wyoming has a 4% state sales tax on purchases of all goods and services. This means that if you forget to stop unwanted EC2 instances and incur a $100 cost from AWS, you'd end up paying $104 after the sales tax is applied. Additionally, many local municipalities impose a general tax of around 1%, which also applies to goods and services purchased in those areas.
Delaware, on the other hand, does not impose any state sales tax.
Summary
| Benefit | Wyoming | Delaware |
|---|---|---|
| State Corporate Tax | 0% | 8.7% |
| Privacy Protections | Top Notch | Top Notch |
| Annual Tax | $60 | $300 |
| Legal Framework | Good | Top Notch |
| Sales Tax | 4% | 0% |
The state you choose for your LLC depends on your specific goals. This overview highlights the main benefits.
Honorable Mentions
Nevada and New Mexico offer similar benefits to Wyoming and Delaware.
Disclaimer: All content here is for general informational purposes only and not intended as legal, tax, or financial advice. Always consult a qualified professional before taking any action. Use at your own risk; the author assumes no liability.