When a limited liability company (LLC) has a physical location, owners usually register their business in their home state because that’s typically where they conduct most of their business. But what about forming an LLC for an online business? Having an online company provides some flexibility when selecting a domicile (home) state. Of course, that freedom of choice brings many questions! States’ LLC laws vary, so it’s important to consider how a state’s rules, regulations, fees, and taxes will affect the business and its owners’ liability risks, financial situation, business opportunities, and more.
Entrepreneurs should research their options and talk with their attorneys and tax advisors to make sure they choose wisely. As a precursor to those important discussions, I’ll share some thoughts in this article about what online business owners should consider when deciding where to form an LLC.
4 Things to Consider
1. LLC Formation Fees
The costs of forming an LLC vary from state to state. The business registration fees range from about $55 to $520, and there may be additional fees as well. Keep in mind that these are ONE-TIME fees. Just because a state charges a low formation filing fee to LLCs doesn’t necessarily mean it will deliver the most cost-efficiency long-term.
2. State Taxes
The tax laws and rates vary by state, too. Some of the types of state tax businesses and their owners may be responsible for include:
- Corporate income tax
- Personal income tax
- Franchise tax
- Sales tax
- Payroll taxes
- Property tax
These can fluctuate over time as laws and tax codes evolve. Therefore, it’s crucial to assess states’ business environments to determine where pricing may be headed.
3. Simplicity of Registration
The LLC formation process varies from state to state — some states require more steps and documentation than others. Also, the information requested on formation documents (Articles of Organization) may differ from one state to the next. Some states require LLCs to submit an Initial Report as well. In addition, some states require LLCs to publish notices in local newspapers papers or legal publications to notify the public about the business and its owners.
Note that all states require LLCs to designate a Registered Agent, an authorized individual or company recognized by the state, to accept service of process and other legal and government notices on behalf of the company.
4. Ongoing Business Compliance
Beyond setting up an LLC, entrepreneurs can expect ongoing business compliance tasks to complete every year.
Examples of Ongoing LLC Compliance Requirements
- Annual Reports
- Business license renewals
- Articles of Amendment
- Tax reporting and payments
- Annual member meetings (and recording minutes from those meetings)
The exact requirements will vary depending on the state and type of business conducted.
Staying current on compliance responsibilities helps ensure that an LLC remains in good standing with the state, which is mission-critical for preserving the corporate veil that protects LLC owners’ personal assets from the debts and legal liabilities of the business.
3 States That Are LLC-Friendly
Now that I’ve laid out many of the things business owners should think about, let’s discuss some of the states that entrepreneurs sometimes gravitate to when forming their LLCs.
Delaware
Delaware has become a popular option, particularly for larger companies. It is attractive to many entrepreneurs because of its:
- Flexible business policies and LLC laws
- Low franchise and initial filing fees
- Business-focused court system (Court of Chancery)
- Favorable corporate tax structure
- Privacy protection for LLC members
Learn about forming an LLC in Delaware.
Nevada
Nevada is another state that has become known as pro-business.
- Low formation fees
- No state corporate income tax or franchise tax
- No personal income tax
- Privacy protection for LLC members
- No operating agreement required
Learn about forming an LLC in Nevada.
Wyoming
Like Nevada, Wyoming has become an attractive choice, too.
- Business-friendly LLC laws and statutes
- Low formation fees
- No state corporate income tax or franchise tax
- No personal income tax
- Privacy protection for LLC members
- No operating agreement required
Learn about forming an LLC in Wyoming.
Your Home State May Be the Best Option
Many business owners, including those who operate online businesses, find that registering in their home state proves most beneficial after weighing the pros and cons. While the states I mentioned above have some attractive characteristics, entrepreneurs may find it more advantageous overall to form their online LLC in their home state.
Why? Because they might have to register there anyway after creating their entity in a different state!
Some entrepreneurs seek out to form their LLCs where they will incur the lowest filing fees and taxes. However, when they do so, they fail to realize that they also may have to register their business as a foreign LLC in their home state. That means the LLC will have to pay the business registration fees where it is formed and those associated with foreign qualification in the business owner’s home state.
Typically, a company must foreign qualify if it conducts substantial business or has a physical presence in a state. States have different criteria (which can be broad) for what they consider as “conducting business.” In some, the simple, seemingly insignificant acts of making business phone calls or sending emails to customers from within the state could make it necessary to foreign qualify.
In addition to any related foreign qualification registration fees, the foreign LLC must also fulfill ongoing compliance rules in the state and pay applicable state taxes and fees there.
So, will it be worth it to form an LLC in a state other than where the business owner(s) reside?
That’s a personal and professional decision entrepreneurs must make after doing some research and asking for guidance from their attorney and tax advisor. Many variables will influence whether one state or another will yield optimal outcomes. The rule of thumb many people base their decision on is that if an LLC has fewer than five members, it’s probably advantageous to register in the state where the members live or the company has a physical presence (e.g., office, store, warehouse, etc.). Small businesses that register in a state other than the owners’ home state (or where the company has a physical site) often discover that any initial savings do not justify the additional fees and paperwork.
Ready to Launch Your LLC and Put Your Online Business on a Successful Trajectory?
Reach out to the team to discuss the next steps! You can also place an online order to register your LLC with CorpNet. It’s fast, easy, and we guarantee our services.
With extensive expertise in filing formation paperwork for LLCs in all 50 states, we are here to help you complete your business registrations and foreign qualifications accurately and efficiently. We can help prepare and submit your ongoing compliance filings, too. Get peace of mind knowing you have our knowledge and experience behind you as you launch your online business!
