What are the Best States to Start a Single-Member LLC?
If you’re looking to start a Single-Member Limited Liability Company (LLC), you’ll want to choose the best state for your business. There are many factors to consider when making this decision, such as taxes, regulations, and the business environment.
In this article, we will discuss the best states for Single-Member Limited Liability Companies (SMLLCs) and provide some tips on how to choose the right one for your business.
What are the Best States to Start a Single-Member LLC?
It’s not just about what you sell, but also the customer base, where they’re based, and ultimately where you live.
States have different requirements for LLCs, so it’s important to know the ins and outs of each state. Some factors that impact an entity on a state-by-state basis are formation fees and annual fees, and income tax rates – these will vary between jurisdictions!
Some of the best states to start a Single-Member LLC are Wyoming, Nevada, South Dakota, New Hampshire, Delaware, and Florida. These states are considered very business-friendly due to their low to no income tax rates.
TOP 6 States to Start an LLC
When it comes to business-friendly states, Wyoming is always high on the list. It’s often regarded as the best state to form an LLC in.
Although Wyoming’s economy is not considered very strong, the state has no personal income tax or corporate income tax. Also, sales tax is as low as 4.0%.
In addition to the low to no tax rates, the state has very minimal reporting obligations and limited fees surrounding LLCs.
Nevada is another business-friendly state, without any personal income or corporate income tax.
If you’re looking to register an LLC in Nevada be ready to pay $425 to the Nevada Secretary of State. Filing the Articles of Organization costs $75, the state business license $200, and the list of managers and members costs $150.
Annual filing fees are also as high as $350, however, the lack of personal income tax should still make up for all these costs.
Just like Wyoming and Nevada, South Dakota has no personal income tax and no corporate income tax.
Articles of organization for forming an LLC in South Dakota have an additional filing fee of $150 and annual fees are $50.
New Hampshire is yet another convenient place to form your LLC. They have no personal income tax, whilst the corporate tax rate is a low 7.90%,
In New Hampshire you’ll be charged a standard $100 for a Certificate of Formation and annual fees will only require an additional $1 fee upon submission.
According to the Delaware Division of Corporations 2012 Report, up to 64% of the 2012 Fortune 500 companies were formed in Delaware.
The LLC formation fee will cost you $75. Thanks to its low maximum income tax rate of 6.6% (for individuals who make more than $60,000), it’s been a favored state to form an LLC.
Florida is also a famous business-friendly state with no personal income tax and a 5.50% corporate income tax rate. Filing fees are $125 and annual fees are $138.75.
A big benefit of conducting business in Florida is their booming economy, driven by the tourism industry.
Single-Member Limited Liability Company
The Single-Member LLC is one of the most popular business entities in the United States. A Single-Member LLC is owned by one person and is generally registered in the state the company does business.
The benefit of setting up a Single-Member LLC is that it’s a separate business entity from the owner and provides the individual with personal asset protection.
An important part of forming your Single-Member LLC is choosing a state and getting familiar with any of the rules and regulations surrounding LLCs within that state. This includes understanding annual fees, franchise taxes you may owe, reports you might need to file, and other processes that are required to keep your operation legal and in good standing.
How to choose the best state for Single-Member LLC?
There are multiple factors (from fees to liability protection) to consider when researching which state to register your single-member LLC in.
First and foremost to form an LLC and maintain one costs money. These costs can start to add up, depending on where you choose to register your small business. State filing fees range anywhere from $40-$500.
Whilst some states like Arizona do not require any renewals or reports, others like Massachusetts charge excessive annual report fees. In addition to that, there are licensing and permit fees.
Liability protection from lawsuits
One of the biggest benefits of setting up an LLC is to avoid personal liability from lawsuits or unfortunate debts of the business. Since the owners and managers will have personal asset protection.
However, depending on the state the legal limitations for creditors can vary, meaning some can help to better protect your LLC and its assets.
Some states are known as “anonymous LLC states”, which reflects in the fact that the Limited Liability Company can be formed without providing the identity of the owners, members, or managers on public state filings (including Delaware, Nevada, and Wyoming).
“Taxes are paid where money is made” is true in most cases but there are exceptions. Some states have much more favorable tax laws than others, but it’s important to note that you are not going to gain these benefits if you conduct business in other states.
Even worse, as a foreign LLC, you might owe additional taxes and fees in the place you’re conducting business in. Franchise tax, which is paid just for doing business in the state, is a thing in California and Vermont for example.
Tax benefits of a Single-Member Limited Liability Company
One unique thing to note in regard to Single-Member LLC is that it’s the most common type of disregarded entity. Meaning that The Internal Revenue Service (IRS) can ignore it for business tax purposes and instead collect taxes through the LLC owner’s personal income taxes filing.
In comparison to corporate taxation, a Single-Member LLC carries a lot of flexibility.
Primary taxes that you will need to pay (as a business owner) is federal income taxes and self-employment taxes.
Single-Member LLC tax form Schedule C
To report federal income taxes as a Single-Member LLC, you’ll need to complete a tax form called Schedule C which contains information about the SMLLC’s annual income, expenses, and overall profit or loss.
You’ll need to attach Schedule C (along with any other required Schedules or forms) to your IRS Form 1040 (U.S. Individual Income Tax Return).
The net profit or loss that is shown on Schedule C is included as part of the total income or loss that you report on your personal income tax Form 1040.
Limited Liability Company is a pass-through entity for tax benefits
Pass-through taxation means that any profits or losses earned by the company pass through the business and on to the member. Therefore the member is held personally liable for reporting their portion of business income or loss on their personal annual federal tax return.
Since there are multiple ways to manage your taxes and set up your business structure, it’s recommended to seek guidance from a financial advisor or tax professional.
The operating agreement of a Single-Member LLC
A Single-Member LLC operating agreements are legal documents that set forth the rules and regulations of the company. This helps to eliminate ambiguity about the business strategy and investments.
A Single-Member operating agreement should include the following:
- LLC details: name, location, purpose
- Registered Agent: the person you’ve chosen responsible for the company
- LLC membership: as a Single-Member LLC, you’ll only list one individual
- Financial instructions: how the profits, losses, and bonuses are handled
- Term of LLC: either a set amount of time or “perpetual”
- Accounting details: who’s responsible for accounting and which method will be used, including tax implications
- Legal: who is responsible in the event of a lawsuit
- Dissolution: what needs to be done when the business stops its operation
State Default Laws
If your Single-Member LLC does not file an operating agreement, you’ll be subject to the state’s default laws in which your business resides. Default laws lay out the state’s rules on how one must operate in certain legal situations.
Although the laws were designed to protect business owners, they can at times hurt them instead.
An operating agreement is a crucial part of the LLC formation to help make sure that the owner’s wishes are honored when certain events occur.