Best state to form your online business in 2024

If you are about to form an online business, you hope to attract customers from all over the country, or even from all over the world. If you plan to incorporate, your first thought might be to form your business in your home state. However, you don’t need to do that. Large companies generally don’t. For example, about two-thirds of Fortune 500 businesses are incorporated in Delaware, whether they’re headquartered there or not.

So, how do you decide in which state to organize your venture? Different states have different incorporation requirements, different fees and different reporting requirements. While incorporating in your home state has some clear advantages, it’s worthwhile to understand the pros and cons or making an alternative choice.

Limited Liability Companies (LLCs)

Most entrepreneurs will choose to organize their business as a limited liability company. LLCs have some advantages that sole proprietorships, partnerships and other corporation types don’t. Like all corporations, they limit the liability of the owners. The owners are at risk only for the money they have invested. They generally can’t lose personal assets, such as homes and personal bank accounts, if the business goes bankrupt or loses a lawsuit. Unlike other types of corporations, LLCs don’t pay corporate taxes. The profits of the business are passed through to the owners and taxed as personal income.

Choosing a State: Why It Matters

If your business is an LLC, you won’t pay corporate income tax, either in your home state or the state where it’s organized. On the other hand, you won’t escape personal income tax by incorporating in a low-tax or tax-free state. You’ll still pay taxes in your home state where you’re actually operating your business. You may wonder, then, why it matters where you incorporate.

There are a few reasons why you might care. There are LLC fees, both initial and ongoing, and they differ by state. Some states require more reporting than others, and some have stricter compliance requirements. Some states afford some degree of privacy concerning the details of the LLC and its owners.

Then there’s the matter of sales tax. You’ll have to obtain a state tax ID and collect and pay sales taxes in your chosen state. While you don’t directly pay that tax yourself, it does add to the cost of your product.

Which State To Choose

If you form an LLC in the state where you reside, that’s considered a domestic LLC. If you organize in a different state, it’s called a foreign LLC. The term “foreign” can be confusing because it might appear to refer to an international business. However, that’s not the case. It simply means that the members of the LLC live outside the state.

A brick and mortar business will have to organize an LLC in every state where it makes sales. It could have one domestic LLC and one or more foreign LLCs. An online business will typically operate out of one state and will need to establish just one LLC.

Your Home State

For most small entrepreneurs, the best state to form an online business is the state where they reside. They’re more likely to be familiar with local laws and processes. LLC fees are often lower for domestic LLCs than for foreign ones. Even if the domestic fee in your state is higher than the foreign fee in a different state, there’s the advantage of simplicity.

Also, in a “foreign” state, where you do not have a physical address, you will need to hire someone to act as your registered agent. That’s the party who can receive government documents on behalf of the LLC, and they have to have a physical address (not merely a PO box) in that state. They must be regularly available at that address during business hours. In a domestic LLC, where you live in the state, you, or the LLC itself, can act as the registered agent. Most foreign LLCs hire a registered agent service at a cost of a few hundred dollars per year.

California

Despite some high taxes and other costs, California is one of the prime states for starting up a business. It has a high business survival rate. It’s a huge market with the largest economy in the country. It boasts skilled workers and is a hotbed of innovation.

• The articles of organization for a California LLC must include the owner names and addresses, the name and address of the registered agent, and whether the members will manage the LLC. In general, there is complexity around California LLC regulation and many companies will need help with legal and accounting.
• The LLC filing fee is reasonable at $70. However, the state assesses an annual franchise tax of at least $800. Companies with earnings in excess of $250,000 pay more.
• While many states require an annual LLC report, in California it needs to be submitted only every other year. California, however, has more substantial compliance requirements than most other states.
• California sales tax is on the high side at 7.25 percent.

Florida

Florida has a high business startup rate and also a lower than average business survival rate. Its low corporate tax rate and lack of state income tax makes it attractive both to new businesses and new residents.

• Florida LLC articles of organization require the name and address of the owners and of the registered agent.
• The fee for forming a Florida LLC is $125.
• Each LLC must file an annual report and must pay $138.50 to do so.
• State sales tax is six percent.

Delaware

Delaware is a business-friendly state with favorable corporate tax laws and reporting requirements. That’s why most large American companies are incorporated in Delaware.

• The articles of organization require the name and signature of the representative who organized the LLC. The filing may be done by the LLC owner or a hired company. Delaware has privacy laws that prevent members of an LLC from being disclosed to the public.
• The registration fee is $110 for domestic LLCs and $200 for foreign. In addition, there is a $300 annual state tax.
• There are no annual reporting requirements.
• Delaware does not have a state sales tax.

Delaware can be a good choice for businesses that are growing rapidly and expect to convert from an LLC to another corporation type in the future.

Wyoming

Wyoming was the first state to establish the LLC as a business structure. The state supports a low cost of doing business for all business entity types.

• The LLC articles of organization require the name of the LLC and the name and address of the registered agent. Wyoming has privacy laws that allow the names of contact information of LLC members to remain anonymous.
• The LLC filing fee is $100.
• Wyoming requires an annual LLC report and changes a fee of at least $50, based on assets located in Wyoming.
• State sales tax is four percent.

Conclusion

Most online entrepreneurs will find it advantageous to organize as an LLC. Most will find it easiest to form that LLC is their home state due to familiarity with local laws and processes and, in some cases, reduced fees. While it’s good to explore the possibilities of organizing as an LLC in a state with lower fees and less stringent compliance and reporting requirements, some will find the savings not worth the inconvenience.

There’s a possible exception for fast-growing companies that expect to outgrow the LLC structure and eventually become other kinds of corporations. These may prefer to form their LLC in Delaware for the advantages that state provides to larger companies.