When you start a physical business, say a retail store for example, you would form your LLC in the state your business is located. However, that isn’t necessarily the case for online businesses. Online businesses have a lot more flexibility for filing requirements. That means that for online business owners, you have the ability to choose the state to form an LLC in for your business.
As a business owner, it’s important to form an LLC to protect your business as well as yourself. But, how do you know which is the best state to form an LLC in?
We’ve put together a helpful guide for you below that will help you understand if an LLC is right for your online business, how you can set up an LLC, and once decide to do so, which state will be best for your business.
Do I need an LLC for my online business?
There is nothing out there that necessarily requires you to form an LLC for your online business. And while you don’t need an LLC for your online business, it’s definitely a good idea to have one. It’s a great risk management strategy for any business. Even if you don’t form an LLC when you start your business, you can always form one at a later date.
So what exactly is an LLC?
An LLC is a limited liability company, a business structure that helps to separate your business from yourself. That means, the LLC can own property, operate bank accounts, and also be sued. That last part is key. If someone were to file a lawsuit against your company, as long as you have an LLC for the company, then they are actually suing the LLC, not you personally.
Another nice benefit to having an LLC for your business is that it provides protection to you if your employees do something reckless, then you won’t be personally held liable.
If you have business partners, setting up an LLC for your company is a great way to keep things formal and properly outlined. It allows you to specifically state certain partnership details like what will happen if a partner were to leave and how money may be distributed. Those can be difficult situations to deal with in the moment, so having them spelled out in your LLC documents up front makes it a lot easier if it were to come up.
What is the best state to incorporate an Internet business?
With an internet business, you can really incorporate your business in any state you choose. Most people choose to form the LLC in the state they live. This is because the online business is still processing transactions in the state you live. So, if you form an LLC in another state, it could cost you more money.
If you choose to incorporate your internet business in a state outside of the one you live in, you should consider Delaware, Wyoming, or Nevada to form your LLC. They are each considered the best state to form LLC for online business, depending on your needs.
If you are forming a large corporation, Delaware is the best state to form your LLC. It’s a very popular choice for a few reasons, one being the state doesn’t charge any out-of-state income taxes. That is good news for any online companies that don’t do a lot of transactions in the state of Delaware. Delaware also boasts no initial filing fees as well as very low franchise taxes.
Another advantage to forming an LLC in Delaware is the fact that Delaware has Chancery Court. Chancery Court is designed to handle business matters only, so disputes are handled much quicker than in other states.
Delaware LLC may be more expensive than other states, but for large corporations that may involve mergers and litigation, it makes a lot of sense. For a smaller business that can’t really take advantage of those benefits, it’s probably not a good fit, unless Delaware is the state in which you live of course.
A great choice for smaller businesses would be forming an LLC in Wyoming. In fact, some consider Wyoming to be the best state to form an LLC and choose to create a Wyoming LLC. Their charging order laws are favored by many since they help keep your LLC assets safe from personal liabilities.
The taxes are lower for Wyoming corporations, so a lot of companies register their LLC in Wyoming to help reduce tax liabilities. Overall, it can be a pretty cost efficient state to form your LLC in.
Nevada could be considered the best state to form a limited liability corporation for a small business. There are several reasons for this, including the fact that the formation of a single-member corporation is allowed. Operating agreements nor annual meetings are required by Nevada law, which makes it ideal for smaller online businesses.
Nevada also doesn’t have registration fees and doesn’t charge LLCs for state income, corporate, or franchise taxes. The state also lacks an information-sharing agreement with the IRs, which means if you want to remain anonymous as an online business owner, you can. If this sounds like you and your business needs, then a Nevada LLC might just be the right choice for you.
What state should I form my LLC?
The answer is, it really depends. Let’s start with a more basic overview first. If you form your business LLC in the state you live, or your home state, it is a Domestic LLC. If you form your business LLC outside of your home state, you will then need to register the LLC as a Foreign LLC in our home state.
Now, that may not sound like a big deal. But, it will mean that you will have to do double everything: you will have 2 LLCs, need to pay 2 state filing fees, and pay 2 annual report fees. As you can see, there’s a lot to take into consideration when trying to decide which is the best state to form an LLC for your business.
For a lot of business owners, forming your LLC in the state you reside is the easiest option since they may already be familiar with the state’s requirements and they will probably be able to choose a registered agent that they trust more easily since they know more people in that state. That said, it may actually be more expensive to file in the state you reside since the filing fees and taxes can vary between states.
How do I set up an online business LLC?
To set up an online business LLC, it’s really pretty simple. You can either have an attorney set it up for you, which can sometimes be costly, or set it up through an online service like ZenBusiness. There’s really just a few steps you will need to take in order to make it official. These include: selecting a state, naming your LLC, choosing a registered agent, filing the articles of incorporation, and creating an operating agreement.
We’ve outlined each of the steps for you below.
Step 1. Select a State
The very first thing you need to do when you set up your LLC is decide which state you are going to form an LLC in. The majority of the time, it makes sense for people to form their LLC in the state where they live. However, for an online business, you can really select any state you want and you may find an advantage to setting it up in a state outside of your home state.
Step 2. Name your LLC
Now that the detail of state selection is out of the way, you get to decide on the name of your LLC. The name of your LLC is an important decision. It can also be a really fun decision! You will need to make sure that the name you choose for your LLC is unique and not like any other LLC name. Every state has guidelines for naming your LCC. Some of the most common rules are:
- The name you choose must include the phrase “limited liability company” or “LLC” or “L.L.C.”
- The name you choose can’t include any words that would confuse your LLC with a government agency such as FBI, Treasury, or State Department)
- If you use certain words such as university or attorney, you may be required to provide additional paperwork, as well as a licensed individual to be a part of the LLC
Step 3. Choose a Registered Agent
You are required to select a registered agent for your LLC in nearly every state. A registered agent is someone who can receive documents on your behalf such as legal papers or tax filings. Be sure that whoever you do choose to be your registered agent is a resident of the state you are doing business in because they need to provide a physical address.
If you don’t have someone that you know that can be your registered agent, you can always pay for a registered agent through a service. Depending on your budget, this could be a good option for you.
Step 4. File the Articles of Organization
Filing the Articles of Organization is the next step in the LLC process. This is the step that actually creates the LLC once the document is officially filed.
The Articles of Organization is a document that provides some basic details about your company. While each state has different requirements for what’s included in the Articles of Organization, the most common information includes:
- The name of the company
- The description of the company
- The mailing address for the business
- The name and address of the registered agent you selected for your LLC
- Information on the owners, managers, and officers of the company
Once you’ve submitted your Articles of Incorporation, the Secretary of State will review the articles. There is always a chance that they could be rejected by the Secretary of State, but that usually only happens if the name of the LLC you have proposed doesn’t meet the requirements.
Step 5. Create an Operating Agreement
Now we are on to the operating agreement. The operating agreement isn’t always required for each state, but even if it’s not required if the state you are forming your LLC in, it’s a wise decision to put one together. It can be a helpful document for your LLC and its members.
The operating agreement helps outline the ownership structure and roles of the members in the LLC. It works as a set of rules that the members of the LLC follow regarding the operations of the business. The operating agreement includes the following sections:
- Management and Voting
- Capital Contributions
- Membership Changes
Every state has laws that outline basic operating rules for LLCs. If you do not create an operating agreement, then those laws will be the ones that govern your business. However, with an operating agreement, you are choosing the rules that govern the internal operations of your LLC instead of the state’s default rules.
After reviewing the ins and outs about LLCs and which states may work best for certain types of companies, you are better equipped to make the best decision for you as a business owner. While some may choose to form an LLC in their home state, others may see a distinct advantage to forming an LLC in Delaware, Wyoming, or Nevada. Whichever state you choose, we feel certain that you will be glad that you chose to form an LLC.