When you’re establishing a limited liability company (LLC) in the US, one of the first decisions you make is where to register. While your home state is likely the obvious choice, each state has different rules, fees, and tax structures. These can either help or hurt your bottom line. The costs can also vary from one state to another, so it’s important to do some research before making your decision.

Below, we explore what factors make certain states cheaper than others for incorporating an LLC, from filing fees and ongoing maintenance costs to potential tax savings. Here’s what you need to know.

What’s in this article?

• How to choose the best state for incorporating your LLC
  
• Which states have the lowest LLC formation fees?
  
• What other costs are involved with forming an LLC?
  
• Cheapest states for ongoing LLC compliance costs
  
• What are the hidden costs of forming an LLC in a “cheap” state?
  

How to choose the best state for incorporating your LLC

Unlike starting corporations, you technically don’t incorporate LLCs; they are formed rather than incorporated, although the process is similar. Choosing the right state to form your LLC is about more than finding the cheapest option.

Here are the most important factors to consider:

• Business location: If your business operates primarily in one state, forming there is usually the easiest choice. It lets you avoid the hassle and cost of registering as a “foreign LLC” in the state where you do business. In many cases, the administrative burden and fees for maintaining a foreign LLC outweigh the benefits of forming in a cheaper state.

• Privacy protections: Certain states have stronger privacy protections for LLC owners. If keeping your personal information out of public records is important to you, consider states such as Delaware and New Mexico that have strict confidentiality rules.

• Legal environment: Some states (such as Delaware) have well-established legal systems that cater specifically to business entities. For example, Delaware’s Court of Chancery is known for resolving corporate disputes with expertise and efficiency. This can make it an attractive option for businesses that anticipate complicated legal matters in the future.

• Reputation: Some states have a reputation for being more “business-friendly,” which can attract investors and partners. Delaware, for example, is a go-to for tech startups and large corporations because of its established corporate laws and pro-business climate.

• Future expansion: If you plan to scale your business beyond your home state, forming in a state such as Delaware, Nevada, or Wyoming might make sense. These states often have more flexible and lenient rules for LLCs looking to expand or operate in multiple locations.

• Taxes: States such as Wyoming and Nevada are known for offering businesses tax benefits. Consider income, sales, and payroll taxes, as well as other less obvious costs, in your decision.

• Fees: The fees to set up and maintain LLCs include filing fees, annual report fees, franchise taxes, and more. These fees vary by state. Make sure you fully assess both initial and ongoing costs.

Which states have the lowest LLC formation fees?

Here are the states with the lowest fees for forming an LLC as of 2024:

• Arizona: $50 filing fee and no annual reporting fees

• Arkansas: $50 filing fee

• Colorado: $50 filing fee

• Hawaii: $50 filing fee

• Iowa: $50 filing fee

• Kentucky: $40 filing fee

• Michigan: $50 filing fee

• Mississippi: $50 filing fee and no annual reporting fees

• Missouri: $50 filing fee for LLCs that file online and no annual reporting fees

• New Mexico: $50 filing fee and no annual reporting fees

What other costs are involved with forming an LLC?

While states with low filing fees provide a great starting point for businesses looking to save on formation fees, you should also consider other costs when choosing the best state for your LLC.

Here’s a look at the other costs you need to know when choosing a cost-effective state for an LLC:

• Annual report fees: Many states charge an annual fee to keep your LLC in good standing, often in the form of an annual report filing fee. These fees typically range from $15 to $50 depending on the state.

• Franchise taxes: In addition to annual fees, some states require LLCs to pay franchise taxes. Franchise taxes aren’t income taxes but rather a fee for the privilege of doing business in the state. For example, California charges LLCs an annual tax of $800, while Wyoming and New Mexico have much lower ongoing costs.

• Registered agent fees: Most states require your LLC to have a registered agent—someone who receives legal documents on behalf of the business. While you can act as your own registered agent, many businesses opt to hire a professional service, which typically costs anywhere from $100 to $300 per year.

• Foreign LLC registration: If you form your LLC in one state but do business in another, you need to register as a foreign LLC in the state where you operate. This comes with additional filing fees and annual costs.

Cheapest states for ongoing LLC compliance costs

When considering ongoing LLC compliance costs, certain states stand out for being budget-friendly for annual report fees, franchise taxes, and other required expenses. While states such as Wyoming and New Mexico offer minimal ongoing compliance costs, it’s important to weigh these savings against other factors—such as tax structures and the legal environment—especially if your business plans to scale or operate across multiple states.

Here are some of the states with the lowest ongoing fees for LLC compliance:

• Arizona: No annual report fee and no franchise tax

• Arkansas: $150 annual franchise tax

• Colorado: $25 periodic report fee and no franchise tax

• Missouri: No annual report fee and no franchise tax

• New Mexico: No annual report fee

• Ohio: No annual report fee

• Wyoming: $60 annual report fee and no franchise tax

What are the hidden costs of forming an LLC in a “cheap” state?

Forming an LLC in a state with low up-front or ongoing costs might seem like the best choice, but additional expenses can surprise you. Here are some of the most common hidden costs associated with registering in a so-called “cheap” state:

• Foreign LLC registration: If you form your LLC in a state such as Wyoming or Delaware but primarily operate in another state, you need to register as a foreign LLC in the state where you do business. This means paying filing fees and ongoing annual fees in both states. For many small businesses, this can end up costing more than simply registering in their home state.

• Complex accounting: When forming in a state other than where you operate, your accounting can get more complicated. You’ll need to account for multistate tax filings and compliance, which might require more expensive accounting services. Navigating multiple tax jurisdictions can also increase the risk of errors and the potential for fines or penalties.

• Registered agent fees: States often require LLCs to have a registered agent who must reside in the state of formation. If you don’t live there, you need to hire a registered agent service, adding to your ongoing expenses.

• State taxes: Some states, such as California, charge hefty annual franchise taxes even if you’re not conducting much business there. If your LLC operates across states, you might also be required to pay income, sales, or use taxes in your home state, which can negate any tax benefits of incorporating elsewhere.

• Banking and financial barriers: Opening a business bank account or securing financing can be trickier if you form in a state where you don’t physically operate. Banks and financial institutions might prefer to work with businesses registered in their own state or the state where you’re conducting business. This can potentially limit your options or result in higher fees.

• Unfavorable legal protections: States with fewer up-front formation costs might not have the same level of legal protections for business owners. For example, Delaware is known for its strong legal framework and business-friendly courts. This can be important for protecting your personal assets and interests during a dispute. Forming an LLC in a state with weaker protections might save money initially, but it could cost more in the event of legal issues or liability exposure.