In any “best of” survey, it’s important to remember the factor of weight variables.
Every person’s circumstances are different. Therefore, certain factors might have more weight to you than to someone else.
We’ve gone through what is generally perceived as the four best states to form an LLC in, and assigned values to different factors without weight variables. This gave us a uniform ranking, determining which is the best theoretical state to open and run an LLC in.
This article is meant to be a guide, allowing you to get a quick glance at the four best states in the USA to open an LLC in. But you should definitely research more deeply into each aspect below. We have provided applicable links wherever possible.
But we simply couldn’t ignore the elephant in the room, which was how “lockdown-friendly” that State has been in the last year.
This is no comment on whether lockdowns are right, wrong, merited, ethical, or any of that. It is simply a statement of fact: Government enforced lockdowns affect a business’s ability to operate, so we simply could not ignore this fact when choosing the “best” state for business this year.
We also couldn’t only consider lockdowns when choosing the states. That would add a weight variable that would not apply to many people, such as those whose businesses can operate entirely remotely.
So, we took the middle ground and chose:
Again, we must reiterate that this is not a political comment on the use of lockdowns. We have no opinion on the matter in this article other than what environment each state government is providing for its local businesses.
Let’s do this thing!
For various reasons, members and managers of companies might not want their name on the public record. This can provide an additional buffer against frivolous lawsuits aimed at individuals, as well as allow entrepreneurs freedom to run multiple businesses in stealth mode—a common requirement for tech startups.
In Delaware, if you use a registered agent, then no information on the members (owners) and managers needs to be listed on the company’s Certificate of Formation. Also, the Delaware Division of Corporations does not store any information regarding LLC members and managers.
Once the business has been formed in Delaware, your registered agent will then provide you with a Certificate of Incumbency, which authorizes you to do business on behalf of that business. But this certificate does not need to be filed with any public authority.
It must be noted that this level of privacy in Delaware exists only when you register through an agent. Delaware, like many other states, requires the organizers of an LLC to be filed publicly. To ensure privacy, this organizer can be your registered agent.
Nevada has a convoluted method of keeping names out of the public record. Nevada is one of those many states where members’ names do need to be filed in the Articles of Organization. But the workaround to this is to assign a “Nominee Director” or “Nominee Manager” to act as the public face of the company. This “in-name-only” person will have no control over the business, but will be publicly associated with it.
When we get to the Sunshine State, things get a little more complicated, and less private.
Florida requires a business’s address to be a matter of public record as per the Florida Public Records Act of 1909. If you’re a one-person show, or just starting out, that’s usually your personal address. No privacy.
To get around this, you would need a registered agent, as in Delaware. But this option doesn’t keep your personal name out of the public record, which would be exposed whenever you file your annual reports. Because Florida law requires the name of a manager or member to be filed along with the company’s annual reports.
The only way around this is a tangled solution where you actually need to form two LLCs, using the name of one as the manager or member of the other. Confused? Yeah, it’s complicated. That’s why Florida gets a three-star rating for member privacy.
South Dakota does not require member and manager names on the public record. It does require the “organizer(s)” of the LLC to be named in the Articles of Organization.
South Dakota’s annual reports also require the names of directors and governors.
The “corporate veil” is a term used to describe the legal distinction between members of a company, and the company itself. It is an essential concept when it comes to the separation of liability, a major reason for forming LLCs.
If a corporate veil is successfully pierced through litigation, a member becomes personally liable for the LLC’s debts, which can be catastrophic for personal wealth.
Delaware is equally robust in keeping the corporate veil in place. To determine fraud in Delaware, the “person behind the curtain” must have committed particularly egregious acts.
Florida actually has quite a strong reputation for not piercing the corporate veil. Judges require that malicious acts be deliberate and not merely as a result of negligence before piercing the veil.
We found little information regarding South Dakota’s treatment of the corporate veil. Specifically, we found nothing negative in this respect. Indeed, as you will see later on in this article, South Dakota’s legal climate is one of the best in the country. So we’re going to give them the benefit of the doubt in the matter of piercing the corporate veil.
|Strength of Corporate Veil||★★★★★||★★★★★||★★★★||★★★★|
Delaware is often cited as a tax haven because it doesn’t charge corporation tax on companies which don’t physically do business there. That’s great if you don’t live in Delaware, not so great if you do.
But there’s another crucial issue to know about this: There is a difference between “registering” and “filing” a business. In the USA, “filing” a business means to incorporate it. “Registering” a business means the procedure you go through when you want to do business in other states.
Let’s say you sell flowers and you live in California. You have a flower shop in California. Well, even if you file in Delaware, you will still need to register the business in any state that you wish to do business in. That means double paperwork. And it also means fees for registering in the foreign state.
So, yeah, “no taxes” is not entirely true.
Nevada is actually on the opposite side of the pendulum: To make full use of tax benefits from Nevada, the business must actually reside in Nevada or conduct its primary business in Nevada.
That means zero corporation tax, zero, franchise tax, zero capital stock tax, etc.
But, yeah, you have to be domiciled in the state to benefit from these tax savings. Want to move to Nevada?
(Also, keep in mind that zero state tax does not mean you are free from federal corporate tax which is levied at 15% for the first $50,000 of net, and increases in amount for anything higher.)
Florida also has numerous tax advantages—both at the individual and business level. It is particularly friendly to small businesses and medium-sized businesses because there is zero state-level corporate tax for LLCs. Only C Corporations (usually “big companies”) pay corporate tax, so it’s ideal for small businesses. But even so, Corporate Tax for C Corps is as low as 5%, or 0% if the company’s profit is less than $50,000. Florida also has no personal income tax. So, for small LLCs, you won’t be taxed at state level for the company profits, and you won’t be taxed personally at state level for dividends pulled from the company.
And then there’s South Dakota, arguably the most tax-friendly state for businesses in the USA. It has zero corporate tax and zero personal income tax. Motor vehicles are also free of sales tax.
|Tax Friendliness Ranking||★★★||★★★★||★★★★★||★★★★★|
Okay, this is the dreaded “lockdown” section. I think we’ve mentioned that this isn’t a political comment, but we’ll mention it again: This isn’t a comment on the ethics or morals of lockdowns! We are looking at this purely from a business perspective, and how your business might fare in the future if the state you are in is eager to close up small businesses or not.
Florida initially went into lockdown but the governor quickly retracted and opened up businesses and reduced restrictions much earlier than the rest of the country.
South Dakota has been called “America’s Sweden” with its governor refusing to lock down since the beginning of the pandemic, even keeping the Sturgis Motorcycle Rally, which many businesses were grateful for.
Delaware’s response was a lot more stringent than Florida and South Dakota. “Non-essential” businesses were ordered to close in March of 2020, for approximately two months. And schools were to remain closed through 15 May. For any business owner, having kids at home instead of at school can be a little bit harrowing. It was actually only in June that some businesses could reopen. But then all the bars were closed indefinitely on 30 June 2020. Schools were finally allowed to reopen in August 2020. Then the governor ordered another lockdown from 14 December through 11 January.
And so it went. Only now is the state starting to reopen slowly.
Overall, not the greatest scene for business, especially small businesses and those in the hospitality sector.
Nevada responded similarly, with initial lockdowns being extended, closing all non-essential businesses. On 8 April, 2020, golf courses were ordered to close, as well as tennis and basketball courts, same for real estate open houses. In one particularly business-hostile move, the governor threatened to close down businesses where a recent COVID outbreak was suspected to originate. Although no further state-mandated lockdowns ensued, this was floated later in the year.
|Government Interference in Business’s Rights||★★||★★||★★★★★||★★★★★|
Delaware’s most appealing trait for business filings has always been its Chancery Court. This is a special court that deals specifically with business matters, and its judges are experts at business. Delaware has built a strong reputation over the decades as a state where business disputes get handled rapidly and fairly in the Chancery Court.
No other state has such a court.
Although Nevada has effectively been waging an all-out war with Delaware in its fight to get to the top of the “Most Appealing State to Start a Business In” ladder, its arsenal has consisted mostly of tax benefits and incentives. (For example, there is no corporate income tax, personal income tax, or franchise taxes in Nevada.) But Nevada does not come close to Delaware’s legal climate.
The U.S. Chambers Institute for Legal Reform (ILR)—an organization tasked with reducing the cost of legal action in America, particularly as a result of “frivolous” lawsuits—ranked Nevada’s legal climate at a scathing #29.
But Florida ranks even worse, at a dismal #46.
South Dakota—which is really starting to grow on us, the more we learn about it—comes in at #10, although it held the top spot in 2017.
There are exceptions to all rules. And “best of” articles can only provide guidelines. Also, some people weight certain factors higher than others. The state you live in (or if you live outside of the USA entirely) can also play a major role in determining the best place to register your company.
That being said, here is how the four states covered above faced off against each other in 2021, weight variables aside.
We’ve done our best to provide a thorough and accurate breakdown of the above states. If you see any errors, please let us know and we will be happy to correct them.
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