Choosing where to form your Limited Liability Company (LLC) is a big decision. It’s like picking the perfect home for your business—one that saves you money, keeps things simple, and offers the right protections. With so much buzz about “business-friendly” states like Delaware, Wyoming, and Nevada, it’s easy to get caught up in the hype. But is forming an LLC in one of these so-called “magical states” really the best move? Or should you stick closer to home? Let’s dive into the details, break down the options, and figure out what makes sense for you in 2025.
Domestic LLC vs. Foreign LLC
First, let’s clear up some jargon. A domestic LLC is one you form in the state where you live or primarily do business. For example, if you’re running a coffee shop in Texas, your Texas LLC is domestic. A foreign LLC is when you form an LLC in one state (say, Wyoming) but operate it in another (like California). If you go the foreign LLC route, you’ll need to register it in every state where you “transact business,” which can mean having an office, employees, or significant sales.
Here’s the catch: registering a foreign LLC means extra paperwork and fees. For instance, if you form a Wyoming LLC but run your business from California, you’ll pay Wyoming’s annual fees and California’s foreign LLC fees. It’s like paying rent for two apartments when you only live in one. For most small businesses, forming a domestic LLC is simpler and cheaper.
States Charge Fines and Penalties
Ignoring foreign LLC registration can bite you hard. States like California are especially strict. If you’re operating a Wyoming LLC in California without registering it as a foreign LLC, you could face a $2,000 fine per year, plus other penalties like $18 per month per LLC member for failure to file. California’s Franchise Tax Board doesn’t mess around, and other states have their own rules too. Connecticut, for example, collected $1.3 million in 2018 from unregistered businesses, with an average fine of $4,600
The lesson? If you’re doing business in a state, register your LLC there or risk hefty fines. It’s not worth trying to “fly under the radar.”
Taxes Are Paid Where Money Is Made
One of the biggest myths about forming an LLC in a state like Wyoming or Nevada is that you’ll dodge taxes. Here’s the truth: LLCs have pass-through taxation, meaning the business’s profits flow to your personal tax return. You pay taxes based on where you live or where the business operates, not where the LLC is formed. So, if you live in California and form a Wyoming LLC, you’re still paying California’s taxes, including the $800 annual franchise tax.
Even in tax-friendly states like Nevada or Wyoming, the benefits only kick in if you’re actually doing business there. For example, Wyoming has no state income or corporate tax, but if your business is in Ohio, you’re still subject to Ohio’s tax rules. The idea of forming an LLC in a “tax haven” state to save money often falls flat unless you’re physically operating in that state.
Nevada
Nevada’s got a reputation as a business paradise—no state income tax, no corporate tax, and strong privacy protections. You can form an “anonymous LLC,” meaning your name doesn’t appear in public records. Sounds great, right? But there’s a downside. Nevada’s fees are steep: $75 to form the LLC, $200 for a business license, and $150 for an annual list of members. That’s $425 upfront and $350 every year after. Compare that to Wyoming’s $100 formation fee and $60 annual report.
Nevada’s also appealing for real estate investors since there’s no income tax unless your revenue exceeds $4 million. The rental market in Las Vegas is hot, with an 8% quarterly growth in short-term rentals. But if you’re not doing business in Nevada, those tax breaks don’t help, and you’ll still need to register as a foreign LLC in your home state.
Wyoming
Wyoming is often hailed as the king of LLC states, especially for non-residents. It was the first state to create the LLC structure, and it’s kept things founder-friendly ever since. The perks? Low fees ($100 to form, $60 annual report), no state income or corporate tax, and top-notch privacy protections. Like Nevada, Wyoming offers anonymous LLCs, and it doesn’t share info with the IRS. Plus, Wyoming’s laws provide strong asset protection, even for single-member LLCs.
For online businesses or non-U.S. residents, Wyoming’s a favorite. Its low costs and minimal reporting make it ideal for e-commerce or dropshipping. But if you’re operating in another state, you’ll still need to register as a foreign LLC there, which can cancel out the savings. Some X users swear by Wyoming for its simplicity and affordability, but others warn it’s not a one-size-fits-all solution.
Delaware
Delaware’s the go-to for big corporations, with over half of Fortune 500 companies calling it home. Its Court of Chancery is a big draw—a specialized court that handles business disputes quickly and fairly. Delaware also offers anonymous LLCs and no state income tax for businesses operating outside the state. But there’s a catch: the $300 annual franchise tax is higher than Wyoming’s $60 or Nevada’s $350. Formation costs are low ($90), but the ongoing fees add up.
Delaware’s great for startups planning to raise venture capital or go public, as investors often prefer its legal framework. However, for small LLCs, the benefits might not outweigh the costs, especially if you’re not doing business in Delaware. X users point out that Delaware’s reputation is more about corporations than LLCs, and the hype can be misleading.
Home State vs. “Magical States”
The “magical states”—Delaware, Wyoming, and Nevada—get a lot of love for their tax breaks and privacy. But for most small businesses, forming an LLC in your home state is the smarter move. Why? You avoid the hassle and cost of foreign LLC registration. If you form a Wyoming LLC but run your business from Ohio, you’ll pay Wyoming’s fees and Ohio’s foreign LLC fees. Plus, you’re subject to Ohio’s taxes and laws anyway.
Forming in your home state keeps things simple. You deal with one set of rules, one set of fees, and one tax system. The “magical states” only make sense in specific cases, which we’ll cover later. For now, know that the hype around these states often oversells the benefits for small businesses.
Online Business
Online businesses—like Amazon FBA or dropshipping—can complicate things. You might think, “I’m online, so I can form my LLC anywhere!” Not quite. The state where you run the business (your home office, warehouse, etc.) determines where you’re “transacting business.” If you’re in Washington and selling on Etsy, your LLC is likely operating in Washington, so you’d form or register it there.
Wyoming’s popular for online businesses because of its low fees and privacy, but you’ll still need to register as a foreign LLC in your home state. For example, a Washington-based online seller with a Wyoming LLC would need to file in both states, doubling the paperwork. Stick to your home state unless you’ve got a specific reason to go elsewhere.
My Customers Are All Over the Country/World
Having customers nationwide or globally doesn’t change where you form your LLC. It’s about where you’re running the business, not where your customers are. If you’re in California and selling to customers in 50 states, your LLC is still operating in California. You don’t need to register in every state where you have a customer—that’s a common myth.
For non-U.S. residents with no U.S. operations, states like Wyoming or Delaware are great because you’re not tied to a specific state. But if you’re in the U.S., your home state is usually the default.
Issues with Seller’s Permits
Seller’s permits (or resale licenses) are needed for businesses selling taxable goods, like e-commerce or retail. The catch? You get these permits from the state where you’re doing business, not where your LLC is formed. Delaware, for example, doesn’t have a sales tax, so it can’t issue seller’s permits. If you’re dropshipping and need a permit, you’ll likely get it from your home state or the state where you have a physical presence.
This is another reason to form in your home state. It simplifies getting the permits you need without jumping through foreign LLC hoops.
Form an LLC in Your Home State
For most small businesses, forming an LLC in your home state is the way to go. It’s cheaper (no foreign LLC fees), simpler (one set of rules), and avoids penalties for unregistered operations. States like California, New York, or Ohio might have higher taxes or fees, but you’re already subject to those if you’re operating there. Forming in Wyoming or Nevada won’t save you from your home state’s rules.
Exceptions
There are a few cases where forming outside your home state makes sense. Let’s break them down.
California Residents
California’s a beast. If you live and operate there, you’re almost certainly “transacting business” in the state, so you’ll need a California LLC or register your out-of-state LLC as a foreign LLC. The $800 annual franchise tax applies either way, and skipping registration can lead to $2,000 fines per year. Some California residents form a Wyoming holding company to own other LLCs for privacy, but you’ll still need to register it in California. It’s rarely worth the extra cost unless anonymity is critical.
Non-U.S. Citizens and Non-U.S. Residents
If you’re a non-U.S. resident with no U.S. operations, you’ve got freedom to choose. Wyoming’s the top pick for its low fees ($100 formation, $60 annual), no state income tax, and privacy protections. Delaware’s a close second for its legal credibility, especially if you plan to raise U.S. venture capital. Nevada’s an option but pricier. Ohio’s also gaining traction for its simplicity and no annual report requirement.
Real Estate Limited Liability Company
Real estate investors often form LLCs in the state where the property is located. Why? Business activities (like collecting rent) happen there, so it’s considered “transacting business.” For example, if you own rental property in Nevada but live in California, you’d form a Nevada LLC to avoid foreign registration in Nevada. Some investors use a Wyoming holding company to own LLCs in multiple states for privacy and consolidated tax filing, but each property-state LLC may still need foreign registration in your home state.
Wyoming Holding Company
A Wyoming holding company can be a smart move for complex businesses, like real estate portfolios or multi-state operations. The parent LLC (formed in Wyoming) owns “child” LLCs in other states, offering privacy and simplified federal tax filing. However, if you’re operating in your home state, the Wyoming LLC still needs to register as a foreign LLC there, which can reduce the benefits. Consult a tax attorney to see if this structure works for you
Best State to Form an LLC FAQs
Q: Do I need to register my LLC in every state where I have customers?
A: No. You register where you’re transacting business (e.g., office, employees, or physical presence), not where your customers are.
Q: Can I avoid taxes by forming in Wyoming or Nevada?
A: Not really. You pay taxes based on where you live or operate, not where the LLC is formed.
Q: Is Delaware worth it for small businesses?
A: Usually not. Delaware’s great for corporations or startups seeking investors, but small LLCs often find the $300 annual fee and foreign registration costs outweigh the benefits.
Q: What’s the cheapest state for an LLC?
A: Wyoming’s the cheapest, with $100 formation and $60 annual fees. Ohio’s also affordable, with no annual report requirement.
References
- LLC University: Best State to Start an LLC 2025
- Forbes Advisor: Best States to Form an LLC
- LegalZoom: Which Is the Best State to Form Your LLC?
- Wyoming LLC Attorney: Best State to Form an LLC
- doola: The Best States to Start an LLC
- X Posts on Wyoming and Delaware LLCs
Final Thoughts
Picking the best state for your LLC isn’t about chasing the flashiest option—it’s about what fits your business. For most small businesses, your home state is the simplest and most cost-effective choice. The “magical states” like Wyoming, Nevada, and Delaware have their perks, but they’re not magic bullets. They shine for non-residents, real estate investors, or complex holding company structures, but for the average entrepreneur, the extra fees and paperwork often outweigh the benefits.
Before you decide, think about where you’re actually running your business, what taxes you’re already subject to, and whether privacy or legal protections are a priority. And don’t skip consulting a tax pro or attorney—those $200-an-hour chats can save you thousands in fines or fees down the road. Wherever you land, forming an LLC is a big step toward protecting your assets and building your dream. Choose wisely, and you’ll set your business up for success in 2025 and beyond.