By Jake Lawson, LLC Formation Strategist
Let me start with the bottom line: for 95% of entrepreneurs, the best state to form your LLC is your home state. Yes, that’s probably not what you wanted to hear after reading all those articles about “magical” Delaware LLCs or “tax-free” Nevada corporations.
I’ve spent over 15 years helping entrepreneurs navigate LLC formation, and I’ve seen too many business owners fall for expensive marketing hype that costs them thousands in double filing fees, unnecessary registered agent costs, and compliance headaches.
The truth? Most of the “advantages” you read about Nevada, Wyoming, and Delaware are either exaggerated, don’t apply to small businesses, or come with hidden costs that far outweigh any benefits.
The “Magical State” Marketing Machine
You’ve probably seen the claims:
- “Nevada has no corporate income tax!”
- “Wyoming LLCs are completely anonymous!”
- “Delaware is where all the big companies incorporate!”
Here’s what they don’t tell you: these benefits either don’t apply to LLCs, don’t apply to small businesses, or come with costly strings attached.
Reality check: Companies promoting out-of-state formation have a financial incentive to sell you on the idea. Nevada alone collects millions in annual revenue from out-of-state LLC formations, and the formation services promoting these states make tens of millions more.
Meanwhile, you’re left dealing with double the paperwork, double the fees, and often zero actual benefits.
The Foreign LLC Problem
When you form an LLC outside your home state, it doesn’t magically exempt you from your state’s laws. Instead, you’ll likely need to register that out-of-state LLC as a “Foreign LLC” in your home state.
This means:
- Two LLC filings (one domestic, one foreign)
- Two sets of filing fees
- Two annual reports and associated fees
- Registered agent fees in the formation state
- Double the compliance headaches
Real example: Form a Wyoming LLC for $100, then register it as a Foreign LLC in California for $70. Now you’re paying Wyoming’s $60 annual report plus California’s $20 annual fee, plus registered agent costs in Wyoming. You’ve just turned a $20 California LLC into a $200+ annual burden.
States Don’t Mess Around with Enforcement
Think you can just ignore foreign LLC registration requirements? Think again. States actively pursue businesses operating illegally within their borders.
Connecticut example: The state collected $1.3 million from companies illegally doing business without proper foreign registration. Average fine: $4,600. Highest fine: $30,795.
Connecticut’s specific penalties for unregistered LLCs:
- $300 per month penalty
- Back taxes and fees for all years unregistered
- Interest and penalties on unpaid obligations
- Inability to sue in state courts
- Potential injunction preventing business operations
Other states have similar enforcement mechanisms and penalties. The question isn’t whether you’ll get caught—it’s when.
The Tax Reality: Money Is Taxed Where It’s Made
Here’s the biggest myth buster: forming your LLC in a “no tax” state doesn’t eliminate your tax obligations in your home state.
Simple rule: Taxes are paid where money is made.
If you live in New York and form a Nevada LLC, but you’re running your business from your New York home office, you’ll still owe New York taxes. You might even owe additional Nevada taxes and fees.
The LLC’s formation state is largely irrelevant for tax purposes—what matters is where you’re actually conducting business.
When the “Magical States” Actually Make Sense
There are legitimate situations where forming outside your home state makes sense, but they’re limited:
1. Real Estate Investment LLCs
If you’re buying investment property in another state, form your LLC there. Your LLC is doing business where the property is located, not where you live.
Example: Live in Florida, buy rental property in Tennessee → Form Tennessee LLC
2. Non-US Residents with No US Operations
If you’re not a US resident and won’t have employees, offices, or physical presence in the US, you can choose any state. Popular options include Wyoming, Delaware, or Ohio.
3. Multi-State Real Estate Investors
If you’re buying properties in multiple states, consider a Wyoming holding company structure with child LLCs in each property state.
4. California Residents (Special Case)
California’s aggressive “doing business” definitions mean you’ll likely owe California taxes regardless of where you form. But if you’re planning to leave California soon, forming elsewhere first might make sense.
Debunking the Big Three “Magical” States
Delaware: Great for Corporations, Overrated for LLCs
Delaware’s reputation comes from corporate law, not LLC law. Over 50% of publicly traded corporations incorporate in Delaware because of its sophisticated corporate court system and extensive case law.
But here’s the key: These advantages primarily benefit corporations, especially those going public or seeking venture capital. For a typical small business LLC, Delaware offers no meaningful advantages and comes with higher costs than most states.
Nevada: More Hype Than Substance
Nevada markets itself aggressively to out-of-state businesses, but the benefits are often overstated. Worse, Nevada has higher rates of fraudulent business activity than most states.
The reality: If you don’t live in Nevada and aren’t doing business there, forming a Nevada LLC typically creates more problems than it solves.
Wyoming: Better Than Nevada, Still Usually Unnecessary
Wyoming is less problematic than Nevada and does offer some legitimate benefits like low costs and privacy protections. But for most small business owners, these benefits don’t justify the foreign LLC registration requirements in their home state.
The Home State Advantage
Forming your LLC in your home state offers compelling benefits:
Cost Efficiency:
- Single filing fee
- One annual report
- No registered agent fees (you can be your own)
- No foreign LLC registration costs
Simplicity:
- One set of compliance requirements
- Direct relationship with your state’s filing office
- Easier banking and licensing
Legal Clarity:
- No question about where you’re doing business
- Clear jurisdiction for legal matters
- Straightforward tax obligations
How to Determine Your “Home State”
If you’re not sure which state counts as “home,” ask yourself:
- Where do you live most of the year?
- Where is your driver’s license issued?
- Where do you file state tax returns?
- Where is your primary business address?
- Where do business activities actually occur?
The audit test: If you were audited, which state would a court determine you’re really operating from? That’s your home state.
Online Business Doesn’t Change the Rules
I constantly hear: “My business is 100% online, so I can form anywhere, right?”
Wrong. Being online doesn’t exempt you from corporate and tax law. If you’re running your online business from your kitchen table in Ohio, you’re doing business in Ohio. That’s where your LLC should be formed.
The location of your customers doesn’t matter—what matters is where you’re working and managing the business.
Real-World Consequences of Wrong-State Formation
I regularly hear from entrepreneurs who fell for out-of-state formation hype and now face expensive problems:
Seller’s permit issues: “I live in California but formed my LLC in Utah. Now I need a seller’s permit for wholesale purchases and have to register as a Foreign LLC in California anyway.”
Banking complications: Many banks prefer to work with local LLCs, making account opening more difficult for out-of-state entities.
Licensing problems: Professional licenses, sales tax permits, and other registrations often require local business registration.
The Exceptions: When Out-of-State Formation Makes Sense
Non-US Residents
If you’re not a US resident and won’t have US employees or operations, you can choose any state. Consider costs, privacy needs, and ease of compliance.
Recommended options for non-residents:
- Wyoming: Low cost, good privacy, simple compliance
- Delaware: Higher cost but strong legal framework
- Ohio: Very low cost, no annual report requirement
Real Estate Holding Companies
For multi-state real estate investments, a Wyoming holding company owning property-specific LLCs in each state can provide liability isolation and simplified management.
Imminent Relocation
If you’re definitely moving to a lower-cost state within months, forming your LLC there first and foreign-qualifying in your current state temporarily might make sense.
Making the Right Choice for Your Situation
For most entrepreneurs: Form your LLC in your home state. It’s simpler, cheaper, and eliminates compliance complications.
For non-US residents: Choose based on cost, privacy needs, and compliance simplicity. Wyoming, Delaware, and Ohio are popular options.
For real estate investors: Form where the property is located, or consider a holding company structure for multiple properties.
For California residents: You’ll likely owe California taxes regardless, so consider formation costs and compliance burden.
The Bottom Line
Despite all the marketing hype, the vast majority of successful businesses are formed as domestic LLCs in their home state. The perceived advantages of “magical” states are usually either nonexistent or come with hidden costs that far exceed any benefits.
Don’t let clever marketing distract you from building your business. Form your LLC where it makes the most practical sense—usually your home state—and focus your energy on creating value for your customers.
Ready to Form Your LLC in the Right State?
The choice of formation state is important, but it shouldn’t paralyze you. In most cases, the answer is straightforward: form where you live and do business.
Need help determining the best state for your specific situation? At Llciyo.com, we cut through the marketing hype to give you honest, practical advice based on your actual business needs and circumstances.
Don’t let formation state confusion delay your business launch—get clear guidance based on facts, not marketing claims.
Jake Lawson has helped over 1,200 entrepreneurs choose the right formation state, including many who needed to “fix” expensive mistakes from out-of-state formations that didn’t serve their actual business needs.