Exploring the various options as to where you should form your LLC as an independent contractor is a daunting process. There are numerous considerations to take into account: will my LLC be domestic, or foreign; are there incentives for either one; what states are more small business LLC friendly; and various others. As an independent contractor looking to register yourself as an LLC, you should have a clear idea of where your LLC should be based out of. Moreover, you need to know how that decision will help you in the short and long run. Read this post to discover where you should form your LLC.
Domestic And Foreign LLCs
The first hurdle is deciding whether yours will be a domestic or foreign LLC. A domestic LLC is one that does business in the same state with which it was registered in. Compared to a foreign LLC, forming a domestic LLC often requires less paperwork and forethought. A foreign LLC is defined as an entity that conducts its business outside of the state in which it was registered. In addition to obtaining a foreign qualification to conduct business outside of its registered state, foreign LLCs face more scrutiny, tax treatment, and obligations in regards to compliance and financial disclosure compared to the former. Before nailing down your registration, keep in mind your obligations and aspirations. If you intend to contract locally, or far and wide, registering as a domestic or foreign LLC is a major consideration you must take into account.
Home States Are Safe
Filing your LLC in your home state is generally a safe bet, as long as you contract most of your business in-state. If this sounds like you, any incentives of filing as a foreign LLC may be offset by the costs and requirements of operating in a foreign state. Take into account what percentage of your core business lies in-state and out-of-state. Are you prepared to comply with state and local tax laws of not one, but two, three, or even more states? Organizing your records appropriately through various states’ mandates could be unnecessarily complex if only a small portion of your business come from out-of-state. If your business operates primarily in-state, it is typically less costly and far easier for an independent contractor to file as a domestic LLC. You can even form an LLC online to get your business running quickly in your home state.
A more unique discussion for forming an LLC lies in the incentives of warm weather climates, and their apparent convenience for independent contractors. When you look at the Top 20 cities for independent contractors, a majority of them are located in the Southeast and Southwest; this includes Miami, Houston, Dallas, Nashville, Austin, Tucson, and New Orleans, to list a few. A good indicator of why these southern cities are so well-liked by independent contractors, and vice-versa, are due to more affordable health insurance costs and lower tax rates. For example, Sacramento offers a 13.3% income tax rate. Alternatively, Tucson and Phoenix boast a far more reasonable 4.5%. For an independent contractor, these differences have the potential to make a huge difference in savings and earnings moving forward, and could be worth the move, or foreign registration.
States And States’ Taxes
The ideal position for an independent contractor filing their LLC is to pay as few taxes as possible. Every entrepreneur needs to know the LLC tax classification options. That is why if you register in a state that has little or no state taxes, you can drastically reduce tax liability; this has the potential to save you thousands of dollars. 41 out of the 50 states incorporate a form of state income tax. The states that are not on that list, and therefore have no state income tax, are Wyoming, Washington, Texas, South Dakota, Nevada, Florida, and Alaska. On the other hand, the states that have the highest state taxes are California, Indiana, Mississippi, Rhode Island, and Tennessee. Of course, specific counties or cities may levy additional taxes, so keep that in mind. Overall, the lower the tax rate, the better the return for your newly formed LLC.
Notice Of Intent
Before filing your LLC, some states will require you to publish a “notice of intent” in a local newspaper. This varies widely from state to state, but when necessary it is extremely important; skipping this step has the potential to leave your progress dead in the water. In some cases, LLC operators may be required to publish the notice multiple times over a set amount of weeks or months. Following this, you may be further obligated to file an affidavit of publication with the state. If you’re looking to hit the ground running with your LLC, these types of notices may slow you down. Be certain of your state’s requirements regarding a notice of intent. Decide whether or not your LLC has a relaxed enough time-frame to accommodate this process before you pull the trigger.
Needless to say, deciding where to register your LLC as an independent contractor is far from a thoughtless process. The steps to take in this process consists of narrowing down your options any way you can. Consider whether your business operates locally or out-of-state to decide whether you will file as a foreign or domestic entity. Examine the tax rates and sales taxes of states you are interested in. Don’t hesitate to look into a warmer climate or alternative states; and double-check which states require a notice of intent before you start. That way, you’re not left in the lurch before start-up. In order to make sure your LLC starts running smoothly, it helps to feel confident, and informed – use these tips as you need to help nail down where you should form your LLC.