Statistics reveal that revenue from e-commerce in the United States amounted to 431.6 billion USD during 2020. This revenue is expected to increase to 563.4 billion USD by 2025, according to the Statista Digital Market Outlook. Although an online business has the potential to reach consumers anywhere in the world, the state in which the LLC is based can have a significant impact on its growth and success. Before we dive into deeper detail about which states are the best for an e-commerce LLC, we need to first answer the question: “What is an LLC?”
The Really Great Information Company (TRUiC) defines an LLC as: “a US business structure that offers the personal liability protection of a corporation with the pass-through taxation of a sole proprietorship or partnership.”
Forming an LLC is one of the simplest ways of structuring a business to protect an entrepreneur’s personal assets in the event that the business is sued. LLCs can be owned by more than one person, who are known as “members.” Now that we are all one same page about what an LLC is, let’s take a look at some individual states for LLC formation in no specific order.
The First State: Delaware
Delaware is undoubtedly a popular choice when it comes to LLC incorporation. During 2019 the state had reportedly seen 226,000 new formations. In essence, the state is favored by many entrepreneurs, who sometimes choose Delaware over their home state, due to business-friendly laws. The Delaware LLC Act and Delaware General Corporation Law are regularly updated, as such Delaware’s statues are at times used as models for other states. The state also has a designated law court, the Chancery Court, to hear lawsuits pertaining to state business matters.
Entrepreneurs who need strong liability protection are often motivated to start an LLC in Delaware, due to the fact personal assets will not be used as collateral in order to repay liabilities. Instead, all the liabilities are typically enforced against LLC properties. Filing fees and franchise taxes do apply, however. Overall, Delaware is touted as one of the most business-friendly states.
Cowboy State: Wyoming
Popularly known as the “Cowboy State,” (in part due to the use of a bucking bronco as the state symbol), Wyoming lends itself favorable for online businesses, courtesy of their favorable taxation. In addition to low sales tax, entrepreneurs need not worry about corporate and individual income taxes. Furthermore, Wyoming offers low filing fees and typically does not charge office filing and state business licensing fees as well, making it an attractive option for entrepreneurs.
As with Delaware, forming an LLC in Wyoming comes with liability protection. In Wyoming the LLC is considered to be a separate legal entity with a separate Federal tax ID number. Therefore, the LLC is responsible for its own debts and the entrepreneur’s personal assets are typically not at risk. As a separate entity, the LLC can continue even when a member leaves or joins. In some states the LLC will need to be dissolved and reformed if a member leaves or joins.
Privacy may be a concern for many entrepreneurs, fortunately the Wyoming business statute does a great job at keeping the entrepreneur anonymous. There is no required report or disclosure of obligations, unless in unavoidable circumstances.
Silver State: Nevada
Nevada legislature has come a long way to turn the state into one of the best to form a business in. Long-term businesses can take advantage of Nevada’s friendly taxation as there is no personal income, corporate income or franchise tax. Yes, you read that right.
Moverover, Nevada do not require LLCs to hold yearly meetings or create an operating agreement, which makes it an attractive option for entrepreneurs. Just like the previous states mentioned, Nevada offers significant asset protection for the entrepreneur who starts an LLC there. Aslo, if privacy is a big concern for entrepreneurs, then it might pique their interest to know that Nevada does not have an Information Sharing Agreement with the IRS. Member information is not a matter of public record and can remain anonymous.
A Few Final Considerations
When considering various states in which to form an LLC, the simplest option is often the entrepreneur’s home state. Forming an LLC out of state can potentially create additional costs as the out-of-state entity will have to register to do business in the entrepreneur’s home state. However, some state laws (such as Delaware and Nevada) are considered to be more business-friendly than others, therefore it would be pertinent for the entrepreneur to weigh up the costs and advantages of LLC formation in various states carefully.