When it comes to starting your own endeavor, choosing the best business structure is one of the most important decisions you’ll make. A popular option is to form a Limited Liability Company (LLC) — which acts as a separate legal entity from the owner(s) of the business. Benefits of this structure include asset protection, credibility, deductible employee benefits, tax savings and greater ease in raising needed funds. Each state has different rules when it comes to starting an LLC — including initial paperwork and the associated fees to file it. The fee range across the U.S. is somewhat extreme, from a low of $40 to a whopping $500. To help make it easier to visualize what each state charges, MBA@UNC, UNC Kenan-Flagler Business School’s online MBA for executives, created a map of LLC startup costs from around the country. Here, we’ll take look at the nuts and bolts of an LLC and dig into the four states with the highest fees.
Throughout the nation, the LLC basics are fairly consistent in terms of what this business structure looks like. Here’s a description from the Small Business Administration (SBA):
“A limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.”
Each state has its own rules, but there are some basic nuts and bolts that generally apply to them all, including regulations related to:
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- Business name—it has to be unique and unrestricted.
- Articles of organization—include general information and member names.
- Licenses and permits—may be required, depending upon what you do.
- Operating agreements—are recommended if you have more than one member.
- An announcement—may be needed, depending upon your state.
- Hiring employees—has a unique set of rules, so be sure to check them out.
States with the highest fees
If you live in Hawaii, Arizona, New Mexico, Colorado, Iowa, Arkansas, Mississippi or Kentucky — you’re in luck. These states have the lowest fees in the nation, topping out at $50 max. However, if you live in Massachusetts, Illinois, Tennessee or Texas—you’d better be ready to write a big check. Fees in these four states are higher than all others, with the top two at $500 each and $400 for the remainder. For each state, there may be other things to consider when deciding whether an LLC is the best option. Here are a few additional considerations from the highest fee states on the list:
- Massachusetts: In addition to the initial filing costs, a fee to file the required annual report is charged as well. In the Bay State, it’s $500 every year. Here, the manner in which you tailor your LLC is significant, too. Attorney Daniel Karpman writes, “Because the Massachusetts statute allows members to tailor the structure of the organization to their needs, avoiding characterization as a corporation requires careful planning.” Known as a “flexible” LLC law, failure to pay attention to specific details when you’re filing could lead to unexpected taxes down the road.
- Illinois: The Land of Lincoln also tops the list in LLC filing fees—at $500 a pop. Some business advocates — like attorney Jacob Huebert — say the state unfairly penalizes LLCs, since rates to both start and maintain a corporation are much lower. Initial filing fees for corporations are only $150, reserving a name is only $50 (for an LLC it’s $300) and it’s just $5 to dissolve a corporation — but if you want to retire your LLC you’ll have to pay $100. However, Huebert notes that these intermittent fees certainly aren’t the only consideration, since selecting the LLC structure may save big in terms of time and taxes. Corporations require a lot more paperwork ongoing, and typically owners get taxed twice — once for the business income, and again on their personal income from the business.
- Tennessee: The Volunteer State shares the dubious honor with Texas as being the region that’s second most expensive to start an LLC — with both charging $400 for initial filing fees. As with every state, there are unique factors to consider, and in Tennessee, some of the most significant are related to the state tax structure. In an article, Jay Hoover, CPA, briefly summarized the issue, writing, “In Tennessee, state taxes play an important role in entity selection, which is primarily due to the fact that Tennessee does not impose a tax on earned income from sole proprietorships and partnerships. Conversely, Tennessee imposes franchise and excise taxes on corporations, limited partnerships, LLPs and LLCs. The franchise tax is based on assets and capital utilized by the business, while the excise tax is based on the profits of the business.”
- Texas: When it comes to LLC fees, it’s certainly true that “everything’s bigger in Texas.” As noted previously, the Lone Star State’s fees are second from the top — yet the state is advertised as being a great place to become an entrepreneur. With a slogan of being “Wide Open for Business,” the Texas small business environment is touted as a place to thrive due to geographic location, a highly-skilled workforce, a low tax burden, a reasonable cost of living and a predictable regulatory environment. A unique factor to consider in Texas regarding an LLC is the requirement to pay a “margin tax.” According to attorney Phyllis Lambert, this tax is imposed on almost all Texas businesses except sole proprietorships and a few instances of general partnerships.
Regardless of what state you plan to do business in, starting as an LLC may be a good choice. Key considerations depend upon your specific needs regarding location, taxation and liability protection. A good first step is to learn all you can about the various benefits and limitations of each business structure — and then find a trusted adviser or two to obtain the best advice. The U.S. Small Business Administration (SBA) offers a wealth of resources to help you get started — and then grow your business after you’ve opened your doors.
The 411 on LLC Start-Up Costs Across the U.S.