US Company Formation: Which State? Which Legal Form?

Start researching a company formation in the US online and you will find a flood of offers, some serious, some less so, all competing for your attention and throwing around jargon and supposed expertise. To put it mildly, it is hard to see through.

The loudest arguments are about the best US state and the best legal form: one adviser insists on Delaware, another wants to sell you on Wyoming. A third claims the LLC does it all, while a fourth condemns the LLC and tells you to form a Corporation.

So what do you do? Who is right? And who just wants to sell you something for a fistful of dollars?

Telling good offers from bad ones is not easy without a close look. So on this page we will not tackle the individual myths and legends of US company formation.

Instead, we want to give you a guide that helps you work out which legal form and which US state best suit your plans, without letting the noisy sales pitches of certain providers rattle you.

1Assumptions

We have nothing to do with bargain-basement formation shops. This page is explicitly not for people looking for the kind of service offered by various dubious US formation agencies. If you need a shell company in the US, please use those providers. We firmly distance ourselves from such structures, and we strongly warn you about the many half-truths you will find on their websites.

What follows is therefore based on these assumptions:

• you plan to form a trading US company with a purely American place of business;

• the company's profits are fully taxable in the US;

• you are not planning to form a shell company;

• where required by law, you plan to report the acquisition of the company to the tax authorities at home;

• you are aware that "tax-free" US companies are a thing of the past.

2US partnership (LLC, LP) or corporation (C Corporation)?

Through Mount Bonnell Advisors you can form and maintain corporations (C Corporations / Inc) and partnerships (Limited Liability Companies / LLC, Limited Partnerships / LP).

Read our in-depth guide to the legal forms and their pros and cons. You will find a tax comparison here.

2.1US corporation (C Corporation):

• Benefits:
  • legal certainty;
  • a straightforward structure;
  • universal recognition.
• Disadvantages:
  • Possibly a higher tax burden than a partnership.

2.2US partnership (LLC, LP)

The LLC and the LP are treated the same for tax purposes, and both offer limited liability. In our view, the LP and the LLC are therefore equivalent.

The LP is structured as a limited partnership and can therefore be slightly more complex to set up than the LLC, since it usually needs a corporation as general partner (which we provide).

• Advantages:
  • in certain circumstances, lower taxation than a corporation;
  • flexible ownership arrangements.
• Disadvantages:
  • some tax benefits are complex and only available in specific situations;
  • internationally, recognition as a partnership may be complicated;
  • profits are attributed to the partners for tax purposes, even if they stay in the company;
  • a partnership's continued existence is closely tied to its partners, so a partner leaving or dying can lead to its dissolution.

2.3Our recommendation

As a rule, the US legal form we recommend is the C Corporation. Only choose an LLC or an LP if, beyond the lower taxation of business profits, you have other good reasons for a partnership and your accountant or lawyer has advised you to use one.

2.4Test questions

These questions should help you decide:

Does a partnership even make sense for your US plans?

If you do not expect profits anyway, or the company cannot benefit from the tax advantages a partnership can offer, forming a partnership probably brings you nothing.

Do you live in a high-tax country where the tax authorities may take a contentious view of how profits from foreign partnerships are taxed?

We recommend the C Corporation, unless your accountant or lawyer advises you to use a partnership. In that case we lean towards the LP rather than the LLC.

Are you a non-domiciled taxpayer in Malta or Ireland? Do you live in another low-tax country (e.g. Dubai)?

A partnership may work in your favor and is worth serious consideration. You may gain further tax benefits if you live in a country that has no "Totalization Agreement" with the US, because then you save the social security tax ("self-employment tax") on partnership income.

Are you planning to move to the US soon?

A partnership may work in your favor and is worth serious consideration.

Are you one of several partners, with the others living in the US?

A partnership may work in your favor and is worth serious consideration.

3Which US state is the best home for my company from a tax perspective?

We also look at the best state for your US company on this page

For many clients, tax optimization is the key factor in choosing the best state. As mentioned above, profits of US companies are first subject to federal tax.

Then comes state tax, and this is where the local differences come in. If you want to know which state has the lowest tax burden, this overview will help:

3.1Corporations (C Corporation)

Learn more about the tax treatment of the C Corporation

These tax-friendly US states, where we operate, work well as the home state for a corporation: 

States with no state-level tax on corporations

• Wyoming (Wyoming C Corporation)

States with no state-level tax on corporations with revenue under $2.65 million

• Nevada (Nevada C Corporation)

• Texas (Texas C Corporation)

• Wyoming (Wyoming C Corporation)

States with no state-level tax on corporations with revenue under $4 million

• Nevada (Nevada C Corporation)

• Wyoming (Wyoming C Corporation)

3.2Partnerships (LLC, LP)

Learn more about the tax treatment of the LLC and the tax treatment of the LP

These tax-friendly US states, where we operate, work well as the home state for a partnership: 

States with no state-level tax on partnership profits

• Florida (Florida LLC / Florida LP)

• South Dakota (South Dakota LLC / South Dakota LP)

• Wyoming (Wyoming LLC / Wyoming LP)

States with no state-level tax on partnership profits for revenue up to $2.65 million

• Florida (Florida LLC / Florida LP)

• Nevada (Nevada LLC / Nevada LP)

• South Dakota (South Dakota LLC / South Dakota LP)

• Texas (Texas LLC / Texas LP)

• Wyoming (Wyoming LLC / Wyoming LP)

States with no state-level tax on partnership profits for revenue up to $4 million

• Florida (Florida LLC / Florida LP)

• Nevada (Nevada LLC / Nevada LP)

• South Dakota (South Dakota LLC / South Dakota LP)

• Wyoming (Wyoming LLC / Wyoming LP)

4Business criteria for choosing the best home state

Clients for whom tax optimization isn't at the top of the priority list approach the choice of state very differently.

They want to pick the best location, and the best US state, purely on practical and operational grounds. It makes no sense to set up a company in Wyoming just because there's no state corporate income tax. Sure, if you're a rancher, Wyoming is lovely. But when it comes to accessibility, presence, proximity to your market and hiring good people, places like that have a clear disadvantage.

Start by asking yourself these questions:

• Where do I like it best?
• Where are my customers?
• Do I benefit from having lots of other players in my industry nearby (Silicon Valley, Wall Street)?
• Where will I find employees?
• What image do I want my choice of location to project?
• How easy is the location to reach? From Europe? From within the US?
• Are the costs of the location (rent, wages and so on) in proportion to the revenue I expect?

I'd argue that 90% of all businesses can make the right location decision just by answering these simple questions.

5Other criteria for choosing the best home state

You'll often hear about other factors that supposedly matter when choosing a state. For most clients they make no difference, but here they are for the sake of completeness.

5.1Privacy

Privacy (that is, what gets published in the state business registry) is understandably a concern for many clients.

Each US state keeps its own business registry and decides independently what goes on public record. Owners are generally not published. In most states, however, at least one member of management must be listed by name.

Since Mount Bonnell Advisors usually provides a US director for the companies we form, and that person is the one listed in the registry, the disclosure requirement is normally not an issue.

That said, the registries in

• Delaware and

• Wyoming

are especially limited in what they publish about your company. Beyond the company name and registered address, nothing else is made public.

5.2Business-friendly corporate law

There's a reason more than two thirds of Fortune 500 companies are incorporated in Delaware. Delaware has highly business-friendly corporate law, with case law going back 200 years.

That may matter to large corporations, but for most entrepreneurs it's not really relevant, unless you're worried about being sued by big-name law firms.

If Delaware's corporate-friendly case law still matters to you, you can do what big companies do: keep your registered office in Delaware and put your principal place of business wherever you like.

5.3Specialized industries (e.g. cannabis products, dietary supplements)

If you work in a specialized industry like those above, your choice of location is limited, because these sectors are all regulated at state level.

The same goes for insurance and financial services, as well as manufacturers and distributors of certain medicines. So if your industry is known for heavy regulation, give this factor extra weight when choosing your location.

5.4Visas/green card (e.g. EB-5)

One of the conditions for an EB-5 visa is that you either invest $1,050,000 in any US business or just $800,000 in a Targeted Employment Area.

If you choose the second option, your choice of location is necessarily limited. Here your visa planning has to come before everything else, so the question becomes which rural area gives your investment the best chance of success.

Here you can find out which states are especially popular with foreign investors, and why.

Mount Bonnell Advisors supports you professionally with everything you need: ongoing tax support for your US company, registering a branch in another US state, payroll, building a professional website and much more. We look after you with expertise and reliability, in English. You'll find an overview of all entity types, states and services under US Company Formation.

In short

• This guidance applies to operating US companies with a permanent establishment in the US whose profits are fully taxable there.
• As a rule we recommend the C Corporation; a partnership only if there are other good reasons, and then the LP rather than the LLC.
• Tax-friendly states include Wyoming, Texas, Nevada, Florida and South Dakota, depending on entity type and revenue.
• For most businesses, operational questions decide it: where your customers are, where your staff are, and how easy the location is to reach.

How we help you

• US Company FormationLLC, Inc or LP in Delaware, Florida, California, New York, Texas or Wyoming.
• Form a CorporationThe US corporation (Inc) for growth, investors and your visa.
• Form a Limited PartnershipThe US LP for structures with a general partner and limited partners.
• Form an LLCThe US LLC with a permanent establishment, turnkey in six states.
• Company formation consultationEntity type, state and tax consequences, before you commit.