What’s the Best State to Form Your LLC in?
**Short Answer: It’s best to form your LLC in your home state. If you want to understand why, see the details below.**
We see this all over the internet:
“Nevada has no corporate income tax.”
“Wyoming LLCs are the most affordable.”
“Delaware is the best state to form an LLC!”
To be completely honest with you, it’s a bunch of bullshit.
The disadvantages of forming an LLC outside of your home state far outweigh the perceived “advantages”.
Let us explain…
Domestic LLC vs. Foreign LLC
If you form an LLC in the state where you reside (aka your “home state”), this is known as a Domestic LLC.
If you form an LLC outside of your home state, you’ll be required to register that out-of-state LLC as a Foreign LLC in your home state.
For example, if you form an LLC in Nevada (but you don’t live there), then you’ll be required to register that Nevada LLC in your home state (as a Foreign LLC) in order to do business in your home state.
– you now have 2 LLCs (one in Nevada and one in your home state)
– you have to pay 2 State filing fees
– you will be required to pay for a Registered Agent in order to use their address for your Nevada LLC
– You have to pay 2 Annual Report fees
(Note: we used Nevada above as an example, but the same applies to any out-of-state LLC.)
In short, this can easily add up to DOUBLE the cost and DOUBLE the headaches since you have to maintain 2 LLCs.
Now, we know the reason that most people become interested in Nevada LLCs is because they think they are going to save money on taxes.
Taxes Are Paid Where Money Is Made
Many people are misled into forming LLCs in other States to take advantage of “tax savings”.
This is simply not true.
In this example, if you formed a Nevada LLC and that LLC is doing business in your home state (not in Nevada), you’ll still need to pay taxes in your home state because that is where you are making money.
A helpful saying to remember is:
“Taxes are paid where money is made.”
Again, your Foreign LLC will need to pay taxes in your home state since that is where you are operating and doing business.
Even worse, you may owe additional taxes and fees in Nevada.
So why do so many websites talk about Nevada?
Again, most of the benefits of forming an LLC outside your “home state” are a far stretch from the truth.
Both the states themselves and the companies promoting those states stand to gain financially by LLCs being created within THAT state’s borders.
For example, if 40,000 LLCs are formed each year in Nevada, that’s approximately $3 million dollars in annual revenue for the state.
And that is just for the state of Nevada alone.
It doesn’t include the tens of millions of dollars made by the companies promoting Nevada as “the” place to form your LLC.
The funny thing is, compared to how much Nevada is “hyped up”, there really aren’t that many LLCs formed there each year.
There are far more LLCs formed states that aren’t “hyped-up”.
Furthermore, Nevada companies rank the highest in fraudulent activity.
Look – don’t get us wrong, if you live in Nevada and you’re forming your LLC in Nevada, there is nothing wrong with that.
But if you don’t live in Nevada, again, it is much better to form your LLC in your home state.
So what about Wyoming?
Although there is far less fraudulent activity in Wyoming compared to Nevada, this state is also hyped up.
Again, the disadvantages of forming an LLC outside of your home state far outweigh the perceived “advantages” and are not worth the extra hassle, time and money.
In fact, it will cost you a lot more in the long run.
Forming your LLC where you reside is your best bet.
Before we discuss forming an LLC in your home state, let’s talk about the first state to ratify the United States Constitution…
Although small in a geographical sense, Delaware is quite large in terms of business activity.
In fact, according to Wikipedia, over 50% of U.S. publicly traded corporations and 60% of the Fortune 500 companies are incorporated in Delaware.
But, did you see the two words we underlined above?
“Corporations” and “incorporated“.
You’ll notice these statistics say nothing about LLCs.
The fact is that Delaware is a good state to form a company in… if you’re a Corporation.
Delaware is best suited for publicly traded companies that sell shares on the stock market (like Microsoft, Apple, IBM, Chase, Coca-Cola), or companies that have multiple investors or need to raise venture capital.
But, most of our customers do not fall into that category.
If you form an LLC in Delaware (but don’t live there), you will still run into the same situation:
– you’ll need to register your Delaware LLC as a Foreign LLC in your home state
– pay annually for a Registered Agent, and
– pay the Annual Reporting fees in both states every year
However, if you do live in Delaware, then you should form your LLC in your home state.
Home State vs. “Magical States”
Again, forming your LLC outside of your home state is just not worth the hassle and cost.
This goes for Nevada, Wyoming, Delaware, and any other “magical” state.
Attorneys Alexander J. Davie & Dana Shultz agree: most of these states are just hyped up. Form an LLC in your home state.
Internet-Based & Online Companies
Even if you have an internet-based business, you cannot get around your state’s tax obligations simply by forming your LLC out-of-state.
For example, if you live in Florida and run your online business from your home (or mostly from your home), then you have a Florida business and your best bet is to form your LLC in Florida.
LLC in Your Home State
This is the least expensive, easiest to setup and the best long-term strategy for your LLC.
The reason it is the easiest is because it is the right way to do it.
Our friends at Northwest Registered Agent say it best:
“We get a lot of people these days coming up with some pretty goofy ideas. We always try to send them in the right direction before they go off and setup their ‘5 LLC asset protection strategy’ to protect their new Taco stand idea.”
If you have any trouble determining where your home state is, ask yourself the following questions:
– What state are you a resident of?
– Where do your employees reside?
– Where do you pay state taxes?
– If you own property, where is it located?
– Where is your office/where do you work from?
– Where is the business physically located?
– Where do the LLC members/owner have a physical address?
We hope this information is helpful to you.
We hope it cleared up a lot of the hype and misinformation about which state is best to form your LLC in.
Now, there is one exception…
Real Estate LLCs
As we mentioned earlier, when operating a business, it’s best to form your LLC in your home state.
This is usually not the case for real estate LLCs.
Of course, if you are investing in real estate in the state where you live, then – yes, it makes sense to form your LLC in your home state.
But if you are investing in real estate located in another state, it is best to form your LLC there.
Your LLC is doing business in that state if you’re generating rental income, buying and selling, wholesaling, or basically any method where you’re making money from your real estate investments.
If you were to purchase property out of state with an LLC that was formed in your home state, you would run into the same issue that we mentioned earlier.
You will be required to register the Domestic LLC in your home state as a Foreign LLC in the state where you are purchasing the property.
Which means that you now have to pay filing fees in both states, pay for a Registered Agent in the foreign state, pay annual fees in both states, and deal with the headaches of unnecessarily managing 2 LLCs.
In summary, it is best to form your LLC in the state where you are buying property.