Why You Shouldn’t Form an LLC in Nevada

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Why You Shouldn’t
Form an LLC in Nevada

Quick Start Guide
This Quick Start Guide is a brief overview of how to form an LLC in Nevada.

Detailed Lessons:

 

Nevada LLC Costs:
Nevada LLC formation: $425
Nevada LLC annual fees: $350 per year

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Note: If you live in Nevada, do business in Nevada, or are a non-US resident, then this information doesn’t apply to you.

Regardless of what you’ve read online, most people should not be forming an LLC in Nevada.

In order to best explain the reasons, let’s look at a example:

• Daniel is a resident of California
• He runs an online business from his home in California
• He reads online “Nevada is the best state to form an LLC
• He forms an LLC in Nevada

Let’s discuss the issues that will arise in this situation.

Domestic LLC vs. Foreign LLC

If you form an LLC in your home state, this is called a “Domestic LLC”. Meaning, the LLC is domestic to that jurisdiction.

If you want this Domestic LLC to do business in another state (a different jurisdiction), you must register that LLC in the new state. Once that LLC is registered, it is known as a “Foreign LLC”.

It’s technically just one LLC. The LLC originally has authority to do business in its home state, since that’s where it was formed. And then it must file as a Foreign LLC in every state it wishes to do business.

So in our example, Daniel has only formed a Domestic LLC in Nevada.

(for more info, please see: domestic LLC vs foreign LLC)

Nevada LLC Illegally Doing Business

Since Daniel is running his business from his home in California, his Nevada LLC is illegally doing business in California.

In order to avoid fines and penalties, he must register his Nevada LLC as a Foreign LLC in California.

Foreign LLC Registration

In order to remedy the fact that Daniel’s Nevada LLC is illegally transacting business in California, he’ll need to register his Nevada LLC as a Foreign LLC in California.

This means he now:

  • has 2 LLC filings to maintain (a Domestic Nevada LLC and a Foreign California LLC)
  • has 2 state filing fees
  • has to meet annual requirements and fees in both states
  • may have increased Registered Agent fees

So in hopes of obtaining certain Nevada LLC benefits, Daniel has instead complicated the situation, increased his fees, and will most likely get no benefits from Nevada.

Doing Business

Even if Daniel has no employees in California, no office in California, and no clients in California, he is still running the business from his home in California.

Furthermore, California not only has strict corporate laws around doing business in the state, but they also have strict taxation laws around doing business in the state. This means that in addition to the LLC costs in Nevada and California, Daniel may receive fines and penalties from both the California Secretary of State and the California Franchise Tax Board. And he’ll end up paying California LLC annual fees and taxes anyway (which may have been the reason he considered a Nevada LLC in the first place).

Note: “Doing business” has more to do with where you are running and operating things from instead of where your clients and customers are located. A lot of our readers ask us if they have to register their LLC in every state where their customers are located. No, you don’t have to. You can just form your LLC where you are running the business from.

The court has discretion about the jurisdiction

If Daniel was looking to obtain certain legal benefits by having a Nevada LLC, those benefits may not apply in a court of law.

If Daniel’s LLC is involved in a lawsuit, the courts have discretion on which state laws apply. Since Daniel is doing business in California, it’s possible that the courts may decide that Nevada law doesn’t apply and that California law applies instead.

So the legal benefits of forming the LLC in Nevada are now useless.

Nevada LLCs are not as cheap as people think

Many websites only mention the Nevada LLC Articles of Organization fee of $75, but fail to disclose the full filing fee, which is $425.

On June 6th 2017, Nevada Governor Brian Sandoval approved Assembly Bill 123 (effective October 1st 2017).

This new change in the Nevada LLC law requires that all LLCs (except for those exempt from a state business license) must file an Initial List of Managers or Managing Members ($150) and a Nevada State Business License ($200) at the same time they file their Articles of Organization ($75).

Again, that’s a $425 Nevada LLC filing fee.

And if you need to hire a Nevada Registered Agent, that will increase your costs by another $100 to $200 per year.

Furthermore, the Nevada LLC Annual Fees are $350 per year. That’s $150 for an Annual List and $200 for the State Business License renewal.

Even worse, if you later realize that you need to register a Foreign LLC in your home state, now you have all these fees mentioned above ($425 to setup and $350 per year) in addition to the Foreign LLC fees in your state. Yikes! This can get expensive quickly.

The headache

And although the money may not be a huge deal for some people, the headache can be quite overwhelming for others.

We hear all kinds of horror/frustration stories about LLCs being set up in the wrong state.

We recently heard from a real estate developer, who after acquiring land and building a subdivision, realized they shouldn’t have formed their LLC in Nevada, wanted to move the LLC to their home state and then were pretty much “frozen” in a state of inaction when they realized how complex a conversion/redomestication filing was (moving an LLC from one state to another).

Not to mention, the need to close a bank account, open a new one, draft internal agreements, re-register their new LLC with vendors and suppliers, update the IRS, and more. The time and opportunity cost were well into the tens of thousands of dollars.

Nevada has no corporate taxes

A lot of people get really excited when they hear that “Nevada has no corporate income tax!

Unless your LLC is taxed as a C-Corp, this won’t even apply. And this is the case for 99%+ of our readers.

Said another way, most LLCs don’t pay corporate taxes since LLCs are pass-through entities.

Meaning, in their default tax classification, LLCs don’t pay any corporate income taxes. The profits from the LLC “flow through” to the owner’s personal income tax return and are paid on the individual level (not the corporate level).

So that fact that Nevada doesn’t have state corporate income tax really doesn’t even matter.

Furthermore, you pay state income taxes where the money is made. Not where the LLC is formed.

Taxes are paid where the money is made

Even if there are applicable tax advantages in Nevada, this won’t apply if you’re doing business in your home state (or in another state).

State income taxes are paid where the money is made. So in Daniel’s case, he would get no tax advantages whatsoever by having an LLC in Nevada and instead, he’d be paying all his state income taxes in California.

What’s worse, is that the Nevada Department of Taxation may require an informational return to be filed. This means additional costs for Daniel’s accountant to file a “zeroed-out” return in Nevada and apportion the LLC’s earnings to California.

“My business is online with no physical presence”

Frankly, the state governments don’t care if your business is online or not.

The fact that you run your business from your home (which is located in a state) means you’re doing business in that state. Even if you work from a coffee shop, that coffee shop is also located in a state.

And that state wants to collect their tax revenue and enforce their LLC filing requirements for businesses illegally operating in the state.

Takeaway

Save yourself the money and the headache.

Just form your LLC in your home state or the state where you’re actually doing business.

Matt Horwitz
Founder & Educator, LLC University®
Forming an LLC shouldn't be so complicated. Our step-by-step guide will make the process a breeze – and no complex legal jargon! LLC University® teaches people how to form an LLC for free in all 50 states. We hope you find our free guides and resources helpful in your business journey.
Disclaimer: Nothing on this page shall be interpreted as legal or tax advice. Rules and regulations vary by location. They also change over time and are specific to your situation. Furthermore, this comment section is provided so people can share their thoughts and experience. Please consult a licensed professional if you have legal or tax questions.

6 Comments

  1. Chris Cook June 25, 2019

    It’s very interesting that the states that you gave an example of are California and Nevada. Cause this is my current dilemma…

    I was born in California (lived there til 5 yrs old) but lived 40 more yrs in Las Vegas. Well I recently (it’s been 1 yr) moved back to California.

    I have determined that I am gonna start a non-emergency medical transportation company (taking clients to dialysis and doctor’s appointments and such). I have been advised that I might wanna start with forming an LLC first. Where my dilemma comes in is where do I wanna start this company? Every time someone asks me, “where are you gonna do your company at” my answer is, “here in California to start, with future plans to do business out of Nevada as well!” Eventually relocating back to Nevada because reality has set in of just how expensive it is to live in California. LOL. So the sequence goes, California business (living here) > Nevada business (move back there) > California/Nevada business (with Nevada as my residence, commute to California as need be for the business). This is my honest plans and have ABSOLUTELY NOTHING to do with trying to skirt around state taxes, yada, yada…Honestly, I’m not astute enough to know what is best when it comes to avoiding taxes, etc…anyhow! Although, I’d be lying if I said that I haven’t heard from a handful of people that the best thing to do is to start my business in Nevada then bring it to California “doing business” out of there.

    Sorry if I got long-winded, but just need some advice on if this is a round about way to achieve my goals of doing the business out of both states? Should I consider doing it out of Nevada first even if I’m living in California yet my long term goals are to move back to Las Vegas? Which is cheapest to start as it concerns the LLC and such? But most importantly, from a business standpoint, which would you say is best long term when it comes to business, tax purposes, etc…? Thanks in advance for your time Matt!

    reply
    • Matt Horwitz June 27, 2019

      Hi Chris, it sounds like you’ll be doing business in both states. In that case, you’d form an LLC in one state and register it to do business (as a Foreign LLC) in the other state. In your personal state income returns, you’d be filing in both states, and your accountant would apportion your income between the two states, depending on how much is earned in each state.

      Which state you choose as the domestic LLC state (where the LLC is formed) won’t impact your LLC fees or personal taxes. It would end up being the same (having said that, we recommend you double-check with a tax professional). Reason why, is both domestic and foreign LLCs (in both CA and NV) still have to meet the state filing requirements.

      If it helps, it could be easier to think of your domestic LLC as the “base” LLC. And if NV is where you’ll ultimately reside, you could form a Nevada LLC now and register it to do business in California as a Foreign LLC. And if in the future, you stop doing business in California, you could withdrawal the California Foreign LLC registration and you’d be left with your domestic LLC in Nevada. Hope that helps!

      reply
      • Chris Cook June 27, 2019

        This ABSOLUTELY DOES help! Thanks a million Matt!

        reply
        • Matt Horwitz June 27, 2019

          You’re very welcome Chris!

          reply
  2. Tim Lovell July 1, 2019

    Matt I live 12 miles over the border from Nevada up north in CA. I want to do my business in Nevada. If I get an address, PO box and file for a foreign LLC will that eliminate from the CA taxes?? If not would getting a Nevada drivers licensee do the trick??
    Thanks and best regards,

    TIM

    reply
    • Matt Horwitz July 7, 2019

      Hi Tim, unfortunately, it’s not that simple. And furthermore, the rules about an LLC doing business in California don’t have to do with how close to the border one is or solely based off the address on their drivers license. The article I linked to explains this in more detail. Hope that helps.

      reply

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