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 an example:
- Daniel is a resident of California
- He runs an online business from his home in California
- He reads online that “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.
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 from wherever you are running the business.
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.
The Nevada Governor approved Assembly Bill 123in 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.
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 was 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.
Save yourself the money and the headache.
Just form your LLC in your home state or the state where you’re actually doing business.
Nevada Revised Statutes: Section 80.015
Nevada Revised Statutes: Section 80.055
Nevada Revised Statutes: Section 80.095
Nevada Revised Statutes: Section 76.020
Nevada Legislature: 2017 Assembly Bill 123
Nevada Secretary of State: Notice of 2017 Legislative Impacts
Nevada Legislature: Written testimony to the Senate Committee on Judiciary – Assembly Bill 123