By The LLC Attorney Team
Feb 22, 2024The decision on where to incorporate a business is important for every serious business owner. Among the factors that entrepreneurs should consider are the tax benefits of registering in one state over another and which state’s laws would be more beneficial to your company in the event of litigation, especially in a business-friendly state. Here, we will discuss some of the pros and cons to incorporating in your home state and when it makes sense to register in multiple states. We will also take a look at some states that have become popular for particular business registration purposes.
Let’s say your business has one brick-and-mortar location from which it operates in the state where you reside. The simplicity of registering your company there may seem straightforward enough, but what if you happened to live in a state where the corporate income tax rate was higher than the rate one state over? Also, what if you found out that another state didn’t even impose a corporate income tax?
“Tell me more about this mystical land of unicorns,” you say? Read on.
According to 2019 state corporate income tax data, two states can make the claim that they do not levy corporate income taxes: Wyoming and South Dakota. While that may be incentive enough to register in one those states, you must keep in mind that you must register your company in every state in which you intend to do business, as well. So, if you would like to take advantage of Wyoming’s nonexistent corporate income tax benefits but your company is based in Illinois where it transacts its business, you are fully within your rights to register in both states. However, you will now be responsible for paying the incorporation fee for both states, as well as the annual reporting fees for each. Every business is different, of course, when it comes to what it can afford paying on a yearly basis. For some, Wyoming’s corporate privacy laws may be worth the extra incorporation, alone. Ultimately, such a decision depends on the business owner’s objectives.
When you incorporate in multiple states, you must designate one state as your home, or “domestic LLC,” jurisdiction, and then any subsequent states would be considered “foreign LLC.” Another consideration here is that many states levy franchise taxes instead of, or in addition to, annual filing fees and state income taxes for the privilege of conducting business in them. Franchise taxes vary from state to state, as well as how
The answer is generally yes, but there are a few criteria that must be met when forming an LLC in a different state. The determining factors for where to establish a company are whether you have W2 employees or a physical office. If you have either of those in a state, then you need to create a company in that state. However, this does not stop you from from forming an llc holding company to protect important assets.
California is unique in having a requirement that if sales exceed 25% of your revenue to CA residents, then you must also register. This along with other laws make California a difficult place to do business, e.g. $800 is due to the franchise tax board fee regardless of whether you generate revenue or profit.
Those who do not have a substantial physical presence or nexus in a particular state, are free to select from the menu of available states for the entity and jurisdiction that best fits their needs. We encourage all business owners to consider their options strongly to avoid mismatching their needs.
The best state to form an LLC ultimately depends upon your personal situation, whether you're a Single Member or Multi Member LLC, your desire for privacy, and how important asset and personal liability protection is, etc. We recommend reviewing not only this page but also the pages specific to various state LLCs to be better prepared. Attorney consultations are also available for those desiring additional clarity.
Asset protection is important. We have seen too many business owners lose what they worked hard for due to frivolous lawsuits. This trend doesn’t seem to be going away as the US is a relatively litigious society. Often lawsuits can be used simply to intimidate and blackmail owners, regardless of the merit.
Those providing goods and services can be sued by their employees, clients, vendors, or even the government. The level of risk depends on the industry and the level of desired protection on the risk tolerance of you and your partners.
Wyoming and Nevada have the best asset protection statutes. They respect Single Member LLCs by providing both a strong corporate veil and charging order protection. In short, Single Member and Multi Member companies are not treated differently, unlike many other states.
We promote private companies as often as possible as it’s not good form to broadcast the assets you own to the broader world. Besides helping protect assets, it also keeps your home address off the internet. This is important because you may have family who lives there, or because you don’t want competitors knowing how large or small your company really is.
A Limited Liability Company’s default tax classification with the Internal Revenue Service is to be a pass-through entity. For Single Member LLCs, this is a Sole Proprietorship. For a Multi Member, it’s a partnership. This means, that regardless of where the company is created, the taxes flow to the owners and are determined by where the owner lives.
For that reason, there is no “best state to form an LLC for taxes”. An LLC can elect to be taxed as an S-Corp, a form of pass-through taxation, or a C-Corporation, which involves paying corporate taxes. Additionally, some states impose sales taxes or a gross receipts tax on LLCs, and the owners may also be subject to personal income tax or personal state income tax depending on where they reside. That is a decision best made by your accountant.
There's a reason why a majority of Fortunate 500 companies have incorporated in the lovely state of Delaware, and it's not for the abundance of peach blossoms (Delaware's state flower) found there. It is because of one main reason: its court system. It even sounds fancy – the Court of Chancery. Juries are not seated in disputes involved with Delaware corporations because the court is set up for cases to be heard by judges only - judges who specialize in corporate law. Cases are generally heard much more quickly in Delaware because corporate disputes have their own forum, away from non-business matters that may clog up the court systems of other jurisdictions. But, again, in order for corporations to enjoy the benefits of this specialized court system, they must play by Delaware incorporation rules and pay Delaware franchise taxes.
Delaware is a good fit for companies looking to raise capital from outside investors. In fact, most Venture Capitalists and Private Equity funds will require the company to be established in DE but will prefer a Corporation.
The state also has a Chancery Court with significant precedence in corporate law. It is extremely shareholder and board friendly. For these reasons, companies looking to eventually go public inevitably end up in Delaware.
It’s important to note, though, that these benefits do not come cheaply. An LLC must pay $300 to the Delaware Division of Corporations per year to remain open. This amount is due by June 1st, of the next year regardless of when formation occurred. For example, if the company was formed on December 31st, then the fee is still due within six months.
Delaware allows online filings, but charges $50 extra for a 24-hour turnaround. Companies unwilling to pay end up waiting weeks. Wyoming and New Mexico respect small businesses and don’t charge expedited fees for online filing, which is how we believe business should be done.
Wyoming is the preeminent destination for small businesses. The state has low fees, the strongest asset protection, and allows anonymous LLCs. This unique intersection of benefits was intentionally created to attract national and international companies. For example, not only are ownership and management details kept out of public databases, but even Single Member LLCs enjoy charging order protection. This means if you are sued personally the creditor cannot seize your business owners personal assets. Similarly, if the company is sued WY has the strongest corporate veil which prevents your personal property from being at risk.
Wyoming also began offering a Chancery Court in 2021 for matters which require an expedited hearing. This can be particularly helpful if there is an existential business dispute which needs to be resolved promptly.
NM is a small player for incorporations, but has a place for cost conscious companies and those desiring privacy. New Mexico allows anonymous LLCs, but only charges a $50 state fee to start and has no annual report. The company only needs to maintain a registered agent, like every other state, to remain in Good Standing.
Another state that has emerged as a popular destination for incorporating entities is Nevada. Like Wyoming, Nevada provides appealing privacy laws to businesses. Among some of these benefits are minimal reporting requirements and the fact that shareholders and certain investors are not required to be disclosed publicly. While Nevada does not have corporate income taxes, it does levy gross receipts taxes and sales tax on businesses, which some believe to be less economically sound for various reasons. Also, companies that fall under Nevada’s unemployment compensation laws and report gross wages to the Nevada Employment Security Division fall under Nevada’s quarterly modified business tax.
Nevada for over a long period provided the best LLCs. The government became greedy, however, and has raised fees almost every year for a decade. At the same time, Wyoming developed stronger laws with lower fees, and New Mexico kept its fees among the lowest.
We cannot in good faith recommend a NV company to anyone at this time. Those who formed one there can consider moving to another state to avoid the needless fees.
The above examples demonstrate that a lot more goes into the decision of where to incorporate than just whether you can pay a lower yearly filing fee. Here are some questions you should consider when determining where to register your business:
As always, it is advised to reach out to a legal and/or tax professional to discuss your business options to help make the best decision for you and your company. If you’re planning to form a business entity in Colorado, you should also read up on business licenses, articles of organization, and EINs.
Choosing a state is like picking from a menu. Some states specialize, whereas others haven’t given their statutes much thought. Specialties include low cost, privacy, asset protection, low taxes, minimal regulation, mediating business disputes, etc.
Below we cover traditional favorites such as Wyoming, Delaware, Nevada, and New Mexico. These are business friendly states which actively court companies from across the USA and the world.
Their laws have been intentionally crafted and are not “loopholes” as some suggest. Their legislatures knew what they were doing when they wrote the laws… promoting small to large businesses to set up shop.
This article will cover the best states in general, plus from the perspective of real estate, online, and non-resident companies
Our preferred state to form a real estate holding company is Wyoming due to its strong asset protection laws and privacy benefits for a limited liability company. The strong asset protection laws and privacy are the determining factors which drive most real estate investors to the state.
Nevada used to be popular, but is several hundred dollars per year more expensive. Wyoming LLCs are also anonymous. This means the public cannot see who owns the property, which assists with avoiding lawsuits and treasure hunters.
We recommend a holding company in Wyoming. The holding company then owns independently formed LLCs which own the properties directly. Most states allow a Wyoming LLC to own and rent real estate as it’s not considered to be doing business, whereas business law in other states such as California require an in-state LLC.
Online companies are considered location independent and may form an LLC where they desire. LLC owners should consider the specific benefits of each state when making their decision. For which state is the best fit, look at our explanation above regarding Wyoming, Delaware, and New Mexico.
Wyoming:Good for websites that sell products or services given the asset protection. Whether it’s candles, dog food, or marketing, customers or vendors will have a difficult time suing you and obtaining a judgment for your assets.
Delaware: Great if you’re raising cash or looking to go public. Otherwise, too expensive.
New Mexico: Fits for those not selling products or services, and just wanting to hide their identity.
If a non-resident is forming a company to raise capital, then Delaware is the best state. If you intend to raise capital from investors, then an LLC will not work, however. You will want to choose a Delaware Corporation. Corporations can issue stock to investors and employees, allow different share types, e.g. common and preferred, and have additional mechanisms for oversight such as the Board of Directors.
If not, then either Wyoming or New Mexico would be suitable options. Wyoming has stronger asset protection laws, ensuring that your personal assets are protected from business liabilities. The initial filing fee is $100 with a $60 annual report. Additionally, there is a $2 convenience fee for filing online.
New Mexico is the better choice if asset protection is not desired. New Mexico LLCs are anonymous, just like Wyoming and Delaware, but the initial fee is only $50 and there is no annual report filing requirement, only that you maintain a registered agent.
In conclusion, the choice of the best state to form an LLC hinges on various factors, including potential tax savings, your business structure, and specific needs such as privacy and asset protection. States like Wyoming, Delaware, and New Mexico cater to diverse business requirements, each offering unique advantages.
In making your decision, it is advisable to consider the specific needs of your business, and we recommend further research and, if necessary, consultation with legal professionals to ensure a well-informed choice that aligns with your goals and preferences.
Please fill out our contact form if you have any questions for us about forming your LLC. Additionally, for those seeking further