As you prepare to form your limited liability company (LLC), you've probably heard that the state where you file the paperwork makes a difference. Some states offer LLCs more financial advantages than others, and that means you should carefully weigh your options before filing. Here are some of the factors to consider when choosing the best state to form an LLC.
Many people form LLCs in their home state because it's the most obvious choice, or they didn't know they had a choice. Filing in your home state can be a good option for many entrepreneurs, particularly those who have a home, physical office or store, and conduct the vast majority or all of their business in their home state. If your business meets all of these criteria, you may have no other choice but to file in your home state. Moreover, filing in your home state could save you money on fees at the outset as well as annually—an LLC does not have to register as a “foreign LLC” if it conducts business in that state. Note, though, that “doing business” generally requires an active business presence if not a physical office. Also, an LLC that does business in its state of filing does not need to find and pay a registered agent to represent its interests within that state.
However, it's important to consider the fees and state income taxes your business may be required to pay if you file in your home state. For that reason, if your business has no physical facility or storefront—a consulting business, for example—or if you plan on conducting the majority of your business out of state, you should consider starting an LLC in a state other than your home state.
The most popular choice for those forming an LLC continues to be Delaware. Why? Delaware has a solid reputation as one of the most business-friendly jurisdictions in the country. Notably, Delaware doesn't tax out-of-state income, which can mean an enormous tax savings for Delaware LLCs who do very little or no business in the state itself. In addition, its initial filing fees and franchise taxes are quite low. Another plus in Delaware's column is its Chancery Court, unique among the fifty states, which handles only business matters. This means that cases involving business disputes are handled much faster in Delaware than they might be in other states where they have to wait their turn amongst all types of civil matters. Along the same lines, the judges of the Chancery Court are well-versed in business matters, whereas a judge in a general court in another state may not be as familiar with applicable business laws and procedures.
As its own pro-business reputation rises, Nevada is a state with advantages for LLCs. Business owners especially appreciate that Nevada doesn't tax business income, capital gains, or inheritance. In addition, it has no franchise taxes (although it does have nominal business license and annual fees). Moreover, Nevada doesn't require annual meetings or operating agreements in order to stay compliant with state law. Notably, Nevada also has no information-sharing agreement with the Internal Revenue Service (IRS). Indeed, the state doesn't require much disclosure at all, allowing Nevada LLC owners to remain anonymous in public filings, which means those who value privacy regarding their business may find Nevada to be a good fit.
Above all, Delaware and Nevada both offer relatively fast processing times, which can be a big advantage for those who want to get their businesses up and running as quickly as possible.
Although not as well-known as Delaware and Nevada in the world of LLC formation, Wyoming is gaining ground fast. Similar to Nevada, Wyoming does not have business income or franchise taxes. It also has a “lifetime proxy,” which allows even more anonymity than Nevada, in a sense. Through this proxy, an individual can privately express his or her vote through a selected person who holds the stock or shares.
As you can see, there are many factors to consider when deciding where to form an LLC, but doing your homework up front can save you a lot of headaches—and hard-earned cash—down the road.
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One state the article did not mention was South Dakota.