What’s the best state to form a LLC? I get this question all the time. No. The answer is not Wyoming, Nevada or Delaware! Simply put, your domicile or home state is the best option.
Don’t fall prey to the internet when it says that:
“Nevada has no corporate income tax,” “Wyoming LLCs are the most affordable,” or“Delaware is the best state to form a LLC!”
To be completely honest with you, none of this matters.
The disadvantages of forming a LLC outside of your home state far outweigh any perceived advantages.
Let me explain why.
Domestic LLC vs. Foreign LLC
If you form a LLC in the state where you domicile (aka your residency state), this is known as a domestic LLC.
If you form a LLC outside of your domicile state, you’ll be required to register that out-of-state LLC as a foreign entity in your domicile state.
For example, if you form a LLC in Nevada and you don’t live there, then you’ll be required to register that Nevada company in your domicile state, as a foreign entity, in order to do business in your home state.
What does this mean?
Let’s use Nevada for the following example. However, the same would apply to any out-of-state LLC.
– you now have 2 LLCs, one in Nevada and one in your domicile state
– you have to pay 2 state filing fees, Nevada and your domicile state
– you will have to pay for a registered agent in order to maintain an address in Nevada
– you now have to file and pay 2 annual report fees (one to each state)
As you can see, this can easily add up to double your costs and headaches, since you’ll have to keep two LLCs in good standing.
Tax Savings = False
Many people form a LLC in a state other than their domicile to take advantage of “tax savings.”
While you might be convinced you will save money on taxes, this is false. LLCs are typically pass-through entities. This means taxes are paid wherever you are domiciled or possibly, where the money is earned. Simply registering the LLC in a no income tax state doesn’t mean you won’t any taxes.
Let’s say you form a LLC in Nevada. Now you have a Nevada LLC which is doing business in your domicile state (not Nevada) and you’ll still owe taxes in your domicile state. This may be a moot point since many full-time nomads choose no income tax states as their domicile. However, it’s still something you need to keep in mind. As a pass-through entity taxes are not necessarily owed where the business is registered, but where you are domiciled.
Maybe this will help you to remember: Taxes are paid where the money is made. In the digital nomad’s case, this means your domicile state.
As a refresher, your foreign LLC will owe taxes in your home state and you may owe additional taxes and fees in Nevada.
So what’s all this talk about Nevada?
Again, most of the benefits of forming a LLC outside your domicile are not accurate.
However, the state itself and the companies promoting it stand to gain financially by the businesses being formed within that state’s system.
For example, if 40,000 LLCs are formed each year in Nevada, that’s approximately $3 million dollars in annual revenue for the state.
This is for the state of Nevada alone. Never mind the tens of millions of dollars made by the companies promoting Nevada as a great place to form your LLC.
You know what’s even better. For all the hype about Nevada, there really aren’t that many businesses formed there every year.
Lastly, Nevada companies rank the highest in fraudulent activity. Think about that!
Do you want your business associated with a state that has high fraudulent activity?
If you already live in Nevada, then keep your business in Nevada. However, many of us don’t domicile in Nevada, so it doesn’t make sense to register a business there.
I reiterate. If you don’t live in Nevada, it is much better to form your LLC in your domicile or residency state.
So what about Wyoming?
While there is far less fraudulent activity in Wyoming compared to Nevada, this state is also not the greatest option.
Once 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. (See above What does this mean?)
Again, I reiterate, form a LLC in your domicile state.
Delaware, the last state on the short-list of “good” states to register a LLC.
While Delaware is quite large in terms of business activity. In fact, according the state’s website, “the state of Delaware is a leading domicile for U.S. and international corporations. More than 1,000,000 business entities have made Delaware their legal home. More than 66% of the Fortune 500 have chosen Delaware as their legal home.”
Notice anything special about the companies using Delaware? That’s right. They’re corporations, not LLCs.
Honestly, Delaware is a great state to form a corporation, but let’s not dwell on the details.
Let’s just know that you don’t fit into the publicly trade company category and shouldn’t use Delaware to register your LLC.
However, if you do live in Delaware, then please do form your LLC there.
But I have an online business
I get many of questions like, “my business is 100% online. Where should I form a LLC?”
The answer in this case is still your domicile state. Am I starting to sound repetitive?
Most people run online businesses from a home. Your just happens to be mobile. No problem. You are still mostly doing business in your domicile state and that’s why you should form a LLC there.
Even if you travel often or run a location-independent business, the state doesn’t care. Pick the state where you have the greatest connection which should be your domicile. This is the state of your residency, where you have your driver’s license, and where you pay state taxes or not, if you choose a no income tax state.
My customers are all over the country
Many people think the legal definition of doing business is about the customer’s location. I’m here to tell you, it’s not!
It’s about where you are running and operating the business.
It doesn’t matter if you have customers or clients located in different states. You register and run your business from your domicile state and that’s still where you need to register.
By now you should understand why you need to form a LLC in your domicile state.
LLC in your domicile state
Why register in your domicile state? Because it is the least expensive, easiest to setup and the best long-term strategy to form a 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:
If you struggle with determining your domicile state, ask yourself the following questions:
– Which state do you claim for residency? This state should issue your driver’s license.
– Where do you pay state taxes?
– Does the business have a physical office or location? If so, where is it?
I hope this information cleared up some of the hype and misinformation about which state is best to form a LLC.
Now tell me in the comments which state you chose for your LLC and why 😉