What’s the best state in which to form an LLC?
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What’s the best state in which to form an LLC?

posted in: Small Business | 1

What’s the best state to form an LLC? I get this question all the time. No. The answer is not Wyoming! Simply put, your domicile or home state is the best option.

Don’t fall prey to the internet or your friends when it comes to business formation.

While some states may be less expensive than others, none of this truly makes a difference.

Let’s take a look at why.

Form an LLC

If you form an LLC in the state where you domicile, this is known as a domestic entity in your residency state.

Think about it. If you form an LLC outside of your domicile state and you’re doing business in your domicile state, then you are operating in your domicile state without registering. You would then be required to register that LLC as a foreign entity in your domicile state.

This means you’ll be paying for upkeep in two states, not one. Do you really want that hassle?

My guess is no unless you are truly doing business in more than one state.

Maintaining your LLC

It takes a little effort to maintain an entity in two states. In another post, I go over a checklist for keeping your LLC in good standing. For now, keep in mind you’ll have two entities to maintain, one in your domicile state and one in the originally registered state.

You’ll need to file 2 annual reports and pay 2 filing fees. You may also need registered agents in both states. Can you see that it’s double the work?

Let’s use me as an example. I originally had my business registered in Colorado because that’s where I lived and worked with my clients. Now I’ve moved to Florida. I could have left my business registered in Colorado, but I would need to keep up with the annual report filing and I would have the need for a registered agent in Colorado to maintain an address there. Plus, I wasn’t physically working there, so why maintain a business there? Instead, I closed the business with the state of Colorado and registered it with Florida. Now I only have one LLC to keep in good standing.

Doesn’t it offer tax savings?

Many people believe creating an LLC in a state other than their domicile will allow them to take advantage of tax savings.

While you might be convinced you will save money on taxes, this is incorrect. LLCs are typically pass-through entities. Pass-through income simply means all the business income gets taxed on the owners or members personal returns and NOT the business return. Simply registering the LLC in a no income tax state doesn’t mean you won’t owe any taxes.

Let’s say you form an LLC in Wyoming. Now you have a Wyoming entity which is doing business in your domicile state (most likely Florida, South Dakota or Texas) and you’ll still owe taxes in your domicile state. Since many full-time nomads choose no income tax states as their domicile, you may owe nothing to your domicile state. 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.

To reiterate, taxes from an LLC are most likely passed-through to your personal income and paid as part of your personal return.

As a refresher, you’ll pay for two annual filings (one a domestic LLC and one a foreign LLC), you’ll have to maintain records for both and you’ll still have pass-through income which gets included and taxed on your personal return.

Anyone see the benefit of registering your LLC in a state other than your domicile state now?

What about Wyoming?

Why Wyoming in the first place?

Do you live there? Do you have a physical office there?

If the answer is no, then why would you register there anyways?

Once again, the disadvantages of forming an LLC outside of your domicile state far outweigh any advantages. It is simply not worth the extra hassle, time and money needed to maintain records, pay filing fees, etc.

Again, I reiterate, form your LLC in your domicile state.

What about Delaware?

Delaware, another state known as a good state to register a business.

While Delaware is quite large in terms of business activity. In fact, according to 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 sentence from the state of Delaware? I’ll give you a hint. Fortune 500 corporation. Yes. That’s right. They’re big corporations that are publicly traded, not small LLCs.

I think we both know that you probably don’t fit into the publicly traded company category and shouldn’t use Delaware to register your LLC unless it is your domicile state.

What about my online business?

I get many questions from nomads about taxation of their online business. Many of us run businesses that are 100% remote as in there is no physical location.

Where should you form your LLC?

The answer, in this case, is still your domicile state. Am I starting to sound repetitive?

Most people run online businesses from home. Your home just happens to be mobile or location-independent. No problem. You still have ties to your domicile state and that’s why you should form an LLC there. It’s where you pay taxes regardless of whether there is a state income tax or not.

Remember, domicile is your home state. You use domicile as your legal address. You file taxes with that address, get auto insurance rates based on that address, and have a driver’s license that reflects that state. Even though you might not physically live in your domicile state, it is your biggest ties to any state. With your RV you might spend time in many states over the course of a year, but your legal address is still your domicile.

Location-independent business

Many people think the definition of doing business is about a customer’s location. For the most part, this is not true. (The only thing that concerns a customer’s location is sales tax, but that’s a whole different topic.)

More important is where you are running and operating your business. This is regardless of the location of your clients and customers. 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 an LLC in your domicile state. If not, let’s go over the reasons one more time.

  1. It is the least expensive
  2. No need to register a foreign LLC
  3. No need to submit and pay annual filings in 2 states

As nomads and full-time RVers, we shouldn’t have much of a struggle determining our domicile state. If you still don’t understand domicile state, then ask yourself which state issued your driver’s license? What address do you use to file your taxes? The answer to these question should tell you your domicile state.

Are you ready to get started? Form an LLC with CorpNet® today – Formation costs as Low as $79!