Where should I form an LLC? I get this question quite often. The answer is not Wyoming or even Nevada! Simply put, your domicile state is the best option.
Don’t fall prey to the internet or a friend’s misguided advice when it comes to business formation.
While some states may be less expensive for maintenance costs than others, none of this truly makes a difference.
Why? Well, let’s take a deeper dive into it.
Many of us RV entrepreneurs and digital nomads run remote businesses. We are not dependent on one location for work and in many cases all the work is online. However, your LLC should be registered in your domicile state.
Many people believe the definition of doing business is about a customer’s location. For the most part, this is not true. In fact, it’s the opposite that is correct. If you aren’t physically going into a client’s office, then you’re doing business in your domicile state and that’s where the business should be registered.
Most important is where you are running and operating the 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.
Yes. You might be traveling all over the country, but your business address is still your domicile. It’s where you have the most ties since you declared it as your home state.
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 think this will save money, this is incorrect.
An LLC is a structure allowed by state statute and is not the entity structure for tax purposes. LLC businesses pay taxes as sole proprietors, partnerships or S corps and therefore, typically pass-through. 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 whether you have an LLC S-Corp, LLC partnership or an LLC sole proprietorship.
Also, there won’t be any savings if you end up doing physical business in another state. If this is the case, you might have to register as a foreign entity in that state which can be more expensive. This means you’ll have to maintain multiple annual filings with records for both, you may need to file a tax return for the business in the additional state and you’ll still have pass-through income which gets included and taxed on your personal return.
I particularly see people doing this with Nevada when they live in California to avoid the filing fees with the state of California. Trust me when I say that California doesn’t like this and will often find these businesses. Then you might be responsible for extra fees/penalties and still have the need to register in California.
Where’s the savings?
Let’s also understand what a domestic entity is vs. a foreign entity.
Domestic vs. foreign entity
Whenever an LLC conducts physical business in a state, it must register with that state. If this state is different than the original you registered with, then you’ll need to create a foreign entity in the new state. This means you’ll have to pay to file reports in this new state in addition to the original state.
So how is it helpful to have to file for a foreign entity in your home state if you registered the business elsewhere?
Forming an LLC can actually be a pretty simple process. Register with your home or domicile state, pay the fees, create articles of organization and get going. This can also be done by using a service to make sure it’s all done accurately. Either way. Let’s say you form an LLC in your domicile state.
If you choose to form an LLC in a state other than your domicile, you are not a domestic entity in your domicile state. Heck, you’re not even registered to do business in your domicile state.
Think about it. You form an LLC outside of your domicile state. Now you start conducting business within your domicile state and have clients locally to you. Technically, at this point, you are operating in your domicile state without a registered business. Now you might need to register your LLC as a foreign entity in your domicile state.
Again, this means you’ll be paying for maintaining your business in multiple states and might possibly owe taxes including franchise taxes. Unless you are truly doing physical business in more than one state, I suggest you keep it simple.
Maintaining your LLC
It takes a little effort to maintain an entity in multiple states. In another post, I go over a checklist for keeping your LLC in good standing. I’m not saying this can’t be done, but you need to understand if it’s the right fit for you and your business.
Remember you’ll need to file multiple annual reports and pay multiple filing fees. You may also need registered agents in multiple states. Can you see all the extra work?
Let’s use me as an example. I originally had my business registered in Colorado because that’s where I lived and physically worked with my clients. I’ve since 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. However, I wasn’t physically working there anymore, 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 and no extra places to file a tax return.
While there are exceptions, in most cases, you might as well form an LLC in your domicile state to keep things simple! Do you really want to pay the extra fees, possibly owe taxes, and have extra paperwork every year?
Wyoming vs. Delaware vs. Nevada
Was is it about Wyoming or Nevada in the first place?
Do you live there? Do you have a physical presence there?
If the answer is no, then why register there? Where’s the benefit?
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.
The other popular state I have people ask about is Delaware. Again, do you live there? Do you have a physical presence there?
While Delaware is quite large in terms of business activity, it’s typically big public corporations that call Delaware home. You need to consider this when looking at your business. Are you planning to grow and go public quickly? If so, then Delaware might be a good fit for you. If you’re planning on being a smaller entity, then why not keep things simple and use your domicile state in the first place?
Registering a remote business
I get many questions from digital nomads about taxation of a business run completely remotely.
You’re running a business from home; your home just happens to be mobile. No problem. Don’t you still have ties to your domicile state? That’s why you should still form an LLC there. It’s where you have the most ties.
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. Your business should still be based in your domicile state.
While there might be some exceptions to this general rule, in most cases, I suggest registering your LLC in your domicile state.
Keep it simple
By now you should understand why you need to form an LLC in your domicile state. If not, let’s go over a few reasons one more time.
- It has the least amount of hassle and fewer filings.
- No need to register as a foreign LLC in any other state.
- No need to submit and pay annual filings/taxes to another state.
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? Which state issues your vehicles tags/license plates? Where do you get your mail? The answer to these questions should tell you your domicile state.