If you are like most LLC owners, you started your LLC to
- Make Money
- Reduce liability
- Reduce taxes
- Increase privacy.
You did not start your LLC to pay more fees and complicate your life.
But if you file your LLC in a state where you don’t reside, you might be doing just that.
Despite what the Internet might lead you to believe, you are usually better to form your LLC in your home state.
Here’s why:
Delaware’s Makes Incorporating A Huge Business – For Them
States make huge revenues by attracting companies to establish their businesses with them. Delaware is the undisputed king as the home to corporate formation as more than 1.5 million businesses from around the world have incorporated there, including almost 70% of the Fortune 500.
Delaware is business friendly. For example, if you are taxed as a C-corp in California, you pay 8.84% state corporate income tax. But in Delaware, there is
- No state corporate income tax
- No sales tax
- No tax on interest/other investment income,
- And more tax advantages
And Delaware’s court system is business-friendly with business protecting statutes and a long line of pro-business court decisions.
Other States Want A Share of the Incorporating Revenue
Other states noticed the revenue Delaware was generating and started promoting the business formation industry in their states. At first, Nevada became a popular state to form your company.
According to the Tax Foundation, Wyoming and South Dakota are listed as the Number 1 and 2 most friendly states for business corporations and have no corporate or personal income tax. While Nevada has no corporate or personal income tax, they have a gross receipt tax.
Everyone is Advising You to Start an LLC in a Different State
A Google search of “Best place to form an LLC” will result in more than ONE BILLION results, with the first several pages filled with ads and articles like
- “Best State to Register and LLC”
- “Four Best States to Form an LLC”
- “What is the Best State to Form an LLC”
The overwhelming majority of the top-ranked articles advise you to pick one of the LLC-friendly states like Wyoming, South Dakota, Nevada, Delaware, etc.
But most of these articles don’t tell you the extra cost
Hidden Fees with a Foreign LLC
If you file your LLC in the state you live, it is called a domestic LLC.
If you file in another state, you have a foreign LLC, formed in one state but then registered to do business in your home state. The LLC is foreign to your home state.
When you file your LLC in Nevada, Wyoming, or South Dakota, you pay that state the appropriate filing and registrations fees.
But if you want to do business in your home state, you will need to pay fees and register as a foreign corporation. These fees are usually the same price as if you had registered your LLC in your home state. To operate in your state, customarily, you need to have the state issue a “Certificate of Authority” or a “Foreign LLC Registration.”
And, you will need the foreign state to issue you a “Certificate of Good Standing” or similar document that you will give to your home state.
Since you do not live in the foreign state, you will also need to pay a registered agent for your foreign LLC.
You are now paying more than the price of two registration fees for your LLC – one to the foreign state and one to your state. You are also paying for certifications and a registered agent.
And You Pay More EVERY Year
You have to pay renewal fees every year for your LLC.
And with a foreign LLC, you will be paying twice – once for your home state and again for the foreign state every year. You also have to pay registered agent fees for the foreign LLC.
And there are often severe penalties with your home state if you miss a filing, file incorrectly or fail to report required information about the foreing LLC.
Taxes Are Paid Where You Make Your Money
Unfortunately, many people think they can form an LLC in Nevada or Wyoming and they will not have to pay any taxes in their home state – even though they are conducting their business in their home state. While Nevada has no corporate or personal income tax, they have a gross receipt tax.
While there are some strategic tax planning strategies possible, simply opening a foreign LLC will not reduce your home state tax burden.
Even if you have an online business that you run from your house, the income generated is likely subject to tax obligations in your home state.
Examples:
Formed in Maryland – Only Does Business in Maryland
Jonny Landscaper forms his LLC in Maryland, and he only does work in Maryland. He definitely needs to file his LLC annual report and pay his Maryland LLC fees. And whether he chose to be taxed as a disregarded entity, partnership, or corporation, he will be paying Maryland income tax and possibly filing a Maryland corporate income tax return.
Formed in Nevada – Only Does Business in Maryland
Jonny Landscaper forms his LLC in Nevada but only does actual business in Maryland. Depending upon how he chose to be taxed by the IRS, he will be paying Maryland income taxes, either on his personal return or when he files a Maryland corporate return. He also needs to file a foreign entity filing in Maryland. He would probably owe no income tax in Nevada (as Nevada does not have income tax), but he will be taxed on his Maryland income. But he still needs to pay his annual Nevada LLC fees.
Formed in Nevada – Only Does Business in Nevada
Jonny Landscaper owns an LLC in Nevada and only does business in Nevada. Nevada has no individual or corporate taxes, so there is no need to file income tax returns in Nevada. However, if his business makes more than $4,000,000 per year ,he will need to file a Nevada Commerce Tax return. He still needs to pay his annual Nevada LLC fees.
Your Best Next Step in Forming Your LLC
Your best step is to get advice BEFORE you form your LLC.
If a foreign LLC offers no savings, increased costs, increased filing fees, and potential penalties, file a domestic LLC.
There are certain circumstances where a foreign LLC is a strategic plan, like some real estate businesses.
Let us show you the best LLC structure to help you and your business achieve your goals
At CE Accounting, we don’t just file forms and crunch numbers. We analyze your business and your business goals to minimize your tax obligations.
We help your business grow and thrive.
We are in the Washington DC metro area and have clients locally and nationwide.
Call today and let us show you your next best steps for minimizing your taxes.
“This article is not intended to give, and should not be relied upon for, legal tax advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of a qualified professional.”