Where to form an LLC / Where to incorporate
One of the unique features of incorporating or forming an LLC (as opposed to filing a DBA) is that you do not necessarily have to form the company in the State where you do business. When deciding on which State to incorporate in, there are basically 2 choices:
- Your Home State
- Delaware, Nevada or Wyoming
For the majority of small businesses, incorporating or forming an LLC in your home state is usually the easiest and least expensive option. This is because virtually every state has laws that require you to "re-register" a Delaware or Nevada company in the state where it is actually doing business.
For example, if you form a Nevada corporation but your physical business is located in Colorado, the state of Colorado will want you to "re-register" as what’s called a "foreign corporation" (a company that was not originally incorporated in Colorado). This is especially true if you intend to get a bank account and business license or rent office space in your home state.
NOTE: We can file a Foreign Qualification in any State, click here to learn more and order online.
In most cases, registering as a "foreign corporation" or LLC will subject you to all the same taxes and fees as an in-state company. So you will probably have not avoided any taxes or fees, plus there is the added expense of registering as a "foreign corporation" in your home state and any annual fees in both states.
This is not to say there are not valid reasons for choosing another State, we just like our potential clients to be aware of the additional steps required when choosing a State outside of their home State. Further discussion with your attorney or other advisor is recommended.
Delaware is where most large corporations (Fortune 500, Nasdaq, etc.) are incorporated. The reason for this is that Delaware’s body of law is more business-oriented and they have a large and advanced business court system to handle complex legal litigation. It is the state of choice for both large corporations, foreign corporations and many fast-growing or high-potential companies.
Article: Read how an attorney that specializes in startups recommends setting up a Delaware Corporation.
Nevada has recently exploded in popularity for both large and small businesses. This is due to Nevada’s very pro-business climate, low-tax mentality and the lack of an information sharing agreement with the IRS (all other States share company information with the IRS). Also, shareholders in Nevada corporations are not public knowledge (though Officers/Directors and Members of LLC’s are).
Despite what you may have heard on radio and TV commercials touting the benefits of a Nevada corporation or LLC, many of those companies are encouraging business owners to engage in a sort of scheme that basically attempts to "trick" the home state and IRS into believing that the company is really operating in Nevada when, in fact, it is not. They encourage a business to utilize things like Nevada forwarding addresses, phone lines and bank accounts to accomplish this. This is not something we recommend for obvious reasons. There are legitimate ways to obtain "nexus" for your company in Nevada, but we highly recommend further discussion with your attorney in this matter.
Wyoming also has a very business-friendly climate and features some benefits compared to a Nevada entity including lower filing fees, lower annual fees, and more.
Common Reasons for Choosing Delaware, Wyoming or Nevada
- Prestige: a Nevada or Delaware entity is the chosen business entity of the largest, most successful and fastest growing companies in the world.
- Protection: predatory consumers or lawyers who attempt to threaten companies may be more hesitant to deal with a Nevada, Wyoming or Delaware company knowing that the body of law protecting the company may be more business friendly and protect the owners/shareholders more effectively. Also the identity of the company owners may be more difficult to ascertain.
- Convenience: in some cases, a business may find itself moving from State to State or having partners all over the country. In this case, some businesses find it easier to simply use a Nevada, Wyoming or Delaware entity as a sort of "headquarters" that maintains the company while it moves or expands to other States. This can be easier than continuously creating and dissolving in-state companies (and changing Tax ID Numbers, Registered Agent addresses, losing company credit profiles, etc.)
- High Growth or High Risk Company: if your company is fast-growing or engaged in a risky industry (such as fireworks or children’s toys), then Nevada, Wyoming or Delaware may provide the liability protection you need. Also, if your company is fast-growing, choosing Nevada or Delaware now may prevent you from needing to inevitably re-incorporate there in the future when your company needs to go public or receive venture funding, etc.
- Holding Property or Independent Contractor: A client who simply needs an entity and a bank account to purchase or hold property, accept payments as a contractor or receive investment money will form a Delaware, Nevada or Wyoming company for this purpose since they are really not "operating a business" in their home State. In fact, many of our clients simply form the company and leave it "on the shelf" until they are ready to engage in business.