Selecting the Right State to Form Your LLC
This is one of those questions where if I was paid a quarter for every time I was asked this question, I would be a rich man indeed. There are many things to consider when choosing the right state to form your LLC in.
What is the Right State to Form Your LLC?
There is no one “right answer” for everyone. The right answer depends on a number of circumstances, including where you live and where you want to transact business, and the right answer also depends on your preferences, including your concern for anonymity, annual fees, asset protection, and more.
To help you select the right state to form your LLC, we’ve created the chart below. There are some important rules to consider, when reviewing this chart:
- Operating Company versus Holding Company. An “Operating Company” is the company that is actively generating revenue (not passive income). A “Holding Company” is the company that is not actively generating revenue, but can earn passive income through potential assets it holds.
- Transacting Business. This means different things to different states, which is why it’s difficult to give you specifics. Where is your company operating? What does “operating” even mean? Most states say, if you have a W2 employee in the state, you’re operating in the state. If you store product, you’re operating in the state. If you have a “base of operations” in the state, you’re operating in the state. If 25% or more of your customers come from one specific state, you’re probably “doing business” in that state.
- The Operating Company. The Operating Company must register in all states its “transacting business”. This means you care about where it’s filed, and if you care about anonymity, then you need to have it owned by a Holding Company instead of yourself personally.
- The Holding Company. The Holding Company can be registered anywhere, because technically it is only “owning another company” which is not considered “operating in a state” (one exception to this rule is California, which places financial limits on companies owned by California residents). You care about “asset protection” at the Holding Company level.
- File Your Operating Company in the States it’s Transacting Business. You can have one operating company, filed in your home state, and then foreign file it in other states you’re doing business.
- Anonymous Holding Company. Should not be an Operating Company. It should hold (i.e. own) the Operating Company, which permits you to keep your personal name off of the secretary of state websites, no matter where your Operating Company is located.
Given the above rules, consider the following chart.
|Delaware||New Mexico||Nevada||Wyoming||Any Other State?|
|If “transacting business”, do you need to register a company in the state?||Yes|
|Great for Asset Protection / Charging Order Protection?||Uses Old LLC Act||Uses Old LLC Act||CA, DC, FL, IA, ID, NE, NJ, UT|
|Doesn’t disclose ownership information on the Internet?||Not Anonymous||AL, CO, GA, IA, VA|
|Doesn’t require disclosure of ownership information to the State at all?||Must Disclose||Must Disclose||Must Disclose||IA, GA, CO|
|No Need to File Annual Reports / Pay Annual Fees?||Expensive Annual Fees||Expensive Annual Fees||Annual Reports Required|
|No corporate income tax?||There is Corporate Income Tax||NV, OH, SD, TX, WA|
The chart can be hard to understand, however, because there are a lot of nuances and detailed information regarding every cell.
First, there are two “Acts” that govern LLC law in the United States — what I call “the Old Act” and the “Revised Uniform Limited Liability Company Act” (or RULLCA). The RULLCA is still relatively new, so there hasn’t been widespread adoption. One of the primary reasons for this new Act, is to make it harder to obtain charging order and foreclose on a LLC. Therefore, the RULLCA is considered “stronger” for “asset protection purposes.” It does require disclosure of ownership information, but the States of Iowa and Wyoming have passed the RULLCA with Anonymity.
Second, don’t get confused about corporate income tax. If you have a pass-through entity, the company is NOT paying corporate income tax. The profits / losses “flow-through” to the owners, and the owners report the profits or losses on their personal income taxes.
Third, anonymity. Only a few states permit anonymity (i.e. defined as not publishing ownership information on the Internet). Nevada is not one of them. Of the states listed, only one state (i.e. New Mexico) doesn’t want to know about ownership information at all. The other states (i.e. Delaware and Wyoming) require disclosure of ownership information, although they keep it private (although if they change their laws, it can expose folks ownership information later). Therefore, New Mexico (along with IA, GA and CO) are considered “more anonymous” because the state cannot publish such information, even if it wanted to.
Fourth, most states require you register a LLC that you own in the state you reside, even if you’re not doing business in that state. Therefore, using a NM or DE or WY company to conduct business anonymously will only work for a little while, until your home state gets wise and makes a demand. You’re much better off addressing this from the start, so you don’t have to make costly changes later. Read our knowledge base article on this topic.