Domestic LLC vs Foreign LLC
A Domestic LLC is a limited liability company that is formed in the state that you reside and manage your LLC in, aka where you live, aka “your home state.” On the other hand, if you decide to register your LLC in another state that is not your home state, that would be considered a Foreign LLC.
We need to take a second to really understand the difference between “filing an LLC ” and “registering an LLC”.
Filing your LLC with a service like Incorporate Fast or Northwest is the first step in the process of forming a business. Registering an LLC on the other hand is usually an additional step that businesses do in order to operate in additional states.
Therefore the purpose of the foreign LLC is to help you conduct your businesses in several states without setting up multiple LLCs.
As a result, two primary factors determine an LLC:
1. Where you form the company
2. The location/s you decide to operate your LLC
If you are operating your business from another state that is not your home state, you must register it as a foreign LLC.
But if you are operating your business in our home state, you would file a domestic LLC.
Which is the Best State to Form LLC?
You should absolutely file your limited liability company (LLC) in the state that you are conducting business. Trying to file in another state will default your business as a foreign LLC.
Why is filing in a foreign state a bad idea?
If you try to file an LLC in a foreign state you’ll be treated as a foreign LLC and then you’ll probably be subjected to corporate and franchise taxes as well as filing fees for the foreign state, in addition to the state that you’re doing business.
For example, if you decide to form an LLC in Texas, yet you work and live in Maryland then you’ll be required to register your Texas LLC as a foreign LLC in your home state. You would then have an LLC in Maryland and Texas.
This would result in the following headache:
The headache of forming an LLC outside of your home state far outweigh the perceived advantages of not paying corporate tax.
To make things clear, it is best to file your LLC in the state that you do business and if that’s your home state then make sure you file your business there.
There are a few exceptions:
- Non-US Residents: If you are a non us resident and you would like to form an LLC in the United States, then you don’t have a “home state” and therefore you can choose any state.
- Real Estate Investors: Many real estate investors form a parent LLC in a foreign state which owns a child LLC in the property state, more on that below.
Form Your LLC in Your Home State- Domestic LLC
As mentioned above, If your looking to file your business then your home state is the place to do it!
An LLC in your home state is the best long-term LLC strategy and honestly, it’s the easiest to set up. You are probably familiar with the laws of your state and you know how to get information. Also, you will enjoy easy access to government offices.
If you are running the business from a coffee shop or location near your house, you are most probably conducting business in that state. That would then be the state where you live and you should file your LLC in that state. Once your operations expand you can start thinking about registering a foreign LLC.
If you decide to use an LLC formation service like Incorpoate.com or MyCorporateion, be sure to ask them all the questions that you have in regard to individual income tax and your home state LLC.
If you’re forming an LLC, S-Corp, or C-Corp, paying income taxes will be an annual routine, so make sure you get an accountant for your LLC. With that said, as you set up your business, note the need to pay tax.
If you try to register as a foreign LLC to save tax, you very well might be doing it wrong and most probably have incorrect information. In the United States, you pay tax where you make money.
That means that a foreign LLC would be required to pay income taxes in your home state if your home state is “where you make money”. Every state has its own laws for establishing an LLC. Some states have strict rules while others are more lenient.
Form an LLC Outside Your State- Forgein LLC
As mentioned above, to form an LLC in a foreign state in order to avoid sales tax or the income tax rate simply isn’t worth the headache. At the end of the day, you will be required to file income tax in the state that you are doing business.
Growth is important when building a business and your home state can only expose you to so much. If you want to file your limited liability company (LLC) in the state you do business in and then register a foreign LLC in a state that you expand to, that’s totally fine and understandable.
Generally speaking, small business owners don’t want to deal with unnecessary filing costs, added annual reports, additional sales tax and other costly expenses that aren’t needed.
If you fit in the category of company expansion. there are plenty of good states for your LLC to grow and prosper. Three awesome states are Delaware, Wyoming, and Nevada. These states have specific enabling factors for every business. We will touch upon them below.
Forming an LLC in Delaware
Delaware LLC Related Facts:
- Corporate tax rate: 8.7%
- Individual income tax rate: 0% -6.6%
- Sales tax rate: 0%
- One time LLC filing fee: $90
Delaware is among the top states for small and big businesses to form an LLC. More than half of the publicly traded businesses in the US registered in Delaware!
With their simple filing process, great asset protection, and ability to file an anonymous LLC, Delaware makes a great state for LLC formation.
Establishing a business in Delaware also comes with low taxes and fees. Another note worth adding, Delaware doesn’t tax out-of-state income so your foreign LLC will a lower income tax rate on items of that kind.
Delaware tries to entice business owners with its low filing fees and 0% sales tax. But just because there isn’t sales tax doesn’t mean that there won’t be other income taxes and annual fees for your business needs to pay. Registering an LLC in Delaware is easy. The information is available on the state’s website.
Forming an LLC in Wyoming
Wyoming LLC Related Facts:
- Corporate tax rate: 0%
- Individual income tax rate: 0 %
- Sales tax rate: 4%
- One time LLC filing fee: $100
Wyoming is another great state to start an LLC. Wyoming is a business-friendly state that offers a minimal level of reporting obligations.
Filing a business in Wyoming has a low filing fee of $100 and an annual reporting fee of $50. As a Wyoming business owner, you do not pay corporate income, franchise, or personal income tax. The state offers a lifetime proxy to business owners.
With a lifetime proxy, you can choose a person to represent your place in the business. That gives LLC owners the choice to stay anonymous, just like in Delaware.
Another plus for Wyoming is that the sales tax rate is extremely low compared to the average sales tax rate.
All of these advantages make it easy and exciting to set up an LLC in Wyoming. If you are thinking about setting up a foreign LLC in Wyoming, check out the Wyoming secretary of state site here.
Forming an LLC in Nevada
Nevada LLC Related Facts:
- Corporate tax rate: 0%
- Individual income tax rate: 0%
- Sales tax rate: 4.6%, depending on local municipalities
- One time LLC filing fee: $425
Nevada is another ideal state for setting up an LLC. Business owners in Nevada are exposed to unbelievably low tax rates. A business does not pay a corporate income tax or franchise tax.
The state offers a high level of privacy and you can stay anonymous during your public filings. Similar to Wyoming and Delaware, Nevada is notable for its high level of confidentiality to LLCs that conduct business in the state.
Nevada will not share your information with the IRS and you don’t have to set up an operating agreement (although it’s highly recommended to do both!).
If you do choose the state of Nevada to file your LLC, be prepared to pay annual filing and fees for your business that are not cheap. The Nevada filing fee is $425 and the annual report costs $350 per year. You will get the information on how to set up an LLC in the state on their website.
Best State to Form an LLC for Real Estate
Although I’ve mentioned many times that it is recommended to file your business in your home state, that is not the case with real estate LLCs.
When it comes to LLC formation and real estate, it is recommended to file the business in the state that you are generating income.
Income generated from real estate is almost always restricted to the state that the property is located. therefore, forming an LLC in the state in which the property is located is the recommended option in relation to reducing costs.
For example, If you are running a real estate business in California but you have properties in New York, it is recommended to form an LLC in New York.
Creating an LLC in New York would mean you only need to pay for filing fees and other taxes to the state that you conduct business, which is in New York.
Best State to Form an LLC for an Online Business
Many business owners think that they can create their LLC wherever they want because they have an online business. Unfortunately, that simply isn’t the case.
If you own an online business in South Dakota and sell your services online, then you essentially conduct business in South Dakota and will pay taxes there.
There are many online businesses that work from home, coffee shops, or local libraries. From a legal point of view, the state where you run your business is the state that you should pay your personal income taxes.
The fact that your clients or customers are scattered throughout the country doesn’t matter, your revenue still goes to a bank account in your state.
The authorities expect you to establish your company in the state that you have the “biggest time investment in”. For an internet-based business, that is almost always your home state of residency.
However, if you have to travel around the country to consult, registering your business in other states that you operate in could be an option.
Wherever you set up your LLC, make sure it works well for your business needs. Your home state is the first place to check. If you want to expand, seek other states with enabling policies. The nature of your business is the decision-maker, remember that.