Which LLC are You Forming: Domestic or Foreign?
There are 2 main types of LLCs, Foreign LLCs, and Domestic LLCs.
It’s very important to deeply understand the operations of your business before you choose the state to form your LLC.
Knowing where you stand will direct you towards the best state to establish your business.
Let’s go over the terms, if you create an LLC in your home state, your LLC is called a domestic LLC.
On the other hand, if you form your business outside your home state, you will register your business as a foreign LLC.
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 in the two states.
But if you are operating it solely in your local state, you would form a domestic LLC.
This explains why it is not the best choice to register your business outside your home state.
Simply put, business operations in more than one state will result in more state fees and payments.
Important note: You will pay registration fees twice in two states. You will also have a registered agent in the other state where you are not physically present.
Form Your LLC in Your Home State- Domestic LLC
Before your LLC needs expansion, it is recommended to set up your business in your home state. It is like the popular saying that there is no other place like home.
Your home state will make the whole process easier.
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.
All of these make it an excellent place to form your limited liability company.
Your Tax Payment
If you’re forming an LLC, S-Corp, or C-Corp, paying taxes will be an annual routine. With that said, as you set up your business, note the need to pay tax.
When you form an LLC in a foreign state to save tax, you very well might be doing it wrong.
Let me explain.
Assuming you create an LLC in Texas and operate the business in your home state (a different state, let’s say Maryland), you will still pay taxes in the two states.
In the United States, you pay tax where you make money.
It is even possible that you will pay more taxes and fees in Texas.
Every state has its own laws for establishing an LLC. Some states have strict rules while others are more lenient.
You must weigh your options on all fronts before deciding the state you will form your LLC in.
Note: If you looking for a great tool to calculate self-employment tax, check out that tool.
Forming an LLC Outside Your State- Forgein LLC
Growth is important when building a business and your home state can only expose you to so many clients.
If you are running a large corporation, you may consider leaving your home state to expand your business. For this, you need to identify the most convenient states for your business operations.
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.
Let’s check them out!
Delaware is among the top states to form an LLC. More than half of the publicly traded businesses in the US registered in Delaware!
With their simple filing process, Delaware makes it easy to start an LLC and to operate it. Delaware gives room for businesses.
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 enjoy fewer fees.
Delaware tries to entice business owners with its low filing fees and taxes on the franchise. Delaware Chancery Court takes on business cases only. This helps you resolve business cases faster than the average state.
The state doesn’t give residency mandates for registering an LLC. At the same time, the disclosure agreement and reporting are limited.
Registering an LLC in Delaware is easy. The information is available on the state’s website.
Wyoming is another great state to establish your LLC is in. Wyoming is a business-friendly state that offers a minimal level of reporting obligations.
As a 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.
Another plus for Wyoming is that the sales tax rate is extremely low compared to other states.
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.
Nevada is another ideal state for your company.
In Nevada LLC owners do 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, Nevada is notable for its high level of confidentiality to LLCs.
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!).
If you do choose the state of Nevada to file your LLC, be prepared to pay annual filing and fees for your business. You will get the information on how to set up an LLC in the state on their website.
Forming your business outside your home state is a good decision for large businesses that are interested in growth. Make sure you, just choose carefully.
Let the needs of your business allow you to choose the right location to form your LLC. A small business may need to be formed in another state. As mentioned before, the best state to form you LLC highly depends on the operations of your business.
Let me take you through some examples to explain.
Real Estate LLC
If you are running a real estate business and you are invested out of your state, it is recommended to form an LLC in that state.
In that example, you will operate and generate the income of the business in a specific state, where the property is located. Therefore it is best to form an LLC where you have your properties.
This will limit your costs.
What I am saying is simple. If you live in New York and own a property in Nevada, you will do all business operations in Nevada.
Online-Based and Consulting LLC
Many business owners think that they can create their LLC wherever they want because they have an online business
While that may be true, our experience shows that registering an online business in your home state as the best option.
There are many internet-based business owners 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 form your LLC.
The fact that your clients or customers are scattered throughout the country doesn’t matter.
The authorities expect you to establish your company in the state that you have the “biggest time investment in”. For an online 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.