Forming an LLC is an exciting first or next step for your business, but you need to ensure you make the right decisions to make your life easier in the future as your business grows. Today, weâll guide you through everything you need to know to confidently decide where to form your LLC.Â
Just looking for a quick answer? The best state to form your limited liability company (LLC) in is nearly always your home state. This is because your company is doing business primarily in that state, whether it is a physical business or an online business.
There are two exceptions to this rule:
1)  You are a non-US resident (in which case you can choose any state and we recommend Wyoming or Delaware)
2) Â Or if you have a real estate LLC (weâll talk about why this is below, but essentially the "home state rule" doesn't apply here)
You can read our Ultimate Guide on deciding between Wyoming vs Delaware here but Doola's recommendation is:
All LLCs are overseen at a state level. Any LLC that has been registered in that state, and conducts business there, is called a Domestic LLC. Any business that has been formed within that state, but conducts business elsewhere, is a Foreign LLC.
For example, if you live and do business in North Carolina, you would form your LLC there. Because you do your business in that state, your LLC is a Domestic LLC.
However, if you formed your LLC in North Carolina but did business in Florida, your business would be a Foreign LLC.
This setup allows businesses to operate in several states without having to form several LLCs and enables states to collect revenue from each business that operates there.
The main disadvantage of a Foreign LLC is that you end up having to pay twice the fees as you would with just a Domestic LLC.
For instance, if you form an LLC in Wyoming and it is not your home state, you will then need to register that Wyoming LLC as a Foreign LLC in your home state before you can conduct business in your home state.
That means two lots of State Filing Fees, the cost of a Registered Agent to use their address in the âforeignâ state, and two lots of Annual Report fees. This can complicate things, cost you more as your accountant has more to do, and may make it more likely that you forget to report your activity.
Whether you are unaware of the fact that you need to register your business as a foreign entity in your home state when forming a Foreign LLC or you try to get around not paying your full amount of tax, there are consequences if you donât report your full business activity.
These possible consequences include:
·   fines (ranges from a few hundred dollars to a few thousand)
·   penalties
·   interest on time you havenât paid
·   court costs
·   restrictions on your businessâs activity
If you are doing business in another state, you must register as a Foreign LLC in that state. Not doing so is simply not worth it. Connecticut collected $1.3million in 2018 from businesses that hadnât registered, and the average fine was $4,600. Thatâs a lot of money, so itâs best to get your legal ducks in a row.
The simplest way to figure out if you need to register as a Foreign LLC elsewhere besides your home state is to think about where youâre making money. If youâre making a significant amount of money within another state, then you need to register there and report those earnings. This can get complicated, so if you are working within multiple states, itâs best to work with an accountant who can advise you and ensure you stay on the right side of the law.
There are some states, however, that have garnered a reputation for being âmagical statesâ; they are believed to be more beneficial to register in. So, is this true?Â
Wyoming and Delaware, among other states such as Nevada, have built a reputation among business owners for offering special benefits if you register as a Foreign LLC there.
There are indeed a couple of benefits, which weâll look at below. However, it is very unlikely that these benefits will extend to the LLCs operating outside of the states themselves.
Wyoming offers low tax rates with no income or franchise tax charges and the annual report fee is only $50. They also have a sales tax rate below the national average of only 4%.
This state also offers enhanced privacy protection as LLC owners are allowed to remain anonymous on the public record, which is obviously unusual. This is beneficial to business owners who would prefer to keep a low profile or donât want the actions of the business associated with their names.
As well as the increased privacy protection, as also offered by Wyoming, Delaware has better legal protection than other states. They have a system known as the âDelaware Court of Chanceryâ which is specifically designed to deal with corporate legal issues. Corporate cases are heard without the presence of a jury so it is seen to be much more business-friendly.
You do not have to be a citizen or resident of the United States to form an LLC, and you are able to choose any state to form your LLC in.
The state you choose typically depends on how you intend to run the business. If you are going to have a physical building for business operations with employees, your LLC should be formed in the âhomeâ state of the business. For example, if you run a successful chain of salons in Canada and you intend to open a branch in Washington state, then you should form your LLC in Washington.
If you are going to operate in the US but wonât have a physical presence, you can choose any state you like to form your LLC, but the way in which you apply for an Employer Identification Number (EIN) or bank account may differ, and you may have additional requirements for filing with the IRS.
The type of federal and state taxes you will need to pay will also depend on your individual business and how it obtains revenue.
Of course, this all makes sense if youâre forming a physical storefront or in-person service, but many of us do business online with customers all over the country or even all over the world. What should you do if you make sales all over the country?
If your business is totally internet-based and your customers come from all over the country, or the world, the best state to form an online LLC is still your home state. Itâs likely that your online business will be run from your home, or at least somewhere close to it, so that is where the business is being transacted which is the factor that matters.
If you operate away from home a lot or have a location-independent business, you should choose the state that you are connected to in the strongest way, such as where your primary residence is located, where your family lives, where your driverâs license is registered to or the state in which you are required to pay taxes to.
As we mentioned at the top of this article, things are different if youâre forming an LLC for your real estate business.
If your LLC is real estate-focused, the home state rule doesnât always apply. This is due to the fact that related business and generated income is typically kept entirely within the state in which the property is located. The best way to limit costs, in this case, is to form your LLC in the state(s) where the properties you own or work with are located.
For instance, say you live in Pennsylvania but own a rental property in New York. This means that all of your business activities (in this regard) occur in New York, and so this is where you should form your LLC. This will enable you to only have to pay costs, including formation fees, state income taxes, and maintenance fees in one state.
If youâre an investor and intend to hold multiple properties in different states under one LLC (some people prefer to form separate entities for each investment, so do your research), make sure you register a Foreign LLC in each state you own property in.
Forming an LLC in your home state (a Domestic LLC) is simply more affordable and easier to set up than a Foreign LLC, and will be better for your LLC in the long term. Unless you are a non-US citizen or resident, or a real estate-focused LLC, you should always form your LLC in your home state to avoid potentially high fees. Of course, always make sure you form the right legal entity in any other state you do business in.
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