Deciding where to register your LLC requires a thorough evaluation of factors such as your business's physical presence, tax considerations, costs, legal and regulatory environments, potential need for foreign registration and state-specific advantages. Registering in Delaware or Wyoming may not be the optimal choice for every business, especially if your company’s activity primarily takes place in your home state.
As an entrepreneur, when you decide to create a Limited Liability Company (LLC), selecting the most appropriate state is something many spend a lot of time thinking about. A common misconception is that registering in Delaware or Wyoming is universally the best choice, regardless of where the business operates. Let’s take a moment to dive into various factors and requirements, including tax considerations, to help you understand the things you should consider when registering your LLC.
Physical Presence, Nexus and Tax Considerations
Your first consideration when deciding where to register your LLC should be where you are physically located and where your business activity will take place. The state or states that you are physically located in, own property in, own a business in, perform business services in, or have employees in, generally, has a right to tax you. This right to impose taxation comes from a legal concept called “nexus”.
The concept of nexus is based upon fairness and the Constitutional concept of due process. A person or business must have sufficient contact with a state in order for it to be fair for that state to tax them. What constitutes sufficient contact has changed over the years through case law, but the most traditional and obvious sufficient contact is the physical presence of people and property. Sufficient contact has expanded in recent years so income sourced from a state can also trigger nexus (each state has its own standards).
For example, you are a California resident who also works in California and is considering forming an LLC. Because California has high taxes, you want to register your LLC in Delaware to save on business taxes. However, because you are physically present in California, work in California, and derive most of your income from California clients – your business has nexus in California. Even though your business is registered in Delaware, you must also register your business in California and pay taxes in California. Instead of making your life easier and paying less in tax, you will actually be paying taxes in both Delaware and California and will have to file business and personal tax returns in both Delaware and California.
Cost and Tax Benefits
It's important to weigh the cost of registering and maintaining an LLC in different states. Delaware is renowned for its business-friendly environment and favorable corporate laws, which attract numerous large corporations. However, Delaware’s tax benefits are geared towards C Corporations. If you have a smaller business, that is not a C Corporation, without operations in Delaware, there may not be a benefit from registering there. Moreover, the fees and franchise taxes in Delaware may outweigh the benefits for some companies.
Conversely, Wyoming is acclaimed for its low fees and taxes. However, if your business lacks a substantial presence in Wyoming (meaning none of your business is conducted in Wyoming or generated from Wyoming), registering there might not yield the expected tax benefits. Carefully analyze the costs and potential tax advantages of registering your LLC in your home state compared to other states before making a decision.
Legal and Regulatory Environment
States differ in their legal and regulatory environments, with some being more business-friendly than others. Research the regulations and requirements of each state, including annual reporting, franchise taxes and the ease of business operations. Consider how these factors influence your specific industry and business model when deciding where to register your LLC.
If you choose to form your LLC in a state where you do not live, you may need to undergo "foreign registration" in your state of residence. Foreign registration involves registering your out-of-state LLC to conduct business in your state of residence. This means:
You may have two separate LLC filings (one in the state where you originally formed your LLC and one in your state of residence).
You would typically be required to pay filing fees in both states.
It's important to note that there will be two registered agent appointments—one in the state of formation and one in your state of residence.
In most cases, you would indeed be required to pay annual report fees in both states where your LLC is registered.
Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as financial or tax advice. It is not intended to be a substitute for obtaining accounting or other financial advice from an appropriate financial adviser or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.