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Forming an LLC: Not All States Are Created Equal

The Huffington Post The Huffington Post 28/10/2015 AJ Agrawal
LAWYER FUNNY © Valeriy Kachaev via Getty Images LAWYER FUNNY

Forming a limited liability corporation (LLC) enables a business owner to differentiate and protect his personal assets from the actions and consequences of his business. While many entities will choose to fully incorporate (by establishing a standard corporation,) forming an LLC allows you to the benefit of personal asset protection (in the case of litigation,) and it also enables you to avoid the double taxation you would suffer with a standard C corporation or S corporation.

What comprises an LLC? While LLCs generally have multiple members, they only need one to get started - this gives them the freedom of formation without creating a board or recruiting a business partner. Not to mention - the paperwork is lighter than the textbook-quantities of legalese you find when drafting up a new standard corporation.

In many cases, it is most logical to create an LLC in the state in which you are either living in or working in. At other times, however - forming the entity in a different state is the wiser decision, depending on the circumstances. There are many factors to consider in either case. For example, states have different degrees of freedoms and flexibility when it comes to creating an LLC. Investigating the distinctions between foreign and domestic LLCs gives light to the distribution of laws and freedoms in each state.
"Foreign LLC," despite its colloquial connotation, does not refer to an overseas company. The term, in a legal sense, refers to an LLC that was formed in one state and operates in another. If, for example, you realize that Ohio has preferable LLC laws compared with Texas - which is where your company originated, you can easily make a case for a foreign LLC.

A domestic LLC, on the other hand, functions in the same state in which it was created. There are many times when forming a domestic LLC is advantageous over its foreign correspondent. For example, it may be cheaper. In the case of a domestic LLC, you are able to avoid extra fees tied to filing additional certificates of registration as a foreign LLC. Not to mention, it can be a healthy practice or new businesses. Let's say you don't have a lot of revenue and low profit margins - domesticating your LLC means that you don't have to worry about hiring a tax attorney or accountant. A lot of times, a domestic LLC will be easier, too. You don't have to worry about the headache of managing the state laws and tax codes of two different states.
Despite its situational advantageous, domestic LLCs have their downfalls. In some cases, forming a foreign LLC is the way to go. To know that a foreign LLC is right for you, consider your existing business plans and future plans. If you reside in one state and do business in a different state. In this case, forming a foreign LLC might be the easiest route. Not to mention, what if you business becomes multi-state? Some states have more business-friendly tax structures when it comes to managing multi-state entities. In fact, some states are known for having advantageous laws for foreign LLCs. Let's consider a few examples by looking at Nevada, Delaware, and Wyoming.
Nevada doesn't require any corporate income or even personal income to create an LLC. Thus, you don't need to factor in franchise taxes. Nevada makes it easy, to say the least. It will even protect the privacy of the owner's names during public registrations, and it excludes this data from the eyes of the IRS. While some states require operating agreements or annual meetings, Nevada requires neither.
Delaware is another great example of a foreign LLC - friendly state. Believe it or not, half of all American companies and a whopping 64% of all Fortune 500 companies are registered in Delaware. Why so many? Delaware has extremely business-friendly regulations, and a court system that is exceptionally pro-business.
Wyoming, like Delaware and Nevada, is a favorite for foreign LLC founders. The state doesn't require personal income, franchise tax, or corporate income. Like Nevada, it protects the identities of the founders.
Whether you choose Delaware, Wyoming, Nevada, or another state, it is important to investigate the pros and cons of each. Before researching the best LLC formation and area of origin for you, diagram a clear scope of your current and future business expansion plans.

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