Where to form your LLC for virtual or foreign business activities September 17, 2008
Posted by Jeff Nabers in : real estate, Self Directed IRA Solo 401k , trackback
When you form an LLC (or Corporation), it is registered and created at the state level. You can choose to form an LLC in any state, regardless of your state of residency.
Nexus
When you have business activity that clearly occurs in a specific state, you are said to have “nexus” in that state. If your LLC has nexus in a state, it will probably need to register itself in that state and pay any applicable taxes for doing business there. An LLC is a pass-through entity, meaning it is designed to have zero taxation because income taxes are paid by the LLC owner(s) on their tax return. Unfortunately, some states have created franchise and/or excise taxes that can be costly.
Virtual Businesses
If you are starting an internet business (or any other business that doesn’t create nexus in a specific state) you can choose to form your LLC in a state where registration is more favorable. You will need to name a registered agent – a person or corporation residing in that state who can be served papers on behalf of your LLC. There are plenty of companies who will provide a registered agent service for $100 to $150 per year.
Foreign business activities
If you form an LLC for the sole purpose of foreign activities (such as holding real estate outside of the U.S.) then you also may not have nexus in any specific state. This puts you in the same situation as having a virtual business – you can choose to form your LLC in any state.
Top 4 States for LLC filing
Oregon – Oregon does not have any LLC income, franchise, or excise taxes. Fees are low ($50 registration & $50 annual report). It offers electronic registration and electronic submission of annual report. Forming an Oregon LLC is fast, easy, inexpensive, and it doesn’t subject the LLC to any special taxation.
Wyoming – Wyoming was the first state to create an LLC law. There are no income, franchise, or excise taxes applicable to an LLC in Wyoming. Fees are low ($100 registration and $50 annual renewal). The only thing I don’t like about WY is that registration and annual renewal must be done through the mail, which is a hindrance if there is a transaction waiting on your LLC to be formed.
Delaware – Delaware has always been one of the favorites for forming Corporations and LLCs because of its pro-business laws and court rulings. Over 50% of publicly traded U.S. companies and over 60% of Fortune 500 companies are formed in Delaware. It does have an LLC tax of about $250, but I consider it to be more of a “fee” than a “tax” because it is a flat figure not based on assets or income. This “fee” can be paid annually online, and there are no other taxes as long as the LLC doesn’t have business activities in Delaware. There is a low initial registration fee ($90), but the formation document does have to be mailed in.
Nevada – Nevada gets a lot of attention as one of the top states in which to form an LLC or Corporation. This is partly because it boasts about its unique privacy policies – that it won’t share owners’ information with anyone, including the IRS or creditors. I’ve heard that over the past few years this privacy claim has been unraveled as owners’ information has been surrendered in court. This reputation for iron clad privacy has also attracted a lot of scam artists into using NV LLCs, and that can attach a negative stigma to your NV LLC. Nevada does have the benefit of no taxation on LLCs, and it accepts faxed formation documents which is almost as good as electronic registration in terms of quick filings. Unfortunately, NV fees and filing requirements have been increasing, and I honestly haven’t been keeping up with them. I don’t see any reason to register a new LLC in Nevada unless the other 3 states become less favorable by increasing fees, taxation, or filing requirements.
The information provided above is not a complete analysis, and you should always consult a competent attorney for legal matters.
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Comments»
Thanks for Sharing this Very Valuable Information Jeff !
Hi Jeff, saw you post on Tim Ferris site and thought I’d drop by. Interesting site. I have a question – is one required to be a US citizen to register an LLC? What would you suggest is the best way to register an internet business which doesn’t have any particular location for maximum tax benefits? And where?
One is not required to be a US citizen to register an LLC. As you can see from the post above, Wyoming & Oregon are worth considering.
Hi Jeff, A question – if a person has a extremly small business of recruiting and the business activity is basically limited to the extent of making phone calls from the place he happens to live, does that create a nexus in that state? If he were to have a website for the business activity would that be considered a “virtual activity?” Thanks
Hi, David. That will depend on the state. You can get more information by:
1. Searching the web site of that state’s Secretary of State office.
2. Searching the web site of that state’s Department of Revenue office.
3. Contacting a local attorney.
I live in Oregon but the LLC will be for business in NY tri-state area and later in LA. No business will be conducted in Oregon. My partner will be handling that in NY but I will be consulting with him on the phone. If I file the LLC here, the tax forms would show 0 income here. Would it be better to consider Delaware? Thanks
Kathy,
You can either consult with an attorney or call my office to see if my staff has more helpful information for you. 877-903-2220.
Jeff
I live in CA. I’m about to set up a self directed ira to invest in possibly notes and or real estate do I need to have my self directed ira llc in CA?
If you buy real estate in CA, then your LLC needs to be either created in CA or registered to do business in CA. Either way you’ll have to pay CA’s franchise tax.
Jeff