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Which State Should I Form My LLC or Corporation In?
By Jennifer Reuting, author of Limited Liability Companies for Dummies™

If you have been researching corporations or LLCs, you’ve surely heard that forming your entity in states like Delaware, Nevada and Wyoming can offer you various benefits above and beyond what your state can offer you. While it may be true that these states do have some benefits which I’ll discuss below, you have to consider whether or not those benefits even apply to you.

Whenever a corporation or LLC transacts business in a particular state, it must register with that state. This means that it has to pay taxes in that state and file reports, just as if it was actually formed there, so if you are operating a “local” business that caters to customers that mainly live in the state you reside in, it generally would not make sense for you to form your corporation or LLC in a different state only to then need to register in your home state anyway. While there are exceptions, in most cases, you might as well just form your entity in the state in which you live and keep things easy on yourself! Why have the extra fees, taxes and paperwork? It makes no sense!

Tip! - A good way to determine whether or not you are “transacting business” in your home state is if you lease office space or have employees there. If either of these are the case, then you will most likely be required to register to transact business in your state and it will be much easier if you just form your corporation or LLC there in the first place.
If you do not have a brick and mortar business, such as an internet-based company or a consulting business, then you may have some more options open to you. Since Corporations and LLCs are entities entirely separate from you – they are like separate people – which means that they can live wherever they choose, which may or may not be the same state that you live in. Some states have more favorable tax laws or better corporate infrastructures. If you have spoken to your attorney and have determined that your business is in fact not transacting business in your state, then you have a decision to make!
Which state is right for you?

The entire idea of forming your entity in a faraway place can be somewhat daunting at first, but don’t let it overwhelm you. With the help of a good registered agent, maintaining your entity in a different state is not more costly or troublesome than keeping your corporation or LLC close to home!

Before determining which state you should form your corporation or LLC in, you have to know your business. After all, all businesses are different! You must first have a clear picture of what sort of business you will be transacting and where. You need to know what your future plans are – do you want to go public or stay privately owned? Is your business ingrained in your community or does it exist in the internet realm and have no real territory? What are your priorities? Would you rather save taxes or avoid extra paperwork? What is your budget? Can you afford to go to another state? Can you afford not to? These are all questions that you need to ask yourself before deciding whether or not to form your corporation or LLC in another state.

Tip! - You will often hear me use the phrase “tax haven.” Trust me, it sounds more ominous and illegal than it really is. There is a huge difference between tax evasion and tax avoidance. Tax evasion is highly illegal, while tax avoidance is highly advised. Tax evasion is not filing your taxes, filing inaccurately or attempting to defraud the government. Tax avoidance is using legal means to minimize a tax burden. Tax avoidance is one of the primary ways that the rich get richer and the poor get poorer.
Once you have a handle on how you envision the future of your business and where you want to go, you can take a look at some popular states and see if they have any benefits that appeal to you…
Delaware – Paradise for Public Corporations

It is common for people to hear often of Delaware and to think that since it is so popular, it must be a good state to incorporate in. However, this isn’t always the case. While Delaware does have a lot of advantages over most states, we wouldn’t go so far as calling it a tax haven and it isn’t necessarily the best bet for small businesses.

What sets Delaware apart is the Chancery Court. The Chancery Court is a special court the makes decisions upon business matters. Delaware is the only state with such a court. While most states are backlogged – your case my take many years to be heard by a judge and be decided upon – you can bet that your Delaware case will be heard right away. In addition, in most states you cannot be certain of the business aptitude of the judge hearing your case – it could be a traffic judge for all you know! But in Delaware, it’s another story. All judges are thoroughly trained in all sorts of business matters, so you know that the person deciding the fate of your company will be someone that knows what they are talking about.

If you intend on transacting business in multiple states and perhaps even go public one day, then Delaware could very possibly be the state for you!

In addition, part of Delaware’s allure is the hundreds of years of case law that has developed over so many centuries. Delaware was a pioneer in the 1800’s for corporations. Before California was even admitted into the union, Delaware was one of the first states to privatize the then-government-controlled corporate entities. They soon followed by loosening restrictions and lessening the tax burden on corporations. From that day on, Delaware has been a force to be reckoned with. Over 150,000 entities were formed there in 2006.

Nevada – Entertainment Small Business! Capitol of the World!

Whoever said there was more to Nevada than glitz and lights was right! Nevada is quickly exploding as one of the fastest growing states in the country and one of the primary reasons for that is the pro-business environment. Nevada is considered a “tax haven” – and for good reason. Thanks in-part to the gaming industry, Nevada has no business income tax, franchise fees, capital gains tax, state corporation tax or inheritance tax. I repeat – NO TAX. None, zilch, nada. Corporations and LLCs in Nevada don’t even have to file an income tax return! Why is this particular state so giving? Because the powers know they will get back all of the money when you take the roulette wheel for a spin!

Not only does Nevada have zero taxes, but there are a lot of other benefits as well, including:

Nevada allows complete anonymity of the shareholders (or the members). Why is this great? Well, if they don’t know you own it, they probably won’t try to sue you for it! Except in the case of corporate fraud, what happens in Vegas, will probably stay in Vegas!

The members do not have to be residents of Nevada - or even of the U.S. for that matter.

Nevada has no I.R.S. Information Sharing Agreement. Doesn’t that say it all?

Nevada’s annual fees are normally $325 per year. (An annual list of principals for $125 and state business license for $200).

Meetings of members and managers are not required to be held in Nevada. They can take place anywhere in the world!

Single-member LLCs are allowed. One person may hold all positions in the company. (This is not the case in every state!)

There is very little disclosure required. This is the main reason why anyone interested in privacy will often form their corporations or LLCs in Nevada.

Stock (or membership interest) does not need to be purchased with cash – anything of value will do, including your time and services.
Wyoming – A Hidden Jewel…

Wyoming is most famous for its national parks, geysers, expansive prairies and cheap land, but this state is always ready to lead the pack when it comes to business issues. It’s a wonder that it hasn’t exploded yet, but just wait…it will happen. Wyoming is also a tax haven and has many of the same benefits that Nevada has - including no business or franchise taxes of any sort. Officers are also allowed to maintain their privacy and remain anonymous. What's more, with an annual renewal fee of $52 and Nevada’s recent imposed business license fee, I expect to see many new start-ups in Wyoming!

But there’s more! One of the advantages that Wyoming offers that Nevada doesn’t is that it allows for what is called a “lifetime proxy.” A proxy is someone that you elect to vote on your behalf. This opens the door to a common asset protection strategy in which you can hide your identity by having someone else hold your stock (or membership shares) while you still control the vote by having a “lifetime proxy” over them.

Wyoming isn’t as popular as Nevada and and I am not certain of the exact reason; however I have a sneaking suspicion that Las Vegas, “The Entertainment Capital of the World” has something to do with it. Wyoming may not be the most glamorous place in the states to domicile your corporation or LLC, however don’t underestimate it as a tax haven. The Wyoming state government is working very hard to push Wyoming into the position of being the most business friendly state in the union. They are pioneers in the truest sense of the word. After all, they were the first state to adopt and legalize what we now know as the Limited Liability Company!

- Jennifer Reuting

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