Should You Form Your LLC in Your Home State?
Forming an LLC in your home state is the traditional move for most small businesses, and it’s often the best move. It’s simple and straightforward, and you’ll avoid any unnecessary and recurring fees from a state that you don’t live in. Read on to find out how keeping your LLC close to home is generally the best choice for small business owners.
What is a Home State LLC?
An LLC’s home state is the state where the LLC was legally formed. This is the state where you filed your LLC Articles of Organization—not necessarily where you personally live or where the company actually does business.
Generally, it can save you time, money, and paperwork to form your LLC in the same state where you live and do business. Why? A big reason has to do with requirements for foreign LLCs.
Domestic LLC vs Foreign LLC
To make it easier to talk about where your business is formed versus where it does business, it’s useful to use the terms “domestic LLC” and “foreign LLC.”
- In the state where your LLC was formed, your LLC is called a domestic LLC.
- In any other state where your LLC does business, your LLC is called a foreign LLC.
So, if you file articles in Delaware but also do business in California, your LLC is domestic in Delaware and foreign in California.
Now, registering as a foreign LLC requires paperwork—a process called foreign qualification. If you plan to do business in a state other than your home state, you have to submit an application to the state first (typically called a Certificate of Authority). These applications are usually similar in cost to filing articles. And, you’ll be required to file any state annual reports and possibly franchise taxes as well, much like a domestic LLC.
What If You Form an LLC Outside Your Home State?
So, maybe you heard Delaware is the best state to form an LLC. You form your LLC there. But you don’t do business in Delaware. You live in California. Your office and employees are in California. You ship from California. You do business in California.
As a foreign LLC in California, you have to register ($70), file biennial reports ($20) and pay the state’s steep LLC annual fee ($800), just to scratch the surface. And you’ll have to pay any required sales taxes in California—tax requirements are based on where you do business and make money.
But you also spent $90 to form in Delaware—and owe another $300 a year for that state’s annual fee. And you don’t live in Delaware, so you’ll need to hire a local registered agent. For most LLCs, any Delaware advantages are outweighed by these extra costs.
Benefits of a Home State LLC
The advantages of filing your LLC in your home state often outweigh the perceived advantages of registering your LLC in a state like Nevada, Wyoming, or Delaware. Here’s why:
- Keep It Simple. Look at it this way. If you form your LLC in another state instead of your home state, you may also meet the legal definition of doing business in your home state. As described above, this means you’ll have to register your LLC as a foreign LLC in your home state, which can lead to double the paperwork. Nobody wants that.
- Keep Costs Low. All LLCs have basics costs, such as formation or annual reports. But if you end up having to foreign qualify in your home state, those costs essentially double. And, if you don’t live in the state where you form, you’ll need to hire a registered agent in your new state. The money you think you’ll save forming outside of your home state may actually be eaten up by extra fees.
- Don’t Run Afoul of Local Rules. If you form your LLC in another state, you’ll need to pay attention to any required licenses and permits in the new state before doing any business there. This may include sales tax registration, business licensing, or local permits. Conducting business without the proper licensing can lead to hefty penalties and legal problems.
When Not to Form an LLC in Your Home State
While general consensus dictates that the home state LLC is often the best choice for small business owners, there are exceptions to every rule. Home state LLCs aren’t a one size fits all solution for every business owner. You might benefit from forming an LLC in another state if:
- You’re Not a US Resident. In the US, LLCs can be formed by non-residents and non-US citizens. If you aren’t a resident of the US, you’re not going to have the anchor of a home state. This means you’ll have the flexibility to choose the state that best fits the needs of your business.
- You Own Rental Property in Multiple States. You might consider forming an LLC outside of your home state if you are a real estate investor with properties in multiple states. If you buy a piece of real estate outside of your home state—with an LLC that was formed in your home state—you’ll typically be required to register as a foreign LLC in the state where you are purchasing property. Forming an LLC for a rental property in another state can help to separate assets and reduce liabilities, as well as compartmentalize and simplify taxes for the property owner.
- You Have a Holding Company. Holding companies are companies that hold assets like real estate, stock, copyrights, and other companies. A holding company doesn’t engage in actual day-to-day business operations, but is meant to add an extra layer of liability and asset protection to a parent company. A holding company can be registered as an LLC, and because a holding company conducts no business activities, it can usually be formed in any state the owners wish, which means that holding company owner is more free to choose the state they feel best meets the needs of their LLC.
- You’re Really Into Privacy and Anonymity. Everyone should be interested in keeping their personal information out of the public eye, especially business owners, who have a lot to lose. Whether it is disgruntled customers, angry employees, creepy contractors, opportunistic lawyers, or scam artists, privacy is paramount. Some states like Wyoming and New Mexico better allow you to live privately with an LLC, especially as they do not require owner names on public filings.
Under most circumstances, the best state to form your LLC in will be your home state. Starting and running a business is hard enough without having to balance extra paperwork, fees, and state regulations.
Home State LLC FAQ
What constitutes doing business in another state?
Just selling a T-shirt or two across state lines doesn’t necessarily mean you are “doing business.” Each state defines doing business differently, but generally, your LLC needs to foreign qualify in a state if it:
- Sells products or services in the state through an agent, distributor or representative
- Has employees in the state
- Has a business bank account in the state
- Owns real estate or personal property in the state
- Maintains an office, retail outlet, warehouse, or manufacturing facility in the state
- Transacts business or holds meetings in the state
Does my LLC’s home state affect nexus?
Possibly. Nexus (also known as sufficient physical presence) is a legal term that refers to the requirement for companies doing business in a state to pay tax in that state. So, nexus is generally more about where you do business than where your business is formed. But in combination with other factors, your LLC’s home state could potentially affect nexus.
Wherever you have your office, employees and inventory, you’ll almost certainly have nexus—but that isn’t limited to a single state. Worst case scenario, if you form your LLC in one state, but do actual business in your home state, you may set off a potential tax presence in BOTH states. So, forming your LLC in Wyoming to escape California’s higher taxes won’t get you out of paying domestic taxes in California—and may in fact complicate your taxes.