Picking a State

The Pros and Cons of Establishing an LLC in Your Home State vs. Other States

Starting a business comes with many decisions, and one of the most critical is choosing where to form your limited liability company (LLC). Entrepreneurs often weigh the benefits of forming an LLC in their home state versus incorporating in a business-friendly jurisdiction like Delaware, Wyoming, or Nevada.

If you are a self-publisher who handles only your own books you will most likely gain little to no advantage by registering your LLC in another state. However, if you plan to publish multiple authors via your publishing company it may be beneficial to register your LLC in a more business-friendly state. The information provided here is for general knowledge. To help you make the best decision you should consult a lawyer and/or a tax professional.

This article explores the advantages and disadvantages of forming an LLC in your home state versus another state, covering critical factors such as tax implications, filing fees, legal protections, and operational considerations.

Key Terms to Know:

• Registered Agent: A person or entity designated to receive legal documents on behalf of the LLC.
• Operating Agreement: A legal document outlining the management structure and operational procedures of the LLC.
• Franchise Tax: A state-imposed fee for the privilege of doing business as an LLC.
• Foreign LLC: An LLC registered in a state other than the one where it was initially formed.
• Annual Report: A filing that LLCs must submit periodically to maintain compliance with state regulations.

Forming an LLC in Your Home State

Pros:

1. Familiarity with Local Laws: Registering an LLC in your home state ensures compliance with local regulations and simplifies legal obligations.
2. Avoids Double Registration Costs: If you register in another state, you might still need to register as a foreign LLC in your home state, leading to additional fees.
3. Lower Compliance Costs: Many states charge extra franchise taxes or annual fees for out-of-state LLCs, increasing the financial burden.
4. Simplified Taxation: Having an LLC in your home state reduces complexity when filing state taxes, as there are no additional tax filings in another state.
5. Easier Banking and Financing: Local banks and lenders may prefer dealing with businesses registered in their state, making it easier to open business accounts or secure loans.

Cons:

1. Higher Taxes in Some States: If your home state has high business taxes or franchise fees, forming an LLC there may not be cost-effective.
2. Weaker Asset Protection: Some states have stronger legal protections for LLC owners than others.
3. Strict Compliance Requirements: Certain states impose extensive regulations and reporting requirements that may be burdensome for small businesses.

Forming an LLC in Another State

Pros:

1. Tax Advantages: States like Wyoming, Nevada, and Delaware offer no corporate income tax, which can be beneficial for businesses seeking tax savings.
2. Enhanced Privacy: Some states allow LLC owners to remain anonymous, providing a higher level of personal privacy.
3. Stronger Legal Protections: Certain states have more robust liability protections, making them attractive for businesses concerned about lawsuits.
4. Business-Friendly Regulations: States like Delaware have well-established business laws and specialized courts that are favorable to LLCs.

Cons:

1. Foreign LLC Registration Fees: If you operate in your home state but register your LLC elsewhere, you must register as a foreign LLC in your home state, leading to double fees and administrative work.
2. Additional Taxes: Even if an LLC is formed in a tax-friendly state, the business may still be subject to taxes in the state where it operates.
3. Complicated Compliance: Managing an LLC registered in another state requires keeping track of multiple jurisdictions’ compliance requirements, increasing complexity and costs.

State-by-State Fee Comparison

Below is a general comparison of LLC formation fees and taxes in popular states (we cover the fee in all 50 states in another article):

These figures can change, so it is essential to verify with the respective Secretary of State websites.

Factors to Consider When Choosing a State

1. Where Your Business Operates:

If most of your business activities occur in your home state, forming an LLC elsewhere may not provide significant benefits.

“But I’m a self-publishing author. I sell books everywhere. I do business in every state.”

True.

However, the legal definition of “doing business” has nothing to do with where your customers are, it has to do with the location you operate your business from.

2. Tax Burden:

States like California impose an $800 minimum franchise tax, while Wyoming and Nevada have no such requirement.

3. Legal Protections and Business Laws:

Delaware is renowned for its strong corporate legal framework, while Nevada offers robust asset protection.

4. Administrative Costs:

Filing fees, renewal fees, and compliance costs vary by state and should factor into your decision.

Conclusion

Deciding whether to form an LLC in your home state or another state requires weighing tax implications, costs, and legal protections. For most small businesses operating locally, forming an LLC in the home state is the simplest and most cost-effective option. However, for businesses looking for enhanced asset protection or tax savings, states like Wyoming, Nevada, or Delaware may be worth considering.

Before making a decision, consult with a business attorney or tax professional to ensure you choose the best state for your LLC based on your unique circumstances.