Jack DonaldIf you consider forming a new limited liability company (LLC) but are unsure whether your home state is all that suitable for this business model, there are a few options with more LLC-friendly laws. The big three are the states of Wyoming, Nevada, and Delaware since their legislatures integrate laws beneficial to business owners and small entrepreneurs.
Despite being known for giving many benefits to anyone forming an LLC in their jurisdictions, the three states can also bring some unfortunate disadvantages to the process that could be a deal-breaker for some entrepreneurs. But even if your LLC may not be that suitable for these states, their rules and regulations are exceptionally favorable for business.
So how come so many business owners choose to form LLCs in Wyoming, Nevada, or Delaware? What legal benefits do these states offer that others don’t? Would they be advantageous for your business? Let’s look at each state closely to establish the clear pros and cons of their corporate laws.
What Is an LLC?
As a business model, LLC has been steadily growing in popularity since its adoption in 1977 by the state of Wyoming. This isn’t that surprising given that LLCs combine the best operational aspects from other business structures, providing their owners with more flexibility while reducing certain financial risks.
So what do LLC have in common with sole proprietorships? The main similarity is in the taxation process. Just like with general partnerships, LLCs can choose the so-called pass-through taxation, meaning that the company’s income becomes exempt from federal income tax. Instead, the owners file their profit shares in their personal tax returns.
When it comes to corporations, whether it’s C-corporations or S-corporations, LLCs adopt all the good parts while avoiding the unpleasant business of double taxation. An LLC is similar to a corporation in terms of limited liability, specifically the protection of personal assets.
To put it simply, the assets of the company are isolated from the personal assets of the entity’s members, so in the event of your company facing a lawsuit, your property and capital won’t be liable.
What Are the Advantages of Forming an LLC in Delaware?
Out of the three, Delaware offers the most perks for LLC formation, so it’s no surprise to see that so choose to establish an entity in this state, whether they’re seasoned business owners, first-time entrepreneurs, or startup developers. Let’s break down the finer points of the Delaware LLC formation below.
Taxation
Delaware LLCs are classified as partnerships and therefore taxed as flow-throughs, meaning that they pay no use or sales tax, no federal, personal or corporate income tax, no VATs or intangible income taxes, and no unitary, inventory, or inheritance taxes.
Moreover, business transactions are also exempt from taxation, including the taxes imposed on stock transfers or capital shares. Keep in mind that an LLC is subject to annual taxation with a flat fee of $250 but apart from that, all profit shares are taxed on an individual level with owners filing taxes on their personal returns.
An LLC owner can still choose for their entity to be taxed as a corporation (by filing Form 1100 or Form 1100S), though this option is not exactly popular and is often chosen due to requirements of specific industries.
If you want for your LLC to be taxed as a partnership, simply file Form 300 instead of the corporate ones.
A single-member LLCs can also register as either a corporation (by filing Form 8832) or a disregarded entity, and by choosing the latter the company becomes exempt from state tax since it’s viewed as a sole proprietorship for taxation purposes.
Remember that if you register your single-member LLC as a corporation, you will naturally be required to pay state income tax. Those who selected to be taxed as a disregarded entity will need to file their LLC’s tax returns on Schedule C using Form 200.
Series LLC
Delaware was the first state to introduce the concept of a series LLC, and even though a few dozen now also support this business model, Delaware offers the best environment for running a series within its jurisdictions.
At its core, a series LLC allows you to form completely separate LLCs that are connected to one parent LLC. This structure is preferable to the regular practice of creating complete new entities in order to start new product lines or branch out your company’s services into other fields independently of the parent LLC.
As opposed to managing a number of unrelated entities, the series LLC is more organized and interconnected while retaining the limited liability status of each segment within the series.
In short, when a lawsuit is brought against a specific segment of the series, the assets of all other LLC entities operating under the same parent company will be sufficiently shielded against legal action.
Estate agents and other adjacent businesses are often attracted to the series LLC model since the segmented structure allows you to isolate the liability of each property in your operation.
Affordability
Although the state of Delaware isn’t the most affordable in the country, its formation fee is considerably lower compared to most states. Establishing an LLC in this state costs only $90 if you only count the mandatory formation fee. On the downside, Delaware’s annual tax rate is fairly high, requiring you to pay $250 on a yearly basis.
Anonymity
If remaining anonymous is your top priority, Delaware is one of the few states offering such personal data protection. The state places no requirements for disclosing the names and other info of their members or managers.
This minimizes the risk of being traced back through your business documentation and protects your personal assets. In some cases, you may be asked to share your personal information, for instance when expanding the business to other states or fulfilling certain tax return requirements.
Regulation
A great advantage in the regulatory system can be seen in the so-called Chancery Court unique to Delaware and several other states. Also called the court of equity, this body of law is a part of the state’s constitutional court system together with the Supreme Court and Superior Court.
What makes the Chancery Court special is its sole focus on business matters, meaning that all lawsuits and legal concerns concerning business are handled by the equity court where the final verdict is rendered by a judge rather than a jury.
What Are the Advantages of Forming an LLC in Wyoming?
In a broad sense, Wyoming and Delaware are somewhat similar in terms of key benefits regarding LLC formation.
Like Delaware, the state of Wyoming does not impose income taxes (corporate or personal) on non-corporate LLCs. It also supports the series LLC structure and offers anonymity protections for LLC owners, members, organizers, et al.
The key difference between the two is the financial aspect. Specifically, Wyoming asks for a $100 LLC formation fee which may not be the cheapest rate but it’s fairly low compared to most states. Its primary selling point is the charge for annual reports. Set at only $50, this is one of the lowest annual report fees in the country.
There is also the matter of the Wyoming LLC formation process and its incredible simplicity. The state only requires you to go through a few easy steps, namely:
- File the articles of organization;
- Submit entity name and address;
- Provide registered agent info (name and address);
Compared to most states, Wyoming is one of the most friendly when it comes to the formation aspects.
What Are the Advantages of Forming an LLC in Nevada?
Nevada offers a number of advantages found in Delaware and Wyoming, namely the right to form an LLC anonymously as well as the ability to create a series LLC.
Although Nevada LLCs are not required to pay personal or corporate taxes, they are still subject to the so-called Nevada Commerce Tax. As of 2015, this business tax is imposed on entities whose earnings exceed $4 million within a taxable year.
It may seem like a high bar for a single business, but keep in mind that the state takes into account all business entities listing you as an owner. The Commerce Tax rate varies depending on the gross revenue of any given entity, ranging from 0.051% to 0.331%.
Given that the taxable year of this tax is fixed, lasting from July 1 to June 30, it’s important to note the shift for the filing dates of your other taxes that adhere to either the calendar year or fiscal year.
If your LLC has employees, it will also be required to pay the payroll state tax called the modified business tax (MBT) each quarter unless the staff consists of household employees or the company is classified as a tax-exempt organization.
As for the projected expenses, Nevada is far from cheap despite being one of the most affordable states for LLC formations in the past. Today the formation process involves quite a bit of paperwork with adjacent state fees which could amount to quite a sum. The main Nevada formation requirements include:
- The Articles of Organization fee: $75;
- The initial list fee: $150;
- State business license registration fee: $200;
- The Annual List fee: $150-400 depending on the amendment;
Which of These States Is the Most Business-Friendly?
The suitability of either of these states depends on the size of your business. Large companies are more likely to thrive in Delaware, while small entities, startups, and single-member LLCs will be better off in Wyoming.
Big business entities and commercial enterprises can manage their transactions and legal matters much better in this state due to Delaware’s business-oriented Chancery Court with precedent for legal business issues. This means that it’s easier to navigate potential disputes and predict litigation outcomes.
Delaware’s state regulations also attract many venture capital investors. This aspect relates more to corporate entities rather than LLCs given the infrequent usage of large VC funds for this business model.
If you deal with entities of a much smaller scope, then Wyoming is the optimal choice out of the three. Even compared to the fairly relaxed tax laws of Nevada and Delaware, Wyoming is a true tax haven when it comes to business tax regulations.
Nevada also has its strong points, namely the unprecedented anonymity laws that allow the state to withhold ownership information from the IRS.
It should be noted that Wyoming comes pretty close to that in its data protection laws. Their policy is almost identical with the exception of real estate LLCs which are required to report ownership information to the IRS.
Should You Form a Business in One of These States or Your Home State?
As with many regional aspects of business management, forming your LLC in Wyoming, Nevada, or Delaware—as well as overseeing its subsequent maintenance—comes with its fair share of drawbacks alongside its many benefits.
For one, having to maintain an LLC in a state without doing any business in the jurisdictions that fall under the governing bodies of that state means dealing with additional costs and paperwork.
If you conduct all business transactions in your home state but the business is registered in one of these three states, your home state will require you to register your business as a foreign entity.
To illustrate, if you registered your LLC in Wyoming but restrict all your business activities within the legal boundaries of your home state of Montana, your company will have to be registered as a Montana foreign LLC.
There’s also not much point to register an LLC in one of these three states if your main goal is to save up on taxes but you still plan to only do business in your home state. This is explained by the nature in which taxable income is processed: whatever you earn through transactions in your home state is taxable by your state’s laws as opposed to those in the state of LLC registration.
Essentially this approach proves to be counterproductive. If you form a domestic LLC in Nevada, Wyoming, or Delaware but only operate it in your home (other than the state of registration), you subject yourself to unnecessary double charges since you are required to pay formation and annual report fees in both states.
And by registering the Nevada/Wyoming/Delaware domestic LLC in your home state as a foreign LLC, you will also need to designate a separate registered agent who is far from cheap.
At the end of the day, forming an LLC in Wyoming, Nevada, or Delaware is only beneficial if you don’t end up paying more than you would have by creating a company in your home state. So prior to making any decisions about forming a company in these states, weigh all the pros and cons that the process will entail for your particular business.
Can I Hire Someone to Form My LLC?
There are three major ways to form an LLC: hire a business attorney, pay for an online business formation service, or go with the DIY route.
The cheapest option you choose is by far the DIY method, but it can prove to be rather tricky in the long run, especially for first-time entrepreneurs who are not well-versed in the intricacies of LLC formation.
Finding a lawyer can fix this problem and help you along the way, but most single-member LLCs and start-ups can’t exactly afford the services of a reputable attorney at the early stages of their business.
And it’s precisely why so many business owners resort to hiring an online LLC service. This option is not only good for saving money but it can also speed up processing times, ensure your paperwork is compliant, and that you never miss any filing deadlines.
Out of dozens if not hundreds of formation service providers capable of handling all main steps of LLC formation, albeit with varying degrees of thoroughness.
A service like that can’t compete with a certified attorney in terms of legal proficiency but many reliable formation companies offer legal consultation services and generally cover the tricky bits of the formation procedure that would pose difficulties with the DIY method.
If you want a more comprehensive breakdown of top online business formation companies, be sure to check our guide to the top 7 best LLC formation services on the market. In order to give you a brief picture, let’s narrow them down to the three best options for business formation service:
- ZenBusiness ($39): ZenBusiness is a real all-rounder here, offering three comprehensive formation plans with the cheapest package priced at only $39, and that’s including a year of registered agent service.
- Northwest Registered Agent ($225): Northwest’s rates may seem a bit excessive at first, with their upfront payment of $225 + state fee, but their premium customer support is more than worth it. Their thorough registered agent service is considered to be one of the industry’s best, and their in-depth approach to managing your correspondence and local scanning of every document is unrivalled.
- IncFile (FREE): IncFile is famous for its free formation service that includes a year of free registered agent and other basic features. The company’s track record is fairly consistent, with customers mostly focusing on the flexibility and accessibility of IncFile’s LLC formation plans.
In Conclusion
As evidenced by the advantages all three of these states provide, forming an LLC in Wyoming, Nevada, or Delaware can prove to be rather beneficial for your business. Long-term benefits include anything from lower formation costs to reduced tax responsibilities and a few unique LLC-friendly regulations.
On the upside, registering an LLC in one of these states while conducting your business in another state as a foreign LLC may prove more costly and detrimental to the whole endeavor. Be sure to fully examine all rules and regulations that are applied to your business type and field of operation in each state before you make the final decision.
If you have more questions about forming LLCs in Wyoming, Nevada, and Delaware, feel free to consult official state resources or contact a business attorney to figure out the finer details of the process.
