Are you in the process of forming a new limited liability company (LLC)? You may have heard that there are certain states with more welcoming business environments than others.
Specifically, Wyoming, Nevada, and Delaware have some unique laws that make them rather friendly for entrepreneurs.
While there are some clear-cut advantages to forming an LLC in these three states, there are also some drawbacks that may make you reconsider your strategy. Furthermore, the rules and regulations for these states are structured in a way that makes them advantageous for different types of businesses.
Why do so many entrepreneurs like to form LLCs in Wyoming, Nevada, or Delaware? What advantages do these states provide? And should you form your business in one of these states? Read on to find out the answers to these questions and more.
First off, let’s quickly outline what an LLC is. A limited liability company mixes elements of sole proprietorships, general partnerships, and corporations, essentially giving entrepreneurs the best of these worlds. LLCs are typically taxed similarly to sole proprietorships and general partnerships, in that the owners include any company profits or losses into their personal returns — the LLC itself does not owe income taxes. An LLC may also elect to be taxed like a corporation, although this is not a very common option.
There are similarities to corporations too, especially when it comes to financial responsibilities. In an LLC, the owners or members are not usually personally accountable for the financial status of the business. This means that if someone sues your LLC, your personal assets are not at risk.
Delaware has long been a favorite state among entrepreneurs, for a variety of reasons. One big selling point for Delaware is that this state has no personal or corporate income tax, and also has no sales tax. Due to this, Delaware businesses typically pay fewer taxes than businesses in many other states, which is obviously quite the advantage.
Another big pro for Delaware LLCs is the fact that this state recognizes series LLCs. A series LLC is a business structure in which several LLC segments operate under the umbrella of one parent LLC. The series LLC is popular for businesses that have many different products or lines of business that it wants to keep separate, but without going through the hassle of forming many different business structures.
In this way, the series LLC is a convenient structure, because you only have the formation and maintenance requirements of one LLC, while still enjoying the isolated liability between each individual LLC. This means that if your business is sued, your creditors can only pursue the assets of that specific LLC segment, while the assets of the other LLCs are protected. The Delaware series LLC is particularly popular for real estate businesses, because each of the company’s properties is shielded from the liabilities of the other properties.
Delaware also has a reasonable LLC formation fee of just $90, which isn’t the absolute lowest in the country, but it is still quite affordable, keeping down the overall cost to start a Delaware LLC. However, one slight drawback to forming an LLC in this state is its rather steep $300 annual tax requirement, as this is a more costly maintenance fee than many other states charge.
Another of the major reasons entrepreneurs like to form LLCs in Delaware is due to the state allowing business owners to remain anonymous. Public filings in the state of Delaware don’t require businesses to reveal the names of their members or managers, which means it’s quite difficult for anyone to track down what you own and where you’re keeping your assets.
Finally, Delaware has a unique attribute known as the Chancery Court. This is a special court system that solely handles business matters, which means that this state is typically able to resolve legal disputes for businesses much faster than other states, and also that there’s plenty of legal precedent for businesses in this state. Furthermore, the Chancery Court is innovative and forward-thinking, keeping Delaware on the cutting edge of business law.
If you’re interested in forming an LLC in Delaware, take a look at our guide to the six best Delaware LLC formation services.
Wyoming has some of the same advantages as Delaware. Namely, this state has no personal or corporate income tax, it allows for the formation of Wyoming series LLCs, and it has similar statutes protecting the privacy of entrepreneurs who wish to remain anonymous.
Wyoming has some unique attributes of its own as well though. First off, this state keeps costs extremely low. While the $100 LLC formation fee in this state is merely “pretty good,” Wyoming annual reports cost just $60, which is definitely on the low end of the scale compared to most other states. Therefore, the true cost to start a Wyoming LLC (and maintain it) is quite reasonable.
Another interesting advantage for Wyoming is how incredibly easy it is to form an LLC in this state. All the state requires to file your Wyoming Articles of Organization is the name and address of your business, along with the name and address of your Wyoming registered agent. It’s arguably the simplest formation process of any state in the nation.
Nevada also has quite a few advantages for LLC owners, and they’re similar to Delaware and Wyoming in most ways. Like Wyoming, Nevada has no personal or corporate income tax. This state also excels when it comes to privacy protections for anonymous LLC owners, and Nevada also is one of the states that allows for the formation of series LLCs.
Nevada used to be one of the most affordable states for LLC formations, but that has changed somewhat in recent years. Once you’ve formed your business, filed your initial list, and acquired your state business license, the costs to form a Nevada LLC are $425. Then, your Nevada annual list will cost $350 to file each year.
One other issue with forming LLCs in Nevada is that the state has a relatively new business tax called the Nevada Commerce Tax, which was just implemented in 2015. With the Commerce Tax, all businesses generating at least $4 million in revenue in Nevada are subject to a tax of 0.051% to 0.331% on all gross revenue.
While $4 million might sound like a somewhat high mark, keep in mind that this tax is imposed based on all businesses you own, so if you own four LLCs in Nevada, you would only need to average $1 million in gross revenue per LLC to be subject to this tax.
Interested in hiring a service to form your LLC in this state? Check out our guide to the best Nevada LLC formation services.
Overall, we generally prefer Delaware for large companies, while we prefer Wyoming for smaller businesses. Delaware is such a great choice for big business due to the way its Chancery Court has provided so much precedent for legal issues in this state.
Because of this, it’s usually rather easy to figure out how the state will rule on business lawsuits, and legal matters move quickly through the system, which is always a big benefit for businesses. Additionally, venture capitalists love investing in Delaware businesses, although this is much more relevant for corporations than LLCs, because you will rarely see significant VC investments in LLCs.
As for small businesses, Wyoming is a great choice. First off, Wyoming has far fewer tax obligations than either Delaware or Nevada. In addition, Nevada is often known as the only state that doesn’t report business ownership to the Internal Revenue Service, but Wyoming has nearly identical protections. The only difference in this regard is the fact that Wyoming only shares info with the IRS if you own real estate in Wyoming — otherwise, there really is no difference between Wyoming and Nevada in this respect.
While there are some advantages to forming your LLC in Wyoming, Nevada, or Delaware, there are also some very good reasons why you might simply want to form a business in your own home state instead. If you form an LLC in a state where you don’t actually conduct business, you’re creating some extra hassles for yourself that you wouldn’t otherwise be subject to.
Let’s say you operate a business based in Nebraska. If you register your business in Nevada, you will also need to file for a foreign LLC in Nebraska. Furthermore, if Nebraska is the state where you conduct business, it doesn’t matter which state you form your business in — your Nebraska business income will still be taxed according to Nebraska state law.
Now you’re operating a foreign LLC in Nebraska and a domestic LLC in Nevada. This means that you’re subject to two LLC formation fees and two annual reporting requirements, and you’ll also need to have two registered agents. See how complicated this can get?
There are certainly some advantages to operating a business in Wyoming, Nevada, or Delaware. Still, before taking the plunge to form an LLC in these states, you’ll need to make sure your business can actually take advantage of the opportunities these states provide to entrepreneurs.
In short, there are plenty of benefits to forming an LLC in Wyoming, Nevada, or Delaware. From lower tax responsibilities to affordable formation fees, there are definitely some advantages to these three states that you won’t find everywhere.
On the other hand, not all businesses are set up in a way that allows them to truly take advantage of the benefits these states provide for LLCs. Before you form your business in one of these states, try to analyze whether you will actually benefit from the choice, or if you’ll just create more hassles for yourself by needing to form foreign LLCs.
We hope this article helped you develop your understanding of forming LLCs in Wyoming, Nevada, and Delaware! If you still have questions, you should probably direct them to a business attorney who can help you figure out if these states are the right choice for your unique business.
In general, Nevada does the best job of protecting LLC members’ identities. That said, Wyoming has very similar protections if you don’t own property in the state — if you are a Wyoming property owner, the state will report your LLC ownership to the IRS, which is the scenario in basically every state other than these two.
Delaware is home to more than 88,000 small businesses, while Nevada hosts nearly 300,000 of them! Meanwhile, Wyoming has right around 70,000 small businesses operating within its borders.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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