Why (not) form an LLC in Nevada?
Questions about forming a limited liability company (LLC) in Nevada come up so frequently – the last time, yesterday – that I feel compelled to write about this topic.
There is something approaching the status of urban legend about the wisdom of forming LLCs in Nevada because Nevada does not have an income tax. The problem is that Nevada’s lack of an income tax will benefit you only to the extent that you do business in Nevada!
Let’s say that you live, and intend to do business (in the legal sense – see Doing Business in CA? Be Sure to Register), in California, but you form your LLC in Nevada. Guess what: Because you are doing business in California, you will have to pay income tax in California. Furthermore, you will have to register your LLC in California as a foreign LLC. The result: You will not have escaped paying income tax, and will have to pay the two states’ annual business fees!
The bottom line:
- Form your LLC in Nevada only if that is where you will be doing business.
- If you will be doing business in another state, that is where you probably should form your LLC.
- If you will be doing business in multiple states, work with a knowledgeable tax adviser – multi-state tax issues can be tricky.
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
Dana Shultz is a business-savvy lawyer with in-depth knowledge of law, business, technology, and the needs of startup and early-stage companies. Located in the San Francisco Bay Area (Northern California), Dana develops close working relationships with clients based on a positive attitude and rock-solid dependability so he can deliver High-touch Legal Services® - thus the name of this blog.
@Jesse
I gather that you will be doing business in the state to which you will be moving, so you might as well form the LLCs there.
Hi Dana, thanks for your reply.
The thing is, I don’t know which state I’ll be moving to. I just know there’s a decent chance I’ll be moving to some other state in the not-too-distant future. And I don’t know how long I’ll then be in that state.
If it’s not much more work / cost to form something like a Wyoming LLC now, and if it would significantly simplify moving to a different state one or more times in the future, then I might be inclined to do it.
If the extra work / cost involved would be prohibitive, or if it wouldn’t significantly simplify the moving process, then I might as well just form in my current state.
@Jesse
I see no benefit from forming LLCs in a state with which you have no connection, so you might as well form them in your current state.
@Dana
Thanks for your feedback. I’m just concerned that if I form the LLCs in my home state and then move to a different state, it will be pain in the neck to either maintain the LLC in the original state and foreign-qualify it in the new state, or move it to the new state. And then if I move again, repeat the process. I wondered if there was some logic to forming in a state that can always be the home base for the entity.
@Jesse
It will take no more effort to maintain an LLC in your old state than to maintain an LLC in a neutral state.
It will take no more effort to register an old-state LLC in your new state than to register a neutral-state LLC in your new state.
There is no need to move an existing LLC from the old state to the new state.
If you move to new states multiple times in the future, you may end up with LLCs formed in multiple states – no problem.
There is, near as I can tell, no principled basis for choosing a neutral state – largely because there is no benefit (that I can see) from choosing one. On the other hand, if you form each LLC in the state where you then are living, you will have, at the least, the benefit of minimizing formation costs and effort (no foreign registration) at that time, and of minimizing ongoing costs and effort with respect to that LLC so long as you continue to live in that state.
Ok, thanks for explaining this to me — I’m very new to it and don’t want to do the easiest thing now only to have it be a mistake that comes back to haunt me later. But I’d certainly appreciate the greater simplicity and lower cost of just forming an LLC in my current state.
I imagine that depending on the state where I form any given LLC, I might then have to file at least some sort of informational tax return even after moving out of the state and even if I don’t owe any money. But perhaps I’m mistaken about that or perhaps that’s less of a burden / expense (for tax prep) than forming in a neutral state.
What if it is an internet company, which offers hosted software use subscriptions? Sales are to every possible state, and some international. I just recently moved to california from texas. All sales are online. I dont even want to handle sales taxes, which makes me think of delaware as well.
@Jorge
Now that you are located in CA, you almost certainly will be “doing business” here (please see the post at http://danashultz.com/blog/2010/05/24/doing-business-in-ca-be-sure-to-register/), so you might as well form your company’s legal entity here.
If you will be selling to customers located everywhere, your company’s state of formation will not have a material effect on you obligation to collect sales tax.
@Jorge
I have the same situation that Jorge describes: an interenet SaaS business with sales to multiple states. Furthermore, I won’t initially have any sales in my state of residence. Would it be advantageous to form my LLC/corp in Delaware or Nevada?
@Andrew
If you form in DE or NV, you still will have to register as a foreign entity in the state where you are doing business, so you will have to pay two states’ annual registration fees.