Why (not) form an LLC in Nevada (or Wyoming)?
Questions about forming a limited liability company (LLC) in Nevada (or, increasingly, Wyoming) 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 a state that does not have an income tax. The problem is that lack of an income tax will benefit you only to the extent that you do business in in that state!
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 or Wyoming. 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 or Wyoming 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 located in Northern California's San Francisco Bay Area (in the East Bay, near Oakland) who has in-depth knowledge of law, business, technology, and the needs of startup and early-stage companies.
Here’s a video on this topic. Great article! http://www.eminutesonline.com/should-i-form-a-nevada-corp/
Dana- thanks for this blog entry. One question- I thought that Nevada offers one very important advantage over CA in terms of forming an LLC- it gives more liability protection since the courts were more pro business. Is this not correct?
Thanks.
@Mike
The sense in which Nevada is pro-business (in comparison to California, for example) is that it has low taxes and puts fewer operational burdens on businesses. But, as noted in my post, those benefits are relevant only to the extent that an LLC does business in Nevada – if the LLC is doing business in California, it is subject to California law.
I know of no fundamental difference between Nevada and any other state with respect to the LLC providing protection against members’ personal liability for LLC obligations.
This brings up a couple of questions. I am starting an llc/corp to sell software online (download only), which I expect to bring customers from around the globe.
1. Is there an advantage to Delaware over my home state, or even Nevada. Most business will not be done in my home state.
2. Is it possible to keep the members of an llc confidential? Does this differ by state?
Thanks
@james
1. As my post suggested, if you will have a lot of interstate activity, you should consult with a qualified tax advisor to determine where to form your entity. If tax considerations turn out to be inconsequential, you might as well form the entity in the state where its (principal) office will be located.
2. In CA, DE and NV, the members need not be identified; I am not familiar with other states, but you can find out easily enough be going to the Secretary of State website and looking at the applicable form for registering the LLC in that state. Please note that some states (such as NV) require that the manager(s) be identified; to the extent that any manager is a member, that member, thus, will have been identified.
A follow up question, that is burning for me. Lets say the corporation is in Nevada and I form a DBA in California with the Nevada company as owner. How does the work?
This mean all my business activities in California is under he DBA itself. I am not sure that was answered directly.
@Larkland
If your Nevada company is doing business in CA, it must register in CA as a foreign corporation or LLC (as stated in the post). Then the *CA* entity (rather than the NV entity) applies for the fictitious business name/DBA (please see the post at http://danashultz.com/blog/2010/02/26/when-should-i-apply-for-my-dba/ ).
Hi. What if you are not a US resident? I’m from Australia and thinking about setting up an LLC to conduct my business initially for my business. Here are my reasons why:
1. I don’t need funding so I don’t necessarily need a C-corp
2. I don’t have employees in the US, but the reason why I’m thinking to set up in the US is to make it easier to get a quality merchant account, and
3. In reality if I have hosting in the US and the majority of customers in the US, and down the track I might have employees in the US then I might be doing business in the US (in which case I might as well have an entity in the US as I will be taxed anyway)
4. Plus I think that the reputation and ability to get other people involved especially high level people in silicon valley will be easier to manage if I set up an entity in the US.
So, my intention is to make this a very successful business which will eventually be acquired and may need funding, plus I want to get high quality directors and they will need stock in which case maybe I do need a C-corp.
Hmmm … hard to put it all together, but basically when thinking about it all, seems like I should go for a Delaware C-corp or an LLC. However it seems like this is a fight between better ability to get people involved and raise money for the c-corp and better taxation for the LLC.
Any thoughts?
@Rob Rawson
Re the state in which to form your entity: Form it where the company will be doing business. If Silicon Valley is important, then form and operate the business in California.
Re balancing tax considerations against business considerations: Only you can make that assessment. I do not know how great the business’s tax burden will be, or how heavily that burden will weigh on you.
Good luck!
Hi Dana, I’m going to be forming one or more single-member LLCs soon. I also may move to a different state in the not-too-distant future.
The businesses won’t have brick and mortar locations. They’re services that I’ll provide remotely via the internet from wherever I reside.
I’m wondering if my move to a different state would end up being simpler if I form the LLCs somewhere like Wyoming (not my current or future state) and foreign-qualify them wherever I end up residing (starting with my current state). As opposed to forming them in my current state and then taking the steps that would require when I move.
I wouldn’t expect to gain any tax advantage by forming in Wyoming (or Nevada), I’m interested in it just for the purpose of simplifying future moves of my personal residence to different states.
What do you think, is that likely to make it simpler?