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Creating an LLC- Which State is Best?

Creating an LLC and wondering which state to use? I usually recommend that you create an LLCCreating an LLC in the state where you are doing business. Yes I know that you have probably heard all the sales pitches that Nevada and Delaware make. You may even believe the asset protection and the “secrecy hype” that these states claim to offer. What I can tell you is that it costs a lot more to form your LLC in a foreign state. (A state in which you or your business does not reside.) And there is really not much more protection.

The whole “incorporate or LLC in my state” thing is basically nothing more than a great business for the registered agent. When you are creating an LLC and you are deciding which state, remember you are at the whim of your registered agent. He will charge you $500 or $1,500 a year to forward a couple of letters from the state to you. He must also receive and forward the service of process for any lawsuit directed at your LLC. Can you trust him to do that in a timely matter? In a lawsuit, time is of the essence. If it takes a week or more for you to get the notice, you may lose the right to reply to the lawsuit or lose the lawsuit. This is an ongoing problem, so beware when you are creating an LLC!

It you choose to incorporate in a foreign state when creating an LLC, you will need to pay all the fees for the foreign state. Once paid, you must also pay all the fees in the state where you’re actually doing business. Can your LLC afford this double fee structure? You must also pay income taxes in the state where you are making money, so there isn’t any tax advantage to doing business in Iowa and having your LLC in Nevada or Delaware.

There may be one good reason to have your LLC in a state where you’re not doing business. If you get in trouble personally, you are most likely to be sued in the state where you are living and doing business. If your creditor gets a judgment against you personally, the judgment creditor has to get a “charging order” to come after your interest in your LLC. The most a charging order will give him is a right to the economic benefits you would receive in the LLC.

The charging order (think of it as a garnishment) will be against your interest in the LLC. This is not automatically part of the judgment. To collect, your creditor must petition the court for the order. If the court where you are sued is in one state and your LLC is in another state, then your creditor must take his judgment to court in the state where your LLC resides. The courts in this “other state” must recognize the judgment and then issue the charging order. If the court is in the same state where the LLC is formed, then it is easier for your creditor to get the charging order.

For this reason, it may be advantageous to consider having your LLC out of the state when you are creating an LLC. If you elect to form your LLC out of state, you will need to pay the extra costs. This is a balance between cost and protection you will have to weigh when making this decision. You will pay more, but you will now have a pretty substantial stumbling block in the way of the guy trying to come after you personally to get to your business assets.

 

2 Comments
  1. Thanks for the no-BS perspective on this! I was almost swayed into the whole Delaware/Nevada/Wyoming thing, but stood corrected by my CPA.

    So basically the advantage of a foreign-state LLC is increased protection for your company from being affected by personal debt. I’m thinking if a catastrophic event happens to you (like an expensive medical event), then this would come into play. Or of course if you’re irresponsible with your own financial planning.

  2. Kevin,
    There really is no advantage to a foreign state LLC.

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