Why You Shoudn’t Set Up Your LLC in Nevada or Delaware

By Bob Montgomery | July 31, 2008

by Bob Montgomery

I am often asked where’s the best place to set up an LLC or corporation, my answer is usually in the state where you intend to conduct most of your business or where you have an office or business presence. In other words, your home state.

If you set up an LLC in a different state than the one you are conducting most of your business in, you will likely be required to file an application as a foreign LLC or foreign corporation (meaning from another state) in any other state where you conduct substantial business or have substantial business contacts.

For example, if you form an LLC in Nevada but your business office is in Oregon and you conduct most of your business in Oregon, you will likely have to file and pay fees in Oregon as a foreign LLC doing business in Oregon, in addition to filing and paying fees in Nevada.

This dual filing can be expensive and can result in substantially more record keeping which may outweigh any potential advantages. Some larger LLC’s and corporations are registered as foreign entities in every state but this is expensive and time consuming for most small businesses.

Sometimes there may be a valid reason for setting up an LLC or corporation in a state different than where you conduct most of your business. There may be some special tax advantages or liability advantages in one state which are helpful to your special type of business. This requires some advanced research into the tax and liability laws of the state you want to use. Your accountant or tax advisor can help you with this issue.

Most people are aware that Delaware and Nevada are promoted as the best places to set up a new LLC or corporation. My experience is that this is not necessarily true. Delaware may be a good state for larger companies but the costs and red tape of foreign state filings likely outweigh the advantages for smaller businesses. The same is true of Nevada.

For example, Nevada boasts no state income tax on corporations or LLC’s. However, LLC’s don’t pay income tax anyway. They are considered pass through entities which means the LLC itself is not subject to federal or state income tax. Rather, the owners or members pay income tax on their pro rata share of the income. If you live and do business in a different state, you will likely have to pay income tax in that state.

It is true that in some states the members will have to pay state income tax on their share of income from an LLC. There are other states which do not have state income tax but they often make up for the revenue with some other form of tax or assessment.

Nevada also claims that it protects privacy because they do not share information with the IRS. However, if the IRS wants information or records from a business, all they have to do is issue a subpoena and they get the information. Believe me, I’ve seen it happen. In addition, if you form a corporation in Nevada but then have to file as a foreign corporation or LLC in another state because you do business there, your information will be shared with the IRS anyway.

There is nothing wrong about being aggressive in trying to reduce taxes and save money but I also believe in doing it honestly. If you are running a legitimate business and are properly filing tax returns, why should you be so intent on not having your information shared with the IRS anyway.

If you operate a business that provides its product or services everywhere, such as an internet based business, then you have more choices. However, even with an internet business, if you do substantial business in any particular state, you may still be required to register in that state as a foreign corporation or LLC.

The bottom line is that for most smaller businesses, forming an LLC or corporation in your home state or in the state where you have the most business contacts or where you do most of your business is still the best practice and will likely save you some money.

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