So you’ve decided that a limited liability company (LLC) is the best structure for your new venture. The next biggest challenge is choosing the best state to form your LLC.
Choosing the right home for your LLC is a largely misunderstood aspect of creating a new business and can cause confusion for even the most experienced business owners.
To help make sure you pick the right state and give your business the best possible start, we outline the key questions you should be asking yourself (and your legal and financial advisors) as well as breaking down the key advantages of popular ‘business-friendly’ states, Delaware and Wyoming.
Where Should You Incorporate Your Business?
When deciding on the right state to file your LLC, many factors can play into your decision making. First and foremost you will need to consider the goals and needs of your business.
We often hear from new business owners frustrated that their LLC was set up in the “wrong state” – needlessly increasing costs, fees, taxes, paperwork, and headaches.
Nevermind the trouble of having to re-domesticate an LLC to another state often requiring closing and opening new bank accounts, redrafting agreements and updating the IRS amongst other things.
To avoid these pitfalls from the outset, we outline the important questions you should consider when deciding where to form your LLC.
1. What’s your home state?
Business owners have the choice of filing their LLC in the same state the business operates or in a different state.
In most cases, where business owners live in the same state as the physical and operational location of the business, it is most practical to form an LLC in their home state.
Setting up a domestic LLC offers a number of key advantages. One – you avoid the added costs of having to pay a registered agent to represent you in the outside state, and two – you avoid the additional step of having to register a foreign LLC in your home state.
If you choose to set up an LLC in a different state, you may have to file a foreign LLC in your home state, immediately doubling your fees and filing obligations to satisfy the requirements of your home state and the state where your LLC is formed.
For this reason, many small business owners choose to register their LLC in the state where they plan to do business.
However, if your business does not have a physical location or you intend on conducting the majority of your business outside your home state, it may be worthwhile to consider filing your LLC in one of the ‘business-friendly’ states.
2. What size business are you hoping to grow?
You will also need to consider your future growth goals for the business. An LLC that opens with a single member and manager in its early days may expand significantly over the years with members all over the country. How big do you anticipate your business to be in five years’ time? Do you plan to have foreign members or members in multiple states?
Where your business is high growth, it may make more sense to set up an entity ‘headquarters’ in a ‘business-friendly’ state such as Delaware in the case you outgrow the LLC structure and wish to convert to a corporation or if you decide to receive venture funding.
3. What are your industry regulations?
Are there any industry-specific regulations that influence where you should register your LLC? For example, if you are required to register vehicles with the Department of Transportation, it may be best to form your LLC in your home state to avoid the possibility of your application being denied on the basis that you are not a resident of your LLC state. Make sure you do your homework on the applicable rules and regulations or seek guidance from legal professionals in the know.
‘Business-friendly’ States
Delaware (traditionally) and Wyoming (lately) are considered business-friendly states due to their pro-business laws and low corporate income taxes. Both states have streamlined the filing process, making it quick and easy to register an LLC with minimal costs and paperwork.
Delaware is internationally regarded as the preferred U.S. state for LLC registration and incorporation. Delaware is home to more than 50% of all U.S publicly traded companies and around 63% of all Fortune 500 companies. However, Wyoming is quickly building a reputation as a great place to start a small business with the Economist magazine even recognizing Wyoming as the “Switzerland of the Rocky Mountains”.
While both states provide a balanced and flexible regime for business registration, asset and liability protection, however, they do not present a universal one-size-fits-all solution. Both states vary in terms of fees, taxes, laws and requirements. The needs of a large LLC with high growth and high risk can be greatly different from a small business with limited growth and limited risk. When deciding on the right home for your LLC it is important to weigh up all options.
Advantages of a Delaware LLC.
There are many reasons why Delaware is considered the capital of corporate America. We list some of these below.
1. Domestic tax haven
Delaware has a number of tax advantages that naturally appeal to large businesses that are looking to reduce their tax bill. The state does not impose income tax on businesses that do not conduct operations within Delaware. Instead, these businesses only need to pay the significantly lower franchise tax which is a flat fee of $300 for LLCs.
The state also does not levy sales tax, value-added tax, inheritance tax, inventory tax, capital shares or stock transfer tax or personal property tax (only county-level real estate tax which is relatively low).
Delaware also does not tax gains from fixed-income or equity investments. This has created a so-called ‘Delaware Loophole’ as businesses that collect a large portion of their income from intangible assets like patents, trademarks and copyright can avoid tax liabilities in other states by making Delaware their “home”.
2. Strong legal precedent
The Delaware Court of Chancery is the oldest and most well-regarded business court in the U.S. The Court of Chancery allows for the quick resolution of corporate disputes. Business disputes that may take up to two years to resolve elsewhere can reach a resolution in a matter of weeks in Delaware. Chancery judges are well-versed in business law and are able to thoughtfully parse complex corporate issues that can easily confuse juries.
Decisions from the Court of Chancery often influence Supreme Court corporate litigation decisions and set the benchmark for U.S. corporate law. It is Delaware’s emphasis on predictability, consistency and stability that has allowed it to maintain its advantage as the preferred jurisdiction for business formation.
3. Privacy
Delaware is just one in four states (Wyoming, Nevada & New Mexico being the others) that does not require the names and addresses of LLC members to be made public. While Delaware does require a list of the initial members or officers to be filed with the LLC application, only the entity and the name and address of the registered agent are publicized. Despite having an anonymous LLC, the state may still be required to disclose your details to banks and the Internal Revenue Service (IRS). However, anonymous LLCs do act as an effective shield from stalkers or malicious persons accessing your personal information and buffering you from negative public relations in the event of any controversy generated from your business.
4. Quick and easy registration
Sometimes, when you file for incorporation, you want to get your business off the ground as soon as possible. You may have other demands on your time or reasons why you need to rush that incorporation through. In Delaware, you can file a $100 rush fee to move your business through the incorporation process faster. Wyoming does not offer this type of service, so if time is of the essence, it may be wise to look into Delaware.
Disadvantages of a Delaware LLC
A Delaware LLC offers prestige and advantages, especially for large, high-risk companies that earn a significant amount of income from patents and trademarks. However, the cost of registering and maintaining a Delaware LLC may be prohibitive for smaller business ventures.
Delaware has a range of sharing and reporting requirements, leaving you with more paperwork to keep up with in the early–and later–days of your corporation. LLCs must also keep up with filing obligations, including annual reports. In Delaware, corporate income tax information is also collected for sharing with the IRS.
If business owners do not have a legal residence in Delaware, they will need to hire a registered agent who has a street address–not just a post office box–in the state, increasing the fees associated with maintaining your LLC.
Smaller, less risky LLCs may find Wyoming better suited to the needs of their LLC.
Advantages of a Wyoming LLC
If you’re looking to register a small business or a tech startup, Wyoming, like Delaware, also provides strong asset protection even for sole owner LLCs. Consider these key advantages of incorporating in Wyoming.
1. Wyoming “closely held” LLCs are well-suited for family business, estate planning, and asset protection.
An often overlooked benefit of Wyoming is the choice of opening a ‘Wyoming Close LLC’. Introduced in 2002, the Wyoming Close LLC is a relatively new addition to the array of available Wyoming business entities and was designed primarily with small and family businesses in mind. It is a tightly controlled structure and differs from a regular LLC by allowing for greater restrictions on the transfer of ownership rights, transfer of company interests, membership, withdrawals, resignation, and dissolution. Membership is only gained with the full consent of all Close LLC members, members cannot leave without the full consent of all members and no member is entitled to the return of their initial contribution. These features allow Close LLC businesses to be passed down from one generation to the next, making a Wyoming Close LLC the prime choice for small family businesses and a great tool in estate planning.
Not only that, Wyoming Close LLC offers some of the most robust asset protection available in the country. The sole remedy a creditor has against a Wyoming Close LLC is a charging order. Even where a charging order is granted, creditors can only receive payment if the Close LLC makes a distribution. Where no distributions are made by the Close LLC, the creditor may not be paid. As a result, creditors may be less inclined to take a Wyoming Close LLC to court.
2. Wyoming is the most blockchain-friendly state.
Wyoming has recently introduced 13 blockchain-friendly laws designed to foster innovation and bring capital, jobs, and revenue into the state. As the first state to clarify the treatment of digital assets under existing commercial laws, Wyoming offers a new and comprehensive legal framework for blockchain technology, creating a boon for tech startups and attracting an influx of fintech based LLCs.
Among other things, the newly passed blockchain laws recognize property rights for owners of digital assets, create a fintech sandbox giving financial innovators a three-year protection from existing regulations, authorize basic banking services for blockchain-based businesses, gives cryptocurrency the super-negotiability rules of money and enables smart contracts.
Individuals, startups and blockchain businesses are able to gain the protection of Wyoming crypto-friendly laws through setting up a Wyoming LLC. Doing so will locate the LLC’s digital assets in Wyoming and may minimize tax obligations as digital assets are exempted from the state’s property taxes. Other states have similar blockchain-friendly laws in their pipelines, but Wyoming has clearly claimed the first-mover advantage in the digital assets space and has been called the “Delaware of digital asset law”.
3. Wyoming has significantly lower taxes for both business owners and private income.
Wyoming does not have a state personal income tax, nor does Wyoming have a state corporate income tax or franchise tax and as explained above, no property tax for digital assets. As a result, many small business owners may find that Wyoming offers much better options for minimizing tax obligations.
4. Wyoming has fewer fees associated with incorporating and maintaining an LLC.
Many small business owners and entrepreneurs are on a tight budget. As a result, you may choose to incorporate in Wyoming to help reduce those fees. Wyoming has some of the lowest administrative costs associated with filing and maintaining an LLC in the country. The initial filing fee is $100 and the annual fee for maintaining an LLC is typically around $50 where the LLC’s assets are under $250,000 and $0.0002 per dollar where the LLC’s assets are over $250,000 and located in the state.
5. Wyoming requires less paperwork and identifying information.
To incorporate your LLC in Wyoming, you will have to put together considerably less paperwork. Wyoming does not require an LLC to have an operating agreement (although one is certainly recommended). Wyoming does require annual reports, but they are limited to information confirming the LLC name and registered agent. There is also no requirement to submit an initial list of LLC members and officers during registration. All these things make it much easier for you to keep up with the responsibilities of business ownership, especially in the initial days after your incorporation. Wyoming also allows for a ‘lifetime proxy’ where an owner can privately express their vote through a selected person, further increasing their anonymity.
6. Wyoming allows easy domestication.
You can easily move an LLC to Wyoming if it was initially formed in another state. Through the process of continuance, an existing LLC can retain its original formation date, retaining the benefits associated with longevity and continuity of operation. Many other jurisdictions would require a continuing LLC to create a new corporate entity. Wyoming makes it easy for business owners who are moving or who have discovered that the advantages of Wyoming incorporation outweigh the advantages of incorporation in their current state.
Disadvantages of a Wyoming LLC
Incorporating your LLC in Wyoming has a number of advantages, especially for small business owners, family businesses and tech startups looking to lower operating costs and receive strong asset and liability protection. However, a disadvantage, especially for entrepreneurs looking to incorporate a significantly larger or riskier LLC is that Wyoming’s corporate laws and legal system are not as well-developed as those of Delaware.
Depending on your business needs, you will need to weigh up whether the lower costs of a Wyoming LLC outweighs the predictability and stability offered by a Delaware LLC.