When Does it Make Sense to Set Up a Delaware/Nevada LLC versus Using Your Own State?

From a CPA's perspective, it almost never makes sense to set up a Delaware or Nevada LLC if you are based elsewhere. The decision to establish your LLC in another state often revolves around avoiding sales and use taxes or seeking specific corporate structures. However, doing so can lead to unnecessary complications and expenses. Let’s explore the nuances and considerations involved.

The Pros and Cons of Non-Home State LLCs

Out-of-state business owners sometimes consider forming entities in Delaware or Nevada to avoid paying sales tax, a common misconception. Here’s the truth:

Sales Tax Considerations

The relationship of sales tax is determined by the point of sale, which is generally tied to the location where the product or service is delivered, not where the business is registered. Therefore, registering your LLC in Delaware or Nevada will not necessarily exempt you from paying sales tax. In fact, taking this approach can complicate your tax filings and compliance processes.

Delaware LLC Considerations

Many business owners consider Delaware due to its reputation for tax efficiency and the protection it offers to LLC members. However, while Delaware’s Delaware franchise tax is nominal compared to many other states, you will still need to register as a foreign LLC in your home state. This involves additional paperwork, fees, and annual renewals, which can negate any initial cost savings.

Nevada LLC Considerations

Nevada is often chosen for its perceived benefits, such as lower fees and more relaxed regulations. However, out-of-state business owners still need to obtain a certificate of authority from their home state to do business there. This is often overlooked and can lead to penalties and legal complications.

Opting for Home State Formation

In my opinion, the easiest and most straightforward way to manage a business is by forming an LLC in your home state. Here are the key reasons why:

Convenience and Simplicity: Dealing with a single jurisdiction simplifies the paperwork, meetings, and compliance obligations. Consistency of Management Information: Keeping your LLC in your home state ensures that all information remains in one central location, making it easier to manage and access. State-Specific Regulations: Understanding and complying with your home state’s laws is more straightforward than navigating regulatory environments in multiple states.

Why Large Companies May Consider Delaware/Nevada/New Mexico

While it is not advisable for small businesses, large companies may still consider Delaware, Nevada, or New Mexico for the following reasons:

Corporate Structure: Delaware is known for its strong corporate governance, flexibility in corporate structures, and robust legal system, making it a preferred choice for large corporations. Institutional Investment:Venture capitalists and institutional investors often prefer companies incorporated in Delaware due to the integrity and stability of the legal framework. Tax and Regulation: New Mexico offers specific tax benefits, such as tax incentives for startups and technology companies, which may be attractive to certain large enterprises.

Conclusion

In my experience, it never makes sense to form a limited liability company in a state other than the state in which the LLC will be doing business. The double payments for registration and compliance in both the home state and another state provide no benefit and can lead to unnecessary complications. For further discussion, please refer to Why Not Form an LLC in Nevada or Wyoming.

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