You are here:

Starting a Small Business/In which state should I register my LLC?

Advertisement


Question
QUESTION: Hello,
I am seeking advice about which state is best for me to incorporate an LLC.
The business will be internet-based and will not require a physical presence. I am currently living in California, but may or may not move in 2013 to either IL, TX or OR for personal reasons. I need to incorporate as soon as possible - well before I will decide about moving.
I know registration fees vary by state and that the foreign LLC fees and requirements vary as well. CA seems to be one of the more expensive states as opposed to DE or others that I mentioned. Some states also seem to have franchise tax and registered agent fees as well.
Assuming I will be in CA for the next 8 months at least, but may be elsewhere after that, is there a particular state that would be best to register in to keep overall fees from both the state of incorporation & state of residence as low as possible over the first few years? Other than cost of fees, are there other considerations that should influence the decision of where to register?
Any advice and/or resources would be appreciated.
Thanks!

ANSWER: Particularly since you don't know where you will end up, there is no "best" state for organizing your limited liability liability company.

Assuming that you are conducting business in the state that you live in, the least expensive choice is from the standpoint of filing fees, franchise taxes, etc... is always going to be the state you are living in.  The reason is that no matter how much cheaper it may be to form the corporation in another state, the state where you are actually conducting business will make you qualify as a foreign LLC in that state as well.  You will be paying fees to your own state and to the state where you organized the LLC.

There are other reasons.  When comparing any two states, you will invariably find differences between the LLC Acts in the two states.  Most of the differences are subtle and probably affect very few LLCs, particularly if the LLC has only a single member.  However, if you plan to have several members, you might find that the differences do matter in your particular situation.  Delaware, for example, provides greater protection for managers than many other states.

Just because you form your LLC in a state does not mean that you must always keep the LLC in that state.  There are procedures to transfer your LLC to another state. Usually it involves setting up a new LLC in the new state and merging the old LLC into it.  There are filing fees for both states, but they are  typically going to be less than continuing to file annual reports in both states for several more years.

---------- FOLLOW-UP ----------

QUESTION: Thank you very much David!

One additional question: is there double taxation of any sort when incorporated in one state and operating in another?

Will the LLC's income only be taxable by the state in which I am living, or is there taxation by the state of incorporation as well? Or does this vary from state to state?

Answer
The short answer is that you probably will not be subject to double tax.  The long answer is much more complicated.

Merely being incorporated in a state where you do not conduct business should not result in any taxable income to that state.

If you are the sole owner of the LLC and it is a disregarded entity for tax purposes, then generally the state of incorporation is not relevant for tax purposes at all unless the state is unusual and imposes some type of tax on a single member LLC.

In other cases, if your LLC is actually conducting business in more than one state, the result could be different. In theory there is no double taxation of a business' income but in practice that may not be the case.   

If you are doing business in more than one state, each state wants its share of your income.  States have what are called apportionment formulas.  These formulas allocate income between the states.  If every state used the same formula, then all the totals would add up to 100%.  Unfortunately, states use many different formulas and it is possible that when you add up the income allocated to each state, it can add up to more than 100% of the company's income.

Originally, most states applied a three-factor formula that gave equal weight to a business' sales, payroll and property.  Eventually, some states weighted the factors unequally, often giving double weight to sales.  Several states now have moved to a single factor formula. Depending on what states you are in, this amalgamation of formulae can result in taxing more than 100% of the business income.  To make things even more complicated, some states have different formulae for different industries, so you don't only need to know the relevant states but also what type of business activity generated the income.

I know that is somewhat confusing, but chances are that it will not apply at all in your case.  When it comes time to file your taxes, however, you should consult with an accountant or tax lawyer.

Starting a Small Business

All Answers


Answers by Expert:


Ask Experts

Volunteer


David K. Staub

Expertise

I am a business and tax attorney and have spent more than 35 years assisting people in starting a wide variety of businesses. I can answer questions about the basic differences between the various entities available to new businesses, including limited liability companies, corporations, S corporations and partnerships. I can provide guidance in other areas facing start ups, such as hiring employees, signing contracts and obtaining necessary licenses. I can also direct people to sources for answers to specific legal questions which cannot be answered in a forum of this nature.

Experience

I have an extensive practice in the mergers and acquisitions area and have been involved in the tax and legal issues on hundreds of business transactions.

Website
Staub Anderson LLC
Illinois business attorneys

Practice Areas
Business Organizations
-Corporations

-LLCs
-Partnerships

-Joint ventures
Mergers & Acquisitions
-Buying/selling business
Securities Law
Tax Law
Technology Law
-Software licenses
-Development agreements

Trademarks

Organizations
Illinois State Bar Association; Chicago Bar Association (former Chairman of the Corporation & Business Law Committee and former Chairman of the Mergers and Acquisitions Subcommittee; former Executive Committee member, Federal Tax Committee and Chairman of subcommittee on general tax issues); Keystone Foundation (Trustee); Association for Corporate Growth; Midwest Entrepreneur Forum; Midwest Association of Alpha Delta Phi

Publications
Commerce Magazine; YLS Journal; ISBA Section of Taxation Newsletter

Education/Credentials
Harvard Law School, J.D., 1977; University of Illinois, B.S. in Accounting, with highest honors, 1974

©2016 About.com. All rights reserved.