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Starting a Small Business/Questions on nexus, registration and taxes for LLC with partners in two different states


Hello Mr. Staub,

Thank you for taking the time to consider this question, were were just planning to file LLC ourselves in one of our home state's but it seems to be more complex and now I am not sure. I have given a lot of detail in the hopes it will help clarify the situation.

This is the scenario: I am resident in Pennsylvania and planning to form an LLC with my partner who resides in Georgia with each of us having a 50% membership in the LLC. We will be launching an online service where income will be generated from users subscribing to the online service from all 50 states plus outside of the US. We do not plan to have employees for the first few years, only contractors. We will be using cloud web services and hosting services distributed throughout the US to power the service, the LLC wont own any data-centers or have a physical office in any state other than a 'headquarters' we declare to be wherever we choose. However, both my partner and I will actively work on developing and launching the product from our homes in each of our states. We are leaning towards electing the LLC to be treated as a partnership at the federal level. We will likely have losses the first year but want to understand the implications for either losses or gains. We can choose to file the LLC in Georgia, Pennsylvania or Delaware whichever works out best.

I have done some research and am confused on the following since 'nexus' and 'doing business' relate directly to how we need to file & pay our taxes.
1. Where is there nexus? Obviously there is nexus wherever we file, but is there nexus anywhere else? I originally thought not, but I found a recent article in Boomberg “ Recent State Tax Developments for Pass-Through Entities: Nexus Over Nonresident Owners and Apportionment of Income” that indicates otherwise.
2. Similar to nexus, what state(s) would we considered to be doing business in since we wont have a physical presence in any state other than working from our computer in our homes.
3. If we register the LLC in Georgia or Pennsylvania, are we required to register in the other state as a foreign entity?
4. Since we each live in Pennsylvania and Georgia, is there any tax or other advantage to filing in Delaware?


Thank you for your questions.  As you will see from my responses below, technology has spurred changes in how business is conducted and the law has not really kept pace with those changes.

1. As you  know, nexus is the term used to describe the minimum level of contact that a business needs to have with a state before the state has the constitutional right to impose its taxes on the business. Even where there are tangible contacts like mail, delivery trucks, etc..., nexus is a difficult question to answer.  When a business is conducted only online, the answer becomes even less clear.  I think each of the states where you and your partner are actively working on the business would have a reasonable argument that nexus exists in those states.  It is far from certain, however.  Even less certain is whether any other state could argue that nexus exists.  For example, if you use a Virginia-based host for the website or a fulfillment company located in Ohio to store and ship the product, could those states argue that nexus exists?  It could easily turn on the very specific facts of your own situation.

2. The concept of "doing business" is determined under state law, as opposed to the concept of nexus which is a matter of U.S. constitutional law.  Therefore, it varies from state to state.  Typically, to be doing business in a state requires a greater level of activity than is needed to create nexus.  Without knowing more details about the nature of the product and the business, it is impossible to say, but from your description it sounds like you would not be "doing business" in states other than Georgia or Pennsylvania.  I don't know enough about the interpretation in those states to say whether simply performing services for the company from your home is "doing business."

3. The requirement to register as a foreign entity is typically based on whether the entity is "doing business" in the state.  See question 2.  Since the states may have different views on what constitutes doing business, you may find that one of the states may require qualifying as a foreign entity if you register in the other state but if you switch the organization to that state, the other state does not consider your activities as rising to the level of "doing business."

4. Assuming that your LLC is taxed as a partnership, rather than as a corporation, there is usually no significant tax benefit to organizing in one state over another.  There are a few exceptions among the states, and I am not sufficiently familiar with state tax issues in Georgia or Pennsylvania to say whether their tax laws create an incentive to organize the LLC elsewhere.  As for other advantages, state LLC statutes generally provide rules that apply only in the absence of an operating agreement.  These default rules frequently need to be overridden in the operating agreement to meet the specific needs of the members of the LLC.  Whether the default rules of Delaware, Georgia or Pennsylvania are best suited to your needs is largely irrelevant if you take the time to prepare an operating agreement that covers the issues as you want them covered.  That is the course I recommend.  

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David K. Staub


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.


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.

Staub Anderson LLC
Illinois business attorneys

Practice Areas
Business Organizations


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


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

Commerce Magazine; YLS Journal; ISBA Section of Taxation Newsletter

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

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