Expert: Richard Fritzler - 5/13/2006

Question

Hi,

I am interested to start an LLC. Some research on the internet lead me to believe Delaware was the best choice until I saw this website:
http://www.corporationstoday.com/compare.html

My questions is I just want a second opinion: is Wyoming indeed the best choice as Corporations Today, Inc claims?

Brgds,

Reginald

Answer
Without specifics of your type of business and your goals, I can't give you the "definitive answer" of which state, so let me give you some ground rules.

First I would recommend that you review your choice of entity.

If you were looking for a tax advantage, you already lose, since the LLC is a "disregarded entity" according to the IRS, there is no tax advantage regardless the state of filing. All the tax liability falls to the owners in their home state, and are taxed as Sole Proprietors.

If you were looking for liability advantages, again you lose the LLC has failed prove any protection in this area.

All in all, the LLC provides no advantage over you operating as a sole proprietor, so filing in another state is like multiplying by zero.

If you plan on being profitable, then you should consider doing that business as ALL of the MOST SUCCESSFUL businesses do. As a Real Corporation. REal Corporations do get tax advantages, and have provided liability protection.
Real Corporations are well understood, and better respected in the business community.

Once you choose an entity, now let's look at domicile.

You will be required to "file" your entity in, and comply with the rules of, the state in which you operate. By operate that means: Address, Bank Account, Telephone Number, significant business presence (employees, Market Share, Real Estate Holdings). Each state has a right to regulate and tax ALL businesses operating within their state. Many businesses are required to file in multiple states. So, for many businesses your home state is your first logical choice.

Filing in another state, does not automatically make you immune to the inequities and taxes of your home state. You could be required to file as a foreign corporation in addition, so that will actually increase your cost.

Don't get me wrong, there are completely credible ways to reduce taxes, and avail yourself of better liability protection, you just have to follow the rules.

Not all states treat businesses the same way, Washington state has a Gross revenue tax. Bad. California has a high 8.8% state tax along with a lot of anti business legislation, Oregon has a 9% state tax. and list goes on. All of the smartest businesses look at the friendlyness of the business environment, and contrast that to teh potential for profitability to determine where they will take root. And many businesses diversify, placing parts of their operations in some states while positioning other aspects of their business in other states.

There are certainly differences.

As far as which state? well, if you are planning on being a "publicly traded company" then Delaware has the advantage. They have always written their rules to benefit publicly traded companies. And Deleware can boast a majority of fortune 500 companies being filed there. But if you aren' planning on being a fortune 500, then Delaware would not be your best choice.

It is normally considered that Nevada is the best state for Privately held businesses. They have created a very agressive pro-business environment. And that pro-business environment has created a lot of business moving to Nevada. Wyoming, having seen that growth madified their statutes a number of years ago to mimic Nevada, but the results have not been the same. Sorry to add more dimensions to your question.

But If you call me, I think we can look at your specific circumstances and make the most effective determination. first look to changing your business entity selection, then consider that your home state is the best place to start. Once you are profitable, then adding an entity in a better domicile to your overall plan may be the best option.

Richard Fritzler
www.owelesstax.com
phone 800 590-6612