While most entrepreneurs choose to register a Limited Liability Company (LLC) in the state where they live and plan to operate, some decide to expand their operations into one or more other states by registering it as a “foreign LLC”.
The LLC is considered a “domestic LLC” in the state where it filed its entity formation paperwork (called Articles of Organization in most states). When an entrepreneur wants to expand their company beyond the borders of the state where they filed its formation paperwork, they may want (or be required) to register it as a foreign LLC in other states. The process for doing so is called foreign qualification.
Let me walk you through some instances in which forming a foreign LLC may be the way to go, and then we’ll look at the best states for forming a foreign LLC.
Why Would You Register a Foreign LLC?
Registering an LLC as a foreign LLC allows a business to expand its operations. Moreover, all states have nexus laws that require business owners to foreign qualify their business entity. If an LLC has a physical presence or has reached a certain sales, income, or other economic threshold in a state, it may have no choice but to register as a foreign entity if it wants to do business there.
When an LLC’s owners want to set up their company to do business in numerous states, they need to foreign qualify in all the states where they’ll have a physical presence or other form of nexus.
Does It Ever Make Sense to Form an LLC in a Different State from the Start?
If a business owner lives in one state but conducts all of their business in another state, it may make sense for them to form their domestic LLC in the state where they do business instead of their home state. Most likely, if they formed their LLC in their home state, they would be required to foreign qualify in the state where they’re actively doing business anyway (remember nexus!). So, simply forming the business in that state could simplify the process—reducing paperwork, minimizing compliance obligations, saving money, etc.
And, if an LLC is established for a real estate investment, it’s often most beneficial to form the company in the state where the property purchased to rent or sell is located, because the LLC will be operating there, not in the entrepreneur’s home state.
Someone who doesn’t live in the United States but wants to do business here has the option of choosing a state in which to form their LLC. It’s important for non-residents to carefully choose where they want to establish their domestic LLC, as it can affect how much taxes they’ll pay, the administrative costs to operate the business, the extent of the legal protections they’ll have, and other aspects of launching and running their company.
Which State Is Best?
So, where is it ideal for an LLC to expand its operations? Certain states are known for having business-friendly practices, including tax advantages, streamlined business formation, privacy protections, less stringent compliance requirements, and other perks. Those offerings are attractive to some business owners looking for lower costs and greater ease of conducting business.
Delaware, Wyoming, Nevada, and New Mexico are popular choices because of the advantages they provide to companies that register within their jurisdictions.
Delaware
There are reasons why a majority of all Fortune 500 companies are incorporated in Delaware. The state has a highly business-friendly General Corporation Law, and a business-centric Chancery Court that is favorable to Delaware-based companies that are facing lawsuits. Also, Delaware is one of the few states that allow anonymous LLCs, enabling entrepreneurs to form a business while keeping their identities private.
Note, however, that while some of Delaware’s business perks might trickle down to LLCs, most are geared toward large Corporations. An LLC doesn’t benefit from the General Corporation Law, as it’s covered by the state’s Limited Liability Company Act. And if an LLC is involved in a lawsuit, it’s not a sure thing that it will benefit from the Chancery Court.
Wyoming
Like Delaware, Wyoming allows for anonymous LLCs, providing privacy to business owners who don’t want their identities known. The state also does not impose corporate or personal income tax, which in addition to providing tax advantages offers an additional layer of privacy protection because there’s no need to file personal information when submitting taxes.
Along with no income tax, Wyoming doesn’t have a franchise tax, which is a fee that owners of LLCs and some other types of business entities must pay each year for the privilege of having their companies located in a state. This lack of taxes earned the state the number one spot on the Tax Foundation’s State Business Tax Climate Index for 2024.
While not having to pay income tax or franchise tax is advantageous, remember that the company must conduct business in Wyoming to benefit. If an LLC is based in Wyoming but conducts business elsewhere, it won’t realize tax benefits. If conducting business in Wyoming and in other states, the LLC and its owners will only avoid paying the tax on the money earned in Wyoming.
Nevada
Nevada is another state that doesn’t levy any income or franchise taxes, contributing to its reputation as a favorable place to form an LLC and earning it the number seven spot on the Business Tax Climate Index.
Anonymous LLCs are permitted in Nevada, although the Secretary of State requires a list of members and managers to be submitted with the Articles of Organization as the company is being formed.
Again, be aware that while the lack of taxes is appealing, you won’t see the benefits unless the business’s income is generated in Nevada.
New Mexico
New Mexico is noted for the low fees it charges to form an LLC and the fact that it doesn’t require annual reports. It also offers enhanced privacy protections. If an LLC conducts all of its business in New Mexico, those benefits are advantageous. If the company conducts business elsewhere, however, it may have to pay additional formation fees and file annual reports in the other state(s).
Important Takeaways and Considerations
- It’s generally agreed that the optimal state to form a company in is the state where you live if you will conduct business there. Registering your LLC in your home state is usually the easiest and most cost-effective way to go.
- Forming your LLC in another state while conducting the business from your home state means you’d be considered a foreign LLC in the state where you live and a domestic LLC in the other state. You’d have to pay two sets of filing fees and have a registered agent—a person or company that receives legal correspondence on your behalf—in both states. Plus, you’d have to file annual reports, pay reporting fees, and satisfy all other compliance requirements in two states instead of one.
- Some business owners elect S Corporation status for their LLC, a move that can reduce the amount of self-employment tax they have to pay. The S Corporation structure allows owners to divide their incomes between a shareholder distribution and a salary they are paid as an employee of the business. An owner must pay taxes—including self-employment taxes—on the money earned as a salary, but self-employment taxes are not levied on the money members receive as distributions. A problem, however, is that not all states’ tax codes recognize S Corporations.
- If you form your company as a domestic LLC in a different state for tax purposes, you’ll enjoy the tax advantages on any money the business earns there. However, if you’re doing any business in your home state, you’ll likely have to register your company as a foreign LLC there—and pay taxes on any income generated there as well.
- This post talks about the term “foreign LLC” as states define it. The IRS defines “domestic” and “foreign” entities differently. In the IRS’s eyes, an LLC, corporation, or other business entity that’s organized in the United States under U.S. laws (regardless of its status as domestic or foreign in a state) is considered a domestic company for federal tax purposes. For instance, if an LLC formed in California is foreign qualified to also conduct business in New York, the IRS would consider it a domestic business in both states even though New York would consider it a foreign LLC in its jurisdiction.
Wrapping it Up
Anyone looking to set up and run an LLC can benefit from consulting a business lawyer and accounting and tax professionals to make sure they understand the effects of forming an domestic LLC in a state and their registration and filing responsibilities in states where they have nexus and must foreign qualify.
