While most entrepreneurs choose to register a Limited Liability Company (LLC) in the state where they live and plan to operate, some take a different path and form their LLCs in a state other than their own. This entity is referred to as a foreign LLC.
Certain states are known for 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 more ease of conducting business, causing them to forego their own states and register their LLCs elsewhere.
Other owners form foreign LLCs in states they’ve expanded into or are planning to expand into as the next step in growing their businesses, or because the laws of their state don’t permit the business to operate as it wishes.
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?
In addition to the reasons mentioned earlier, there are certain scenarios in which it makes sense to register your LLC in a state other than your own. If you live in one state but conduct all your business in another state, it makes sense to form the LLC in the state where you do business instead of your home state. You’d have to qualify to do business there anyway, so simply forming the business in that state could simplify the process.
Likewise, if your LLC’s business is real estate investment, it’s advisable to form the company in the state where you’ll be buying real estate to rent or sell, as you’ll be operating the business there, not in your home state.
Another reason to form a foreign LLC is if you plan from the time you set up the company to transact business in numerous states. Anticipating that you’ll need to foreign qualify in all the states in which you’ll conduct business, choosing a state that offers financial or legal advantages as the home for your LLC may be prudent.
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 recognize S Corporations, and other states are not very favorable toward them. That can lead to those desiring S Corporation status for their LLCs in states that do not recognize them to register their businesses as foreign LLCs in another state.
Also, someone who doesn’t live in the United States but operates an LLC here has the option of choosing a business-friendly state in which to form, as they don’t have a home state. Choosing the right state is important for non-residents wishing to form an LLC, as it can affect how much taxes they’ll pay, what it will cost to operate the business, what sort of legal protections they’ll have, and other considerations. Someone looking to start a business in another country should consult a business lawyer to make sure they’re working in their best interests.
If for some reason it makes sense for you to form your business in a state other than where you live, it’s important to do some research and learn which states offer advantages for foreign LLCs. Let’s have a look at which states are considered the most business-friendly and what they offer.
Which State Is Best?
It’s generally agreed that Delaware, Wyoming, Nevada, and New Mexico are states that offer the most advantages for companies that register there.
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 companies based in Delaware that are facing lawsuits. Delaware is also one of just four states that allows 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 your LLC is involved in a lawsuit, it’s not a sure thing at all that you’ll 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 the 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 you need to conduct business in Wyoming to benefit. If your LLC is based in Wyoming but your business is conducted elsewhere, you won’t realize tax benefits. If you conduct business in Wyoming and in other states, you’d 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 a foreign 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 your 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 you live there or conduct all your business in New Mexico, you can take advantage of those benefits. If you conduct business elsewhere, however, you’ll have to pay additional formation fees and file annual reports in that state, reducing the benefit of forming your LLC in New Mexico.
Other Foreign LLC Considerations
While there are some good reasons for forming a foreign LLC, it’s generally agreed that the optimal state to start a company is the state where you live and are where you are most likely to conduct business. 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.
And remember, if you register your LLC in a different state for tax purposes, you’ll take advantage of the tax advantages on any money the business earns there, but still have to pay taxes on money generated in your home state.
Wrapping it Up
Understanding which states are most hospitable for forming a foreign LLC is important if there’s a specific reason that you must do so. If there is not, however, your own state is probably your best bet for getting your business registered and operating. If you’re not sure where to start your business, seek advice from a trusted professional.
