Which State Should you Form In?

Tax attorneys assist companies, organizations, and individuals with tax-related legal problems. This includes assisting organization in reducing their exposure to tax obligations. Tax attorneys also represent clients who are involved in tax disputes with the IRS or other government agencies that collect taxes. According to legal industry watchers and thought leaders, the work of a Tax Attorney may be less stressful than other legal Specialization because taxes aren’t going away anytime soon, as they are the main mode of funding for a formal government, it’s also seen as a highly stable field of work.

When is it worthwhile to hire a tax attorney?

There are many circumstances when there it might make sense to hire a tax attorney. Generally, the thought is that hiring an attorney will be a decent investment, so the amount of money at issue should be sizable enough to warrant the investment in expert legal advice. 

For example, if you are 18 years old and are just starting your own lawn mowing company, and you have found that you made $3,000 in your first year, it’s not likely worth it to discuss with a tax attorney how best to structure those funds because the legal fees could easily be over $1,000 which would make up over 30% of the entire revenue. 

Pros of Filing in your Home State:

  • You could save money on fees
  • Your company does not have to register as a “foreign entity” if it conducts business in that state. Note, though, that “doing business” generally requires an active business presence if not a physical office.
  • LLC that does business in its state of filing does not need to find and pay a registered agent to represent its interests within that state.
 

However, it’s essential to consider the fees and state income taxes your business may be required to pay if you file in your home state. For that reason, if your company has no physical facility —a consulting firm, for example—or if you plan on conducting the majority of your business out of state, you may consider starting a company in a state other than your home state.

Delaware, Wyoming, and Nevada

 

 

Nevada

Wyoming

Delaware

Privacy

Nevada has no information-sharing agreement with the Internal Revenue Service (IRS). Indeed, the state doesn’t require much disclosure at all, allowing Nevada companies’ owners to remain anonymous in public filings, which means those who value privacy regarding their business may find Nevada to be a good fit.

It also has a “lifetime proxy,” which allows even more anonymity than Nevada, in a sense. Through this proxy, an individual can privately express his or her vote through a selected person who holds the stock or shares.

Delaware’s corporate laws protect the privacy of director and shareholder identities

Taxes

It does not require entities to pay a tax based on net income

Does not have business income or franchise taxes

Delaware does not require companies to pay tax based on net income unless they have elected to be classified as corporations for federal tax purposes.

Fees

LLCs doing business within the state must obtain a business license. The business license fee is $200 at the time of initial application and then $200 annually.

Articles of organization: $75; Annual report: $125

Articles of Organization: $100; 

Annual Report: $50

an annual fee of $300 due by June 1st, beginning the year following formation

Certificate of formation: $90;

Other

It doesn’t require annual meetings or operating agreements to stay compliant with state law

 

Delaware is best suited for publicly traded companies that sell shares on the stock market (like Microsoft, Apple, IBM, Chase, Coca-Cola) or companies with multiple investors or need to raise venture capital. 

Please note: you will still need to pay Federal income taxes with the IRS even if there is no state-level income tax. Calculating your tax obligations federally (with the IRS), on the state level, and locally (with your city, county, or township) can be complicated and can negatively impact your company if done improperly. That’s why you need to consult an accountant on your specific situation.

Additional Factors to Consider when Choosing Where to File

As you can see, there are many factors to consider when deciding where to form an entity.

If you form a company in Delaware/Wyoming/Nevada (but don’t live there), you might run into the following. courts situation:

– you’ll need to register your Delaware/Wyoming/Nevada entity as a Foreign LLC in your home state (if you have an active physical business presence in your home state),

– pay annually for a Registered Agent, and

– pay the Annual Reporting fees in both states every year.

 As pros of the forming LLC in the states mentioned above might be the next:

Lack of “Outside” Liability Protection for a single-member LLC in your home state. In a variety of states, courts have “pierced the veil” of a single-member LLC from the outside and have held that it is not a separate entity and thus may not be used to protect the assets of the LLC from the creditors of the member.

EXAMPLE: 

You get into a car accident texting, and you get sued in excess of your insurance policy.  Can the plaintiff come after your rental property in an LLC?  Answer:  The law says in 18 states that IF your LLC is owned by two members, they can’t break into the LLC. 

However, only THREE states give the Single-Member LLC the same protection as a Multi-Member LLC (Wyoming, Nevada, and Delaware). Thus, the Single-Member LLC in the far majority of states will not protect against personal liability in the event of a lawsuit or other claim

To avoid this issue, you can do one of two things: (i) create at least a two-member LLC with sufficient legal documentation (including an operating agreement and annual company minutes, etc.) to reflect that the two-member LLC is indeed a separate entity and has been treated as such; or (ii) set up a holding or parent company in Wyoming, Nevada or Delaware to own your other LLCs and force a plaintiff to fight their way through another state before getting to your ‘other’ Single-Member LLCs owned by your ‘Parent.’

 Foreign Qualification

As you can see, there are many factors to consider when deciding where to form an entity.

Below are a few examples that might help you to determine if your Wyoming/Nevada/Delaware LLC will require a foreign qualification in your home state.

– If you are a consultant and perform most of your work online, with clients in multiple states, you do not need to file a foreign qualification.

– You often have in-person meetings with the bulk of the clients in your home state- you might need a foreign qualification or home state LLC.

 

In the table below, you can find information regarding tax implications and fees in some states.

 

 

 

Requirements for foreign (out of state) LLCs

Fees (filing fee and annual)

Tax implications

Maryland

LLCs formed in other states must file a Form 510 if they have income in Maryland. But a foreign LLC that operates in Maryland but is not subject to the Maryland income tax law is not required to file. However, a return reflecting no income allocable to Maryland may be filed for record purposes.

Articles of organization: $100; Foreign LLC registration application: $100; Annual fee: No franchise fee but $300 annual personal property tax

Maryland does not require LLCs to pay a tax based on net income unless they have elected to be classified as corporations for federal tax purposes.

Every Maryland LLC must file the form even if it has no income or the LLC is inactive. 

New Jersey

Registration as foreign LLC: $75;

An LLC with two or more members is subject to an annual filing fee of $150 per owner, up to a maximum of $250,000

Certificate of formation: $75; Annual Report $50.

LLCs are not subject to tax on net income at the entity level if treated as partnerships for federal tax purposes.

Virginia

Every LLC doing business in the state with taxable income derived from Virginia sources must file a partnership return (Form 502).

Certificate of registration for foreign LLC: $100

Articles of organization: $100; Annual registration fee: $50.

Virginia does not require LLCs to pay a tax based on net income unless they have elected to be classified as corporations for federal tax purposes.

New York

An LLC must file Form IT-204 if it has NY source income or at least one individual member is a NY resident.

Application for the authority of foreign LLC: $250.

Domestic and foreign LLCs with New York source income are subject to an annual filing fee. The minimum fee is $25, and the maximum fee for New York source income over $25 million is $4,500.

Articles of organization: $200; Biennial Report Fee: $9.

Cost of publication ranges from $300 to over $1,600 (within 120 days after the effectiveness of the initial articles of organization, a domestic LLC must publish in two newspapers a copy of the articles of organization or a notice related to the formation of the LLC). The fee for filing the Certificate of Publication is $50.

New York State does not require LLCs to pay a tax based on net income unless they have elected to be classified as corporations for federal tax purposes.

Also, New York City collects an Unincorporated Business Tax (UBT) on the business income of every LLC carried on, wholly or partly, in New York City. The portion of its business is done outside New York. The city is not subject to UBT. The rate is 4% of taxable income. An LLC must file for and pay UBT if it has a total gross income of more than $25,000 or unincorporated business taxable income of more than $15,000. If the tax is $1,800 or less, a credit is issued for the entire amount of the tax, and no tax will be due.

Massachusetts

Foreign LLC registration application: $500; Annual report for foreign LLC: $500

Certificate of organization: $500; Annual report for domestic LLCs: $500;

Massachusetts generally does not require LLCs to pay a tax based on net income unless they have elected to be classified as corporations for federal tax purposes

An LLC must file a Mass return (Form 3) if the LLC meets a usual place of business in Mass or receives federal gross income of more than $100 during the tax year subject to Mass taxation.

Connecticut

Certificate of registration for foreign LLC: $60;

All LLCs must pay the State Department of Revenue an annual $250 business entity tax.

Filing Articles of organization: $60 Annual Report: $10.

Connecticut does not require LLCs to pay a tax based on net income unless they have elected to be classified as corporations for federal tax purposes.