Forming an LLC out of state.

[Leon]

I'm getting close to forming my business and getting things running, so I've been reading up on forming an LLC and I was wondering if anyone here has formed an LLC out of their state.

I live in Virginia but I'm extremely interested in this Tax Haven in Nevada - no corporate or personal income tax. So I'm wondering about everyone else's personal experience with setting up in another state, headaches, ease of forming, bumps in the road or what not.

Thanks.

[Stu]

I'm not an accountant but an LLC is not a taxable entity, thus any taxable profits are assigned to the owners as personal income. Regardless if the LLC is in Nevada it would seem to me that the owner living in Virginia will be paying taxes on the profits. Besides, I assume we're talking about state income taxes only as federal income tax would certainly still apply.

If I'm incorrect I'd be pleased to be enlightened.

[Leon]

I'm not an accountant but an LLC is not a taxable entity, thus any taxable profits are assigned to the owners as personal income. Regardless if the LLC is in Nevada it would seem to me that the owner living in Virginia will be paying taxes on the profits. Besides, I assume we're talking about state income taxes only as federal income tax would certainly still apply.

If I'm incorrect I'd be pleased to be enlightened.

I've contacted someone who should be able to clear this up and explain how exactly this works or why it doesn't work. If I get a reply, I'll post it.

This is from the 2008, LLC for Dummies by Jennifer Reuting.

LLCs are completely separate from their owners - they're like their own individual person that you can have full control over. They can live wherever they want to live, wherever is best for them. When your LLC does business in a particular state, it must be registered with that state, but where your LLC is actually formed is entirely up to you. The state where your LLC is formed is called domicile.

If you don't have a bricks-and-mortar business - maybe you're running an internet company or consulting or service business that isn't restricted to a particular state - and you live in a high tax state, then I urge you to consider forming your LLC in another state. After all, some states have worked very hard to structure their tax and LLC laws to make it desirable to domicile companies there.

Compare the tax structure of the state that you live in to those of other states. If it looks like you can do much better(For instance, you live in California!), then you should definitely consider domiciling your LLC in another state. But which state? Well, Nevada and Delaware stand out among the rest. They are actively trying to lure businesses by keeping their taxes low(or having none at all!) and making sure they provide the proper legal support for small businesses(Such as Delaware's Chancery Court).

(Furtherer down the page talking about Nevada)That number-one reason every entrepreneur and real estate mogul out there goes on and on about the benefit of Nevada is that there are no taxes. Yes, you read correctly. No taxes. Zero. Zilch. Nada. And I mean nada...No franchise taxes, no corporate taxes, no personal income taxes.


Here's her website as well.
http://www.myllc.com/which-state-to-form-llc.aspx

[Leon]

Took a while but I tracked down a lawyer(Jennifer Reuting, in fact) who answered my question on this, and here it is:

You are right that the profits would pass on to you and you would end up paying Virginia taxes anyway... unless you have elected corporate taxation. Your LLC is not required to have pass-through taxation and by electing corporate taxation, you are allowed to keep your profits in the LLC. The profits you keep in the LLC will be taxed at the federal corporate tax rate. In addition, you will also be required to pay state taxes. However, by forming your LLC in a tax-free state (such as Nevada), you can eliminate any possibility of state taxes being assessed on the profits you keep in your company.

I hope this helps someone out there.

[arcadetown]

Technically you need a tax guy to setup things and a registered agent on the corporation for legal purposes (i.e. receive summons, etc).

Just setting up biz doesn't do a lot of good as you must pay taxes within the state you are a resident of. In the above case you could keep monies in company for re-investment purposes but I suspect the whole reason is to withdraw monies to yourself. Once you receive it personally it's subject to any applicable state income taxes. Plus the IRS frowns heavily on keeping unjustified amounts within a company.

I moved to Nevada from California to avoid it's crack addicted politicians and it's insane taxes, plus Vegas has kick butt houses for much less. Am now a Nevada resident including new home, moved bank accounts here, re-incorporated here, cars here, voter registration, everything. Doing it right requires wholesale changes.

[Crunch]

We currently live in the Seattle area, and Washington doesn't apply state income taxes, but we're also looking into moving to North Carolina for cost of living. We can sell our house here, and buy a house straight out with the amount of difference in prices, and live mortgage free. That could help us go full time with our projects years sooner than we'd hoped to.

NC is a state with income taxes, and corporate taxes, but it also hits the top of the charts for business startups for offsets on all the other business costs. You have to look at the whole picture.

Incorporating out of state is also a bit more maintenance, and could lead to delays of imporant information if mailings or filings don't make it through the registered agent you'll need in that state in time.

For tiny companies like Indie Gamers, I'd say that ease-of-operation is more important than a few percent of taxes. I believe you can also deduct your state income taxes from federal, at least for salaries, so it does wash out in the end in some ways.

Forbes, MSN Money, Inc. Magazine, etc. all do giant breakdowns of the costs and benefits of incorporating and living in different metros throughout American each year. This years tops for Forbes is Raleigh NC for instance. It's really worth taking the time to do a LOT of research before incorporating. You can reserve your company name now with many online services, to make sure you don't lose it, and then just do the actual company when you're double triple sure you've made the right choice.

Cheers,
Crunch