Examples:

• • John formed his single-member LLC in Delaware but lives and operates the business solely in California, so he had to foreign qualify in CA anyway, doubling his formation and annual costs.
  • Unaware her Wyoming LLC needed to foreign qualify in her home state of New York where she conducts business, Maria got hit with fines and penalties plus added legal fees to resolve it.
  • The annual $399 registered agent fee for Bob’s Nevada LLC felt reasonable at first, until he realized he’d also have to pay for a second registered agent in his home state of Texas too.
  • Janice’s Oregon-based accounting firm struggled to correctly prepare tax filings and provide proper guidance for her out-of-state Florida LLC, costing her extra accounting fees to fix mistakes.
  • When Kevin’s South Dakota LLC was sued in Arizona where he operates his bed and breakfast, his failure to have foreign qualified left him facing harsh legal penalties on top of the lawsuit itself.

How to Proceed:

• • Research the foreign qualification requirements of any states where your LLC has a physical presence or conducts business activities.
  • Calculate the total annual costs of maintaining an LLC in multiple states, including state filing fees, franchise taxes, registered agent fees, etc.
  • Factor in the added accounting and legal fees to stay compliant and in good standing across each state’s differing LLC laws and regulations.
  • Consider the administrative headaches and risks of managing LLC compliance in multiple jurisdictions.
  • For most small businesses, the benefits of an out-of-state LLC rarely outweigh the added costs and complexities compared to just forming in your home state.

FAQs:

• • Do I have to foreign qualify my LLC in every state where I have customers? No, but you likely need to register in states where you have a physical presence, employees, or are otherwise considered to be “doing business”. Consult a business attorney if you’re unsure.
  • What are the risks of not foreign qualifying when I should? Your LLC could be fined, penalized, barred from bringing lawsuits, and unable to secure licenses or permits needed to operate legally in that state.
  • Can’t I just get around this by forming a new LLC in each state? That creates even more filings, fees, and compliance burdens to juggle. It’s usually simpler and cheaper to just form one LLC and foreign qualify as needed.
  • If I foreign qualify in my home state, can I stop paying fees in my formation state? No, you’ll have to maintain good standing in both states, paying annual fees and appointing a registered agent in each.
  • Will I lose asset protection if I foreign qualify? No, foreign qualifying does not jeopardize the limited liability of your properly formed LLC. It simply allows you to legally operate in that state.

Examples:

• • Tina dissolved her Delaware LLC to form a new one in her home state of Colorado, simplifying annual filings and saving hundreds per year in franchise taxes and registered agent fees.
  • By forming his LLC in his home state of Ohio instead of Wyoming as he originally planned, Rashid kept an extra money in his pocket to invest back into his new landscaping business.
  • Leah’s local bank required her to have an in-state LLC in order to open a business checking account and secure a line of credit for her Georgia-based marketing agency.
  • Ethan struggled to find an accountant in his area familiar with the tax nuances of his out-of-state Nevada LLC, leading to much higher fees than if he had just formed locally in Washington.
  • When pitching her Maryland tutoring business to local school districts, Sarah found they were more receptive to working with her once she switched from a Delaware LLC to a Maryland LLC.

How to Proceed:

• • Research what’s required to form and maintain an LLC in your home state and compare that to the total costs of an out-of-state LLC when factoring in foreign qualification.
  • Consider how much time and money you’ll save on accounting and legal fees by working with local professionals familiar with your home state’s LLC laws.
  • Ask your bank and key vendors if they have any in-state LLC preferences or requirements before deciding where to form your company.
  • Assess whether an out-of-state LLC might negatively impact your brand credibility with local customers, clients and business partners.
  • For most small businesses primarily operating in one state, the benefits of a home state LLC outweigh any perceived advantages of forming out-of-state.

FAQs:

• • Are there any situations where an out-of-state LLC makes sense? Possibly, if you have a specific reason, like a planned IPO, securing VC funding, or desiring certain state tax or legal benefits. But those factors don’t apply to most small LLCs.
  • Do I have to be a resident of the state where I form my LLC? No, you can form an LLC in any state regardless of where you live, but if your LLC does business in a state, it likely needs to be registered there.
  • What if I move states after forming my LLC? If you keep doing business in your original state, you need to maintain that LLC. If you cease operations there, you can either dissolve that LLC and form in your new state, or foreign qualify the original LLC in the new state. Other options also exist, depending on the states involved.
  • How do I find the right professionals to help with my in-state LLC? Ask for referrals from other local business owners, your local chamber of commerce, and your state’s bar association. Look for attorneys with proven LLC expertise.

Examples:

• • Since Xavier’s real estate development LLC flips houses in Texas but has investors in multiple states, he formed in Texas where the business actually operates to avoid foreign qualification in his passive investors’ home states.
  • Initially drawn to Delaware’s business-friendly reputation, Mike ultimately chose to form his e-commerce LLC in his home state of North Carolina to avoid DE’s high franchise taxes and compliance complexity.
  • As a licensed contractor, Luis had to form his LLC in New Mexico where he’s licensed and does all his construction projects, even though annual LLC fees are much lower in a neighboring state.
  • With his sights set on major VC funding for his tech startup, Vikram is basing his LLC in Delaware to tap into the state’s special Chancery Courts and investor-friendly laws, despite the added costs.

How to Proceed:

• • Make a list of all states where your LLC has a physical presence, property, employees, sales, or other business activities.
  • Research and compare each of those states’ LLC filing fees, annual report fees, franchise taxes, income taxes and other applicable costs.
  • Determine where you can form to minimize the number of states where you’ll have to foreign qualify, while still meeting any state licensing or business registration requirements.
  • Review your business plan and goals to assess if your company would uniquely benefit from a certain state’s special legal, tax or investor benefits.
  • When in doubt, default to your home state for simplicity and cost savings, unless you have a clear and compelling business reason to form elsewhere.

FAQs:

• • What if my LLC operates entirely online? Generally, you’ll need to register your LLC in any state where you have a “physical presence”, like a home office or employees/contractors. Your online sales alone usually don’t trigger registration requirements.
  • What if my home state has really high LLC fees and taxes? You may be tempted to shop around for a cheaper state, but often the added costs and hassles of foreign qualifying outweigh any savings. Crunch the numbers carefully.
  • Should I form my LLC in the state where I plan to grow and expand? Not necessarily – you can’t avoid foreign qualification by forming in a state where you plan to operate in the future. Base your choice on where you’re actually doing business now.
  • Does it matter if my state is slow to process LLC filings? Probably not. Most states have expedited filing options for a fee if you’re in a major rush. A slight delay in processing time isn’t a good reason alone to form out-of-state.

Questions: LLC Formation Basics

• • 1. What does it mean when an out-of-state LLC must “foreign qualify” in a state?
    • A) The LLC must file formation documents in that state too
    • B) It refers to hiring employees from another country to work in that state
    • C) The LLC must register to do business in that state and pay associated fees
    • D) It’s a tax election allowing the LLC to be taxed as a foreign entity
  • 2. In what state(s) is an LLC considered to be “doing business”?
    • A) Only where the LLC has a physical office location
    • B) Any state where the LLC has a physical presence, employees, property or is offering products/services
    • C) Whichever state the LLC’s owners reside in
    • D) Only the state listed in the LLC’s Articles of Organization
  • 3. What added costs do LLCs typically incur when foreign qualifying in states outside their formation state?
    • A) Foreign qualification filing fees
    • B) Annual report fees & state taxes in multiple states
    • C) Registered agent fees in each state
    • D) All of the above
  • 4. Which of these is a potential consequence of failing to foreign qualify an LLC when required?
    • A) Late fees and penalties from the state
    • B) The LLC is barred from bringing lawsuits in that state’s courts
    • C) The LLC’s owners can lose their limited liability protection
    • D) Both A and B
  • 5. What’s a key benefit to choosing your home state LLC over an out-of-state LLC?
    • A) Your LLC gets extra asset protection in your home state
    • B) You don’t need a registered agent in your home state
    • C) You can avoid the need and costs of foreign qualifying in your home state later
    • D) Your home state LLC can never be sued in other states

Answers: LLC Formation Basics

• • 1. C) Foreign qualification is when an LLC registers to do business in states outside its formation state because it is considered to be “doing business” in those states.
  • 2. B) An LLC is doing business in any state where it has a physical presence, property, employees, or is offering products/services to customers, regardless of where it was originally formed.
  • 3. D) When an LLC foreign qualifies in additional states, it typically must pay each state’s qualification fees, annual report fees, state-specific taxes, and registered agent fees.
  • 4. D) If an LLC fails to foreign qualify when it should, the state may assess monetary fines & the LLC may be barred from bringing a lawsuit in that state. In some states the owners could even lose liability protection.
  • 5. C) The main benefit to forming your LLC in your home state vs. an outside state is that you avoid the need and added costs of having to foreign qualify your out-of-state LLC in your home state later.

Questions: Choosing an LLC State

• • 1. Which of these is not typically a strong reason to choose an out-of-state LLC over your home state?
    • A) Slightly lower LLC filing fees
    • B) More favorable state tax treatment
    • C) Special legal benefits like anonymity or asset protection
    • D) Planned large-scale fundraising like securing VC investments
  • 2. If an LLC operates fully online without any physical presence, where should it form?
    • A) The state with the lowest LLC filing fees
    • B) Delaware, Wyoming or Nevada
    • C) The state where the owner lives and works
    • D) Any state, it doesn’t matter for online businesses
  • 3. Which factor is usually most important when deciding where to form your LLC?
    • A) The lowest annual LLC fees
    • B) Where your LLC has a physical presence or is transacting business
    • C) The state with the fastest filing processing times
    • D) Where you plan to expand your business in the future
  • 4. Forming your LLC in the state where you do business allows you to:
    • A) Avoid needing a registered agent in that state
    • B) Skip any foreign qualification filings & fees in that state
    • C) Not pay any state taxes or annual report fees
    • D) Prevent your LLC from ever being sued in other states
  • 5. A good tie-breaker if debating between two states for your LLC is:
    • A) Which state processes filings faster
    • B) Where it’s easier to find an available LLC name
    • C) The state whose LLC laws seem easier to understand
    • D) Where you live or spend the most time

Answers: Choosing an LLC State

• • 1. A) While some businesses may legitimately benefit from certain states’ tax incentives, legal protections, or financial resources, a slightly lower LLC filing fee alone is rarely a strong enough reason to justify an out-of-state LLC.
  • 2. C) Even if your business operates entirely online, you should generally form your LLC in the state where the owner/manager primarily lives and works to avoid potential foreign qualification issues. The online nature of your business doesn’t negate your LLC’s physical presence.
  • 3. B) The most important factor in choosing where to form your LLC is usually where your company is physically located and doing business, as you’ll need to register in those states regardless. Forming where you operate helps avoid extra foreign qualification filings and fees.
  • 4. B) The key advantage of forming your LLC in the state(s) where it does business is that you can avoid the time, paperwork and expense of foreign qualifying as an out-of-state LLC in those states. But you’ll still owe that state’s reporting and taxes, and need a registered agent.
  • 5. D) If you’re torn between states and have no clear legal or financial reason to choose a certain one, it’s usually best to go with your home state for simplicity. Minor differences in processing times or name availability generally shouldn’t drive the decision for a small business.

Disclaimer

The legal information provided in this article discussing the factors to consider when choosing a state to form your LLC is for general educational purposes only. It is not specific legal advice for your company and does not create an attorney-client relationship.

Because each business has unique needs and circumstances, it’s important to consult with a licensed business attorney in your state to discuss the legal implications of choosing a certain state for your LLC. They can advise on your specific situation and help you weigh the pros and cons of each option.