Hey folks, Matt Horwitz, LLCUniversity.com.
Six reasons why you should not form an LLC in Delaware.
I just got finished writing this and figured it would be an excellent piece to make a video
on, and we get so many phone calls.
This is such a pain point for so many people, and they make a lot of mistakes here.
Note if you live in Delaware or you do business in Delaware, this information does not apply
to you, you should form an LLC in Delaware.
If you don't live in Delaware and you don't do business in Delaware, and you've heard
that you should form an LLC in this magical state, let me save you a lot of money and
headaches.
Don't form an LLC in Delaware.
The disadvantages of forming an LLC in Delaware far outweigh the perceived advantages.
Let's look at an example.
Nathan is from Connecticut.
He reads online that Delaware is the best state to form an LLC in, so he forms an LLC
in Delaware.
He's a resident of Connecticut, he already pays taxes in Connecticut, and his home office
is based in Connecticut.
Most people aren't aware of, but there's a lot of issues with this setup, illegally transacting
business without authority.
Nathan's Delaware LLC is doing business illegally in Connecticut.
The Connecticut secretary of state is going to enforce it's laws and will soon be sending
Nathan a citation in the mail with a fine, so he needs to register as a Foreign LLC.
To remedy the citation and because it's the law, Nathan must now- It's hard to read your
own writing.
Nathan must now register his Delaware LLC as a Foreign LLC in Connecticut.
He needs to file a Connecticut Foreign LLC registration, pay the state filing fee, which
is $120 in Connecticut, it's a lot more expensive in other states.
Then he must keep this Foreign LLC in compliance with Connecticut law.
That means filing an annual report every year and paying that fee, as well as paying a Connecticut
business entity tax of $250 every other year.
Remember, this is already on top of him paying the $90 registration fee in Delaware, the
$300 required annual franchise tax in Delaware, and $125 every year for his Delaware registered
agent.
In short, Nathan now needs to maintain two LLCs.
He has a Domestic LLC in Delaware and a Foreign LLC in Connecticut, and it gets worse.
Nathan was deceived into forming a Delaware LLC because he read it was a tax friendly
state, and while this is true, it really only applies to large, multi-million dollar companies
and not small business LLCs.
Look, don't just take our word for it.
Read what the Delaware secretary of state has to say about the hype ... I guess you
can't click the link, but the link is below the video.
Most people are unaware of this simple fact, taxes are paid where the money is made, not
where your LLC is set up.
That means Nathan still owes Connecticut taxes, which could include but aren't limited to
sales and use tax, business entity tax, withholding tax, corporate business tax, net income tax,
franchise tax, property tax, and more.
Remember, Nathan's a resident of Connecticut and an LLC is a pass through entity, which
means the profits of the LLC are reported on his federal income tax return, as well
as his Connecticut personal income tax return.
In short, the whole reason that he formed the Delaware LLC in the first place is defeated.
It's not saving him any money on taxes.
In fact, this whole loophole is unknowingly costing him a lot more money.
What about the Delaware Court of Chancery and Delaware Law?
I'm sure you've read online something about these.
The Delaware Court of Chancery is the oldest and most established business court in America,
and Delaware has the most robust business case law.
Who cares?
What are you starting, some lawsuit rampant company where you're going to go to court
every other month?
Look, take your reality check.
Not that this information is not true, it just doesn't apply to you.
Again, take a reality check.
Most of the companies promoting Delaware, they don't give a crap about your business's
long term success and well being, and all the headaches that you're going to have to
deal with.
They just want your money.
Don't be misled into the headaches.
Focus your energy on running a legitimate and successful company in the state where
you actually live and do business in.
Whew… alright, I get a little angry here.
Other industry related issues.
Again, we get painful phone calls from our readers about these issues.
Recently, a guy from Pennsylvania running a trucking company in Pennsylvania formed
an LLC in Delaware.
Later, he tried to register his trucks as being in Delaware with the department of transportation.
They denied his application because he was not a resident of Delaware, and that ended
up costing him $20,000 of business that month.
I'm not going to list out dozens and dozens of examples here, but I just want to let you
know.
This information, you're not going to find on websites promoting Delaware, and you're
probably going to hit industry specific quirks where you're going to have issues with your
out of state LLC.
All right, take away.
Instead of forming an LLC out of state and then later learning that you need to register
your out of state LLC as a Foreign LLC in your home state, paying for an extra registered
agent, paying annual reports in two states, having tax liabilities potentially in two
states, and dealing with the headaches of two LLCs, just form the LLC in the home state
and the state where you're doing business.
If you'd like more information on this whole topic, we have another video, link below.
Here's an excuse I hear, "But I work online!"
Even if you run a business from home or online, you're still a resident of your home state
and you're still transacting business in that state.
You can't get around your state's tax obligations simply by forming an LLC out of state.
If you really want to, you've got to move.
Again, put your time and energy into building a successful company, not wasting your time
on a handful of loopholes you've read on the internet.
Again, if you live in Delaware or you do business in Delaware, just please disregard this, form
an LLC in Delaware.
If not, form your LLC in your home state and/or the state where you're transacting business.
Hope this information is helpful.
Take care.