I spoke to a client a year ago about setting up a real estate flipping business. He never hired us, and went his own way. No problem. We’re always happy to help even if we’re not hired. But sometimes… they come back.
He attended a seminar on setting up his flipping business, and they offered a plan to set him up with an LLC and everything else he needed. And “of course” that would be a Nevada LLC. Because privacy is better in Nevada with less detailed online records, and filing fees are dramatically cheaper than they are in Illinois.
Both true points. But unfortunately both points fall apart pretty quickly when you apply Illinois law. The client went to close on his first property and was told he needs to “register his foreign LLC in Illinois.” Okay, no problem. Cost? Exactly the same as it would have cost to form his company in Illinois in the first place. So now he has paid full Illinois fees, plus Nevada fees. How about privacy? Well, his private information becomes public in Illinois as soon as he completes that foreign registration. You can stop by his house, it’s listed on the Illinois Secretary of State website. There are some tricks we can use to avoid this (like creating a manager-managed LLC with a generic named trust as the manager) but privacy wasn’t that critical to this client. He was just annoyed.
So not only is the client now paying annual filing fees in both states, Nevada recently overhauled their fee structure and his annual fee in Nevada is five times what it is in Illinois. So forming his company in Nevada has turned out to be a total loss, as opposed to the intended savings. He called me, saying, “You know all that advice you gave me a year ago? I didn’t take any of it. Can you help?” Yep. We’ll help and we won’t even say “I told you so.” It’s all part of the job.
In most cases, form your company in the state where you operate your company. It’s very common to end up having to file in your home state anyway. This might be because you own property there, do a certain amount of business there, have employees there, or hold a required license there. But it’s not always a bad idea to choose a foreign jurisdiction. Here are a few legitimate reasons to consider forming a company somewhere else:
- You are seeking investors. Investors often like seeing Delaware C-Corps to invest into. They are used to the Delaware statutes, and the C-Corp prevents any surprise pass-through tax consequences. There is no real-world benefit to you. But you don’t get their check unless you do it their way. That alone is a fairly compelling reason to file in Delaware!
- You are seeking consistency of law. If you operate several locations all over the country, it would be nice to not have to drill down on local law for every single deal you put together. We have a client who does land development deals all over the country. When it comes to land ownership, local law always rules. But when it comes to the terms of his LLC operating agreement, consistency is nice. We form a separate LLC for each deal, and each deal is a little different in terms of how we bring investors in. It’s nice to apply the same law to all of those individual LLC operating agreements so we’re not having to redraft every one of them to conform to a specific state law, research state law, etc.
- You operate a huge number of companies. In my story above, a client formed one LLC and did it in Nevada to save money on filing fees. It backfired but even if it didn’t, the savings would hardly have been worth the hassle. But I have another client with forty-seven LLCs. He had them all domesticated in Nevada at first, until Nevada dramatically increased their fees. Then he moved them all to Montana. With that many companies, those minor savings per company added up to over twenty-five thousand dollars each year. For him, it was worth it, even after paying us a little bit to move them all over.
Think twice about choosing a particular jurisdiction just to save on filings fees. Be sure you don’t still have a local filing requirement which would cancel out your savings, and avoid following the trends of where the entrepreneurial podcasts and articles say is the hot jurisdiction. Take a bit of time to talk to an attorney and CPA and choose the jurisdiction that’s right for you. There are more factors to consider (like tax) than are listed in this article.
Go make today awesome. Thanks for reading.