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Which is the best state for limited liability company formation?

In most cases, the most practical state you can choose for your new limited liability company is the state in which you operate your business or the state in which your investment is located. In other words, if you’re setting up an LLC to own investment property in Florida, you want to setup a Florida limited liability company. And if you’re setting up an LLC for a construction business you operate in Ohio, you want to setup an Ohio limited liability company.

Some entrepreneurs and investors do pick other states and some of the time, going with another state’s LLC can be a good decision. Attorneys, for example, often like Delaware limited liability companies. Many attorneys say that the Delaware courts are the most sophisticated and business friendly in the country. And, what’s more, Delaware provides entrepreneurs and investors with something called a multiple series llc, which lets you compartmentalize investments and business activities within a particular LLC into subsidiary LLCs.

Note: The sophisticated and business friendly legal environment of Delaware explains why all the really large corporations in America are Delaware corporations.

Another popular state is a Nevada because Nevada doesn’t levy a state corporate income tax. In some very limited circumstances, a business owner or investor might save state income taxes by choosing Nevada llc formation or incorporation. However this idea is, in my opinion, way, way oversold—usually by sloppy incorporation services selling their wares to ignorant taxpayers who don’t realize they’re on their way to income tax evasion.

A related comment about choosing the right state for your limited liability company: In addition to setting up your LLC in some state, you’ll also need to register your LLC as a foreign limited liability company in any other state where your LLC owns property, invests or operates a business. For example, if your Nevada LLC operates a business in California, you’ll need to register your Nevada LLC as a foreign LLC operating in California. (Obviously, when you do register a foreign LLC in some other state, that alerts that other state to your presence and they will probably begin to tax you and your LLC.)

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