Episode 014: Q&A 7

On this episode, I answer the question "In which state should I form my LLC?"

Episode Transcript

Braden: (00:00)
Hello and welcome to episode 14 of the unfuck. Your biz podcast. Today is our sixth Q and a that we are doing. If you have not been following the podcast for long, let me just explain briefly what these Q and A's are. I have a Facebook group that you all can join called Brayden's besties. Just go over to the Facebook search bar, search Braydon's besties, you spell my name, B, R. a, D, E. N. and then upon joining the group, you'll be prompted to share one legal or tax question that you have. I save all those questions and each Tuesday I cover one here on the podcast, so the question that we will be chatting about today is as follows, I started my LLC in New Mexico and moved to California in 2018 I set it up as a new LLC here, still doing business in New Mexico.

Braden: (00:59)
Upon further reading, looks like I may have messed up somewhere. I would love some guidance. So I'm going to get into more specifics about this question, but first I want to talk about where you should form your LLC and general before we dive into that. Before I forget, I'm saying before a lot, I'm going to remind you that I have a couple of masterclasses that are actually happening this week. The first two are tomorrow the 20th which is a Wednesday. We'd love for you to join me and then I have two more on Friday. So on the masterclasses we're going to be talking all things LLC, escorts, small business entities and licenses when you should do it, where you should do it, and then answering any questions that you might have as well. So join me there. Just go to my website, unfuck your business.com you can click the masterclass button and get signed up.

Braden: (01:51)
So with that out of the way, let's dive in in which state should inform your business. This is one of the most common questions I get, and as always, the answer is it depends. However, the answer does not depend on what most new business owners think. In fact for many, the answer is actually pretty simple. You might read and some business publications or if you've taken a college business class, you've likely heard about the magical Delaware corporation. We all learn the corporations love to form in Delaware. You also might know that States like Nevada and Wyoming are popular for business filings. Businesses typically are governed by the rules of the state in which they are formed. However, the more important and often overlooked truth is the businesses are also governed by the laws of the States in which they operate. This is why my first question, whenever I do a consultation with the new business owner is where do you plan to operate your business?

Braden: (02:53)
Now you might be asking yourself why then with so many businesses wished form and Delaware. That's a great question. Delaware is very pro business that the state of Delaware actually has its own court system that is set up just to hear business disputes where the cases are heard by judges rather than juries, and those judges are very familiar with business law. Juries as a whole tend to favor the little guy. Whereas bench trials, which is a trial by judge, tend to render verdicts that are more favorable towards larger businesses as judges are more likely to decide based on law and not sympathy like a jury can do. So while differences and state business law, Barry, uh, across States and some are very beneficial for large corporations, smaller businesses typically don't need to worry about that so much. They don't need to put as much time and energy and money into worrying about business disputes typically and LLC or corporate formation along with liability insurance and a good contract should be sufficient to protect yourself.

Braden: (04:04)
Small business, you don't need to worry about going into Delaware for all of your issues. So the Delaware corporation is not the magical business entity unicorn that it's always made out to be. Where should you form your business? That's kind of the question we're left with, right? The answer is in most cases where you plan to operate and here's why. I'm going to explain the details. You will pay income taxes in the state in which you are physically located in earned money. So if you live in California, you're going to pay California state income tax. Many States also have annual franchise tax for LLCs. So in the state of California, LLCs pay $800 a year for the privilege of operating as an LLC in the state. A lot of other States are much more cost effective as some of them don't charge anything for LLCs.

Braden: (04:57)
Many are between a hundred and $300 most States also will require foreign LLCs saying the same quotes, which you can't see to pay it the state franchise tax if they are doing business in that state. So in other words, if you form an LLC in Indiana and now you are operating business and the state of New York, your business is foreign to New York, it is a foreign LLC because it was not formed there and you need to register as a foreign LLC in New York. I probably shouldn't have used in New York as an example. I'm not a New York attorney. I don't know if that's the rule in New York. That's an example of how most States, including California, operate a business, quote unquote does business in a state like California if it is located and providing services in California. So what does this all mean? If you have an LLC formed in Delaware that you operate within the state of California, you will still pay all of these state income taxes as you would if you'd form in California because you're based here, you will also pay California state franchise tax.

Braden: (06:10)
That $800 fee we discussed since the business would be considered a foreign LLC. The only difference is that now you also have to meet whatever state fees, taxes and requirements Delaware might also have. So in short, forming an LLC in a state where you don't operate is going to cost you more money and more time without providing much if any benefit. So that's the, just to get back to our question from the Facebook group, this individual said they started their business in New Mexico and moved to California and they set up a new LLC here, still doing business in New Mexico. I'm a little confused by this question, but I can say typically the best way that can be done or the way that it really should be done. If you're moving a, I've worked with several people who've moved from Arizona and other States to California and if you have an LLC in those States, you can look into something called domestication, which essentially is a transfer.

Braden: (07:13)
It's a really fancy way of just saying you're in a transfer your LLC from that state to this state. The reason why that's a great option is because domestication allows you to keep your EIN, which then allows you to keep all your bank accounts, so you don't need to shut everything down. You just do a transfer. If you simply move to the new state, which is I think what happened and this example here, and you register your LLC in the new state as a foreign LLC like we've discussed, then you still are going to have to meet the requirements of New Mexico unless you dissolve. So basically the options are you domesticate or you dissolve your old LLC and form a new one. You don't want to have LLCs in both States unless you're operating in both of them. Um, forming a new one in dissolving, not too much more difficult than domestication.

Braden: (08:06)
You're just basically going to have to start from scratch and open new bank accounts. So that's kind of the drawback. I hope this was helpful. I know it was a little bit more technical than a lot of the other episodes. I am actually planning on doing an episode in the future, just [inaudible] domestication. I get a lot of questions about it, so we'll kind of break down the process. But meanwhile I hope the overview is helpful. Again, would love to see you in the master class tomorrow or Friday. Hop on over to the website. Unfuck your biz.com to sign up. You can also find the show notes there with all the details and transcript from today's episode. As always, we'd love for you to subscribe, LIBOR review. That's always much appreciated and I look forward to being back in your ear buds and chatting with you again in a few days. I'm a good one.