Where Should You Form Your LLC?

One of the first questions many new business owners located in Virginia ask is:

“Should I form my LLC in Delaware, Wyoming, or Nevada instead of Virginia?”

My answer surprises many people.

If your business is located in Virginia, the best place to form your LLC is almost always Virginia.

That advice may not be as exciting as the conventional wisdom about “asset protection,” “privacy,” or “tax savings,” in those other states, but for most Virginia entrepreneurs it is the right answer.

Pundits Love Out-of-State LLCs

Search online for information about forming an LLC, and you’ll quickly find companies and pundits encouraging you to organize in Delaware, Wyoming, or Nevada.

Those recommendations often make sense in the specific situations they describe, but they are frequently presented as though they apply to every small business. They don't.

Those states have legitimate advantages for businesses with specific needs. For example, large publicly traded companies, venture-backed startups, and businesses operating nationwide may have good reasons to choose Delaware, Nevada, or Wyoming.

Most small businesses in Virginia do not have those specific needs. For them, forming an LLC outside of Virginia will create more work and expense without returning much benefit. A local consulting company, retail business, contractor, restaurant, professional practice, or family-owned business usually gains little by forming an LLC somewhere else.

Two States Means More Work

If your business is located in Virginia, but you form your LLC in another state, you now have to maintain your LLC in two different states instead of one.

Depending on the circumstances, you may have:

• Formation filings in the state of formation.

• Qualification to do business filings in Virginia.

• Annual reports or annual registration fees in two states.

• A registered agent in both states.

• Additional compliance requirements to keep the LLC in good standing.

A Virginia business owner would spend hundreds of dollars each year maintaining an out-of-state LLC that provides little or no practical benefit.

There Is Usually No Tax Advantage

Another common misconception is that forming an LLC in Wyoming, Nevada, or Delaware will reduce your taxes.

For most small businesses in Virginia, that simply isn’t true.

The explanation is surprisingly simple. Most LLCs are taxed as pass-through entities (PTEs). A pass-through entity does not pay federal or state income tax at the entity level. Instead, the LLC’s profits and losses pass through to its owners, who report them on their individual tax returns.

If your Virginia business operates through a pass-through LLC, forming your LLC in another state will not change the way the LLC and its owners are taxed. Forming the LLC in Wyoming rather than Virginia does not magically eliminate Virginia or federal income taxes.

There may be tax considerations for businesses that elect to be taxed as corporations or that operate in multiple states, but for the typical LLC owned by one or a few individuals, the state of formation usually does not create the tax savings that online advertisements and pundits often suggest.

Virginia Can Protect Your Privacy

Privacy is another reason frequently given for forming an LLC in another state.

Many business owners are not aware that Virginia already provides a significant degree of privacy in its public filing requirements.

To form a Virginia LLC, the Articles of Organization generally require only:

• The LLC’s name.

• The address of the LLC’s principal office.

• The name of the registered agent.

• The address of the registered office.

The names of the LLC’s members and managers are not required to be included in the Articles of Organization.

As a practical matter, if an owner:

• Does not include his or her name or initials in the LLC’s name;

• Uses a business address rather than a personal residence as the LLC’s principal office address;

• Appoints someone else to serve as the registered agent; and

• Does not sign the Articles of Organization as the organizer,

the owner’s name and personal address will not appear in the publicly available Articles of Organization filed with the Virginia State Corporation Commission.

For many business owners, that level of privacy eliminates one of the principal reasons they consider forming an LLC in another state.

Of course, privacy in the Articles of Organization does not mean complete anonymity. An owner’s identity may appear in tax filings, bank records, loan documents, litigation, deeds, or other public records. But many Virginia entrepreneurs already receive more privacy than they realize simply by properly structuring the formation of their Virginia LLC.

Don’t Let Marketing Replace Good Advice

Delaware, Wyoming, and Nevada have earned reputations as business-friendly states, and in those reputations are well deserved for businesses with specific needs.

The problem is assuming that what works for a Fortune 500 company also works for a Virginia-based consultant, contractor, marketing agency, restaurant, professional practice, or family-owned business.

Those are very different businesses facing very different legal and tax considerations.

The right question is:

“Which state makes the most sense for my business?”

For most business owners located in Virginia, the answer is Virginia.

Keep It Simple

One of my jobs is helping clients avoid unnecessary complexity.

If your business is located in Virginia, forming your LLC in Virginia is usually the simplest, least expensive, and most efficient approach.

There are certainly exceptions. Multi-state businesses, companies seeking institutional investment, and businesses with specialized legal or tax considerations may benefit from forming elsewhere.

But those situations are the exception, not the rule.

Don’t create extra paperwork, extra filing fees, and extra annual fees and obligations unless there is a clear legal or business reason to do so.

Final Thoughts

Forming an LLC is an important decision, but it doesn’t need to be complicated.

For the overwhelming majority of entrepreneurs located in Virginia, the best place to form an LLC is exactly where they plan to do business: Virginia.

Sometimes good legal advice isn’t about finding the most sophisticated answer. It’s about finding the right answer. For most Virginia business owners, that answer is to form their LLC in Virginia.

Contact me at joel@jalawoffice.com with your questions about forming an LLC.

This article is intended for educational purposes only and discusses general principles of Virginia law. It is not legal or tax advice. Every business is different, and business owners should consult their own legal and tax advisors before deciding where to form an LLC.