Why Do So Many People Form LLCs in Nevada?

Why Do So Many People Form LLCs in Nevada?

One of the most important decisions you’ll have to make for your LLC is choosing the state in which to incorporate. In some cases, it makes sense to incorporate outside of your home state to take advantage of another state’s small business tax breaks and legal infrastructure. However, with 50 states to choose from, it can be hard to find the right one.

Delaware has traditionally been a favorite state for incorporation thanks to its strong pro-business institutions and laws. However, Nevada has recently emerged as a serious contender for small businesses who want to form an LLC. Each state has its own set of advantages, but there are key differences that can make one state more suitable for your business.

Why Do So Many People Form LLCs in Nevada or Delaware?

There are plenty of reasons that LLCs have traditionally looked to Delaware as a haven for incorporation. For example, all the factors below helped make Delaware the state of incorporation for over 1 million corporations, including half of all publicly-traded enterprises and 64 percent of Fortune 500 companies.

  • Delaware developed sophisticated infrastructure in its Division of Corporations, which offers extensive assistance to those who wish to start a business in the state.
  • The Delaware General Corporation and Business Entity Law is highly accommodating. It allows corporations to avoid paying taxes on some forms of out-of-state income.
  • Delaware offers low franchise and initial filing fees plus strong privacy protections for owners, who are not required to publicly disclose themselves.
  • Delaware’s Chancery Court is a unique institution created to quickly settle disputes between businesses. In other states, such disputes must be settled in civil court, usually by a jury, which can be a lengthy and expensive process.
  • Delaware’s extensive body of case law serves as a de facto national standard in courts across the country.

While Nevada is a relative newcomer, its legislature has worked since the early 1990s to turn the state into a business-friendly environment. Nevada’s advantages have made it a rival to Delaware in reducing the tax burden for business owners, and their particular combination of benefits makes it especially appropriate for smaller businesses.

Advantages to Forming an LLC in Nevada

Nevada offers a wide range of benefits as a state of incorporation, including its ease of registration, relatively low corporate taxes and lack of state taxes. Nevada also offers strong privacy protections to business owners and a business-friendly environment. If you are starting an LLC, Nevada may be a better home for your business than Delaware.

Some of Nevada’s benefits for LLCs include:

  • No state income, corporate or franchise taxes
  • No taxes on corporate shares or profits
  • Strong privacy protection for owners, who can remain anonymous
  • No requirement for operating agreements or annual meetings
  • Fast registration times (businesses can register in as little as one hour for a fee)
  • Low business registration fees
  • Formation of single-person corporations allowed
  • Permissive rules on the creation of shares, allowing them to be created for everything from services offered to real estate
  • Efficient judicial system that often relies on Delaware case law to settle business disputes
  • Strong corporate veil that protects agents, employees, officers, and directors from liability
  • No formal information-sharing agreement with the IRS

One key difference between Nevada and Delaware corporations is the absence of the “Delaware loophole.” This allows companies to transfer profits to their subsidiary in Delaware and reduce their tax burden in other states in which they operate.

However, Nevada does not require a company to have a separate director in order to incorporate. This favors smaller, leaner family-owned businesses in contrast to the larger corporations that Delaware tends to attract.

In addition, Delaware has state franchise, corporate, and personal income taxes, making Nevada the superior choice if one of your main priorities is reducing your tax burden.

The Bottom Line

Choosing a state of incorporation different from your home state can provide many advantages, especially if you plan on doing significant amounts of business in that state.

However, your business may be classified as a foreign entity in your home state if it is incorporated elsewhere, which can make it difficult for you to open a bank account or even legally operate if you fail to register in your home state.

Before you decide to choose to incorporate out of state, make sure it’s a wise choice for your business needs.

 

Larry-BertschAbout the Author: Larry L. Bertsch, CPA & Associates, a top CPA and small business accounting firm, has been offering quality accounting and tax preparation services to the entire Las Vegas market since 2003.

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