Unbeknownst to many, you don't have to form a limited liability company (LLC) in the state where you live, you can form an LLC in whichever state you find most advantageous, even if you don't reside in that state.
Consequently, several states have become very popular for business formation, for instance:
- New Mexico;
- Delaware; and
Each of these states offers its own unique set of advantages in terms of startup costs, privacy, anonymity, asset protection, annual fees, and income taxes. The objective, however, is to identify the state that provides the most advantages to your business.
Doing Business in a State Other Than Where Your LLC Was Formed
While you can form your LLC in whichever state you want, if you are planning to do business in a different state, you will not only be subject to the laws, taxes, and disclosure requirements of the state in which you formed, but also the state in which you are doing business.
In fact, for your LLC to do business in any state other than the state in which it was formed, you will be required to register the LLC as a foreign entity in that state. This means two registration fees, two annual filing fees, and two sets of maintenance requirements.
Also, bear in mind, the filing fee for a foreign entity is usually much higher than for a “domestic” entity. In Texas, the filing fee for a domestic LLC is $300, but $750 for a foreign LLC.
Businesses with Physical Locations in Texas
As a general rule, if you’re going to be doing business from a traditional, geographically-fixed, physical location in Texas, such as a medical practice or a butcher shop, then you are better off forming your LLC in Texas, where it will ultimately operate. Otherwise, you will still be required to register as a foreign entity to transact business in Texas, and you will only be wasting your time, effort, and money filing elsewhere.
One of the few exceptions to this general rule for businesses that are physically located in Texas comes into effect if the type of LLC you want to form is not permitted in the state. For example, Texas does not allow the formation of completely anonymous LLCs. Your only option for forming a completely anonymous LLC is to form in New Mexico, where that type of LLC is permitted, then register as a foreign entity in Texas where your business is located.
Remember, if you are going to be operating in multiple states, then you will need to register to transact business in all the states in which you will be operating.
For Non-Centralized Businesses
If you’re not going to set up a traditional, physical location in Texas, but operate your business online or in some other non-centralized way, then it may be a good idea to look into forming in a state like New Mexico, Wyoming, Delaware, or any other state that is very friendly to LLCs like yours. States like these want to host these types of businesses and have worked very hard to establish an environment that will attract businesses that have geographic flexibility.
Why Form an LLC in Texas?
If you are thinking about forming an LLC in Texas, you may be wondering if Texas is a good state in which to form. Whether you are starting a new business or converting an existing business, forming an LLC in Texas offers several advantages, including:
- The Economy - Due to its size, entrepreneurial environment, business-friendly laws, and the number of jobs it creates, Texas has one of the largest economies in the country, second only to California.
- Taxes - There is no personal income tax in Texas and business taxes are very low.
- Certainty - There are more LLCs registered in Texas than any other state in the country. Texas also has a larger body of legal precedent than most other states. This means that Texas courts have a vast amount of experience and expertise in deciding business disputes. Which, in turn, means more certainty and reliability for business owners.
- Flexibility - Texas law gives members of a Texas LLC the flexibility to freely customize the duties and liabilities of its members. Members of an LLC may choose to waive, modify, expand, or restrict any provision of the law that pertains to the duties and related liabilities that members have to the company or its members. Furthermore, a Texas LLC may create classes of membership with varying rights, duties, and voting privileges. This means that a Texas LLC can be organized to engage in everything from highly structured business deals to succession planning for a family-owned business, and can achieve almost any goal set forth by its members.
- Asset Protection - The creditors of a member of a Texas LLC are not allowed to take his or her membership interest. Instead, they may only obtain a charging order to receive any distribution that the member would otherwise be entitled to receive.
- Series LLCs - Texas is one of the few states that allow series LLCs. This can enable you to essentially create a single LLC with an unlimited number of LLCs underneath, all for the same cost of creating one LLC. Series LLCs are very popular for holding multiple real estate holdings because each series LLC is insulated from the assets and liabilities of the others.
It has become popular for businesses to form in states like New Mexico, Wyoming, and Delaware, and there are many good reasons for this. However, for most businesses, the drawbacks of forming in one of these states will outweigh the benefits.
Texas offers many advantages to LLCs formed in the state. Notably, its business environment and economic strength, asset protection for the members of the LLC, tax benefits, and a great deal of flexibility.
If your business has a physical location in Texas, it is probably best to form your LLC in Texas. However, if yours is one of the growing number of non-centralized businesses with geographic flexibility, you may benefit from forming in a state like New Mexico, Wyoming, or Delaware that can offer advantages that are unavailable in Texas.
Need help deciding where to form your LLC? We can help you weigh the pros and cons of forming an LLC in Texas or in a state like New Mexico, Wyoming, or Delaware. Call us today to arrange a free consultation with a knowledgeable and experienced Texas business attorney.