Where Do I Form My LLC?

I have usually recommended that a person establish their LLC in the state where they are doing business. I am still a firm believer that the “secrecy hype” and all the other sales pitches that Nevada and Delaware make are basically bogus. It costs a lot more to form your LLC in a foreign state (one where you’re not doing business), because you have to pay the registered agent, pay all the fees in the foreign state, pay all the fees in the state where you’re actually doing business, etc. You have to pay income taxes in the state where you are making money, so there isn’t any tax advantage to doing business in Iowa and having your LLC in Nevada or Delaware.

The whole “incorporate or LLC in my state” thing is basically nothing more than a great business for the registered agent. When considering “Where do I form my LLC ?” Remember all a registered agent has to do for his $500 or $1,500 a year is forward a couple of letters from the state to you each year and hang around to see if anyone wants to serve a lawsuit on him directed at your corporation or LLC.

When considering where to form my LLC, remember there may be a pretty good reason to have your LLC in a state where you’re not doing business. You are most likely to be sued in the state where you are doing business. With an LLC, if a guy gets a judgment against you personally, the judgment creditor has to get a “charging order” to come after your interest in your LLC. The most a charging order will give him is a right to the economic benefits you would have in the LLC. It doesn’t give him any rights to management in the LLC. (This is all assuming you have a few common provisions in your LLC operating agreement, which you should have even if a half-baked attorney did the paper work.)

If the judgment creditor is stupid enough to “foreclose” on the charging order, then they will be the total owner of any economic benefits that come from the LLC to you. Before they foreclose on the charging order, they simply are able to “garnish” the benefits that are coming your way. Once they foreclose on the charging owner, they actually own the rights to your economic benefit in the LLC. Since they own the rights, they also own the responsibilities, including the obligation of paying taxes. Your creditor may get a charging order to help collect his judgment, but he isn’t going to be stupid enough to foreclose the charging order interest. Basically, the LLC is not only a protection for you against any business activities that might go bad, it is also a protection against people (creditors) coming after you and trying to get your interest in the LLC.

It is actually a little more complicated for your creditor than has been described. The charging order (think of it as a garnishment) against your interest in the LLC isn’t automatically part of the judgment. The creditor has to petition the court for the order. If the court where the guy is sued is in one state and the LLC is in another state, the guy has to take his judgment and get the courts in the “other state” to recognize the judgment and then issue the charging order. If the court is in the same state where the LLC is formed, then it is easier for the guy to get the charging order.

It may be advantageous to have your LLC out of the state if you are actually doing business out of state. But you don’t have to pay the big bucks to someone in Nevada to be your registered agent. Find a trusted relative in a different state and have them act as registered agent. There’s really no work, so they won’t be put out much, and probably won’t charge like the Nevada companies. They just have to be responsible enough to make sure you get all the notices that come to their address.

You have now put a pretty substantial stumbling block in the way of the guy trying to come after you personally who wants to get to your business assets.

By Lee R Phillips

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