Whether you should form your LLC in another state other than your home state depends on the reasons you are forming an LLC and type of business you are running. The benefits of forming an LLC outside of your home state are often overhyped and may not even apply to you.
Some of the good reasons you might consider forming an LLC in another state are:
Ownership of real estate in other states – If you are a real estate investor and you own properties in states outside your home state, then you may want to consider forming entities in the states where your investment properties are located. This can help you simplify taxes and you will not be required to authorize an out of state entity to do business in the state where your real property is located.
Holding company – Holding companies hold assets, such as real estate, stock, and other companies. Holding companies act as an additional layer of protection and do not conduct business. If the LLC does not conduct business, then there is no reason to authorize the LLC to do business in another state.
Privacy – Some states, such as Wyoming and New Mexico, do not require the names of the LLC to be listed in public filings offering more privacy. If privacy is your goal and you live in a state that requires members or managers of the LLC to list their names, then you may want to form your LLC in another state that offers more privacy.
Some of the downsides of forming an LLC in another state include:
Complication – You might be making your business structure overly complicated. You will need to comply with the rules and regulations of more than one state and you will need to follow their requirements for filing annual reports, business licenses, maintaining the entities, and other state specific requirements.
Increased costs – If you form your LLC in one state, but do business in another state, then you will need to authorize your LLC to do business in the state where your LLC does business. For instance, if you form a Delaware LLC, but do business in Florida, then you will need to authorize your Delaware LLC to do business in Florida. The authorization process costs time and money, and you will need to pay annual fees in the state you form your LLC and the state where your LLC is authorized to do business. You will also need to appoint/hire a registered agent in each state. This can double your costs of owning your LLC.
Taxes – Taxes are paid where money is made. Thus, if your business is making money in your home state, then that is where you will pay taxes. For instance, if you form your entity in Delaware, but you are not doing business in Delaware, then the favorable Delaware state tax treatment does not matter for you. Also, depending on state laws, you might be subject to taxation in both states where your LLC is formed and where you are doing business.