I get this question ALL THE TIME! People who don’t live in Delaware always want to form their LLC in Delaware. Why? Because it’s waaaay cheaper (fees for Delaware LLCs annually cost around $300 compared to $800 in California).
Now before you go run out and form a Delaware LLC, let me explain why you shouldn’t do it (unless, of course you live in Delaware).
The law allows you to file an LLC in the place where you are doing business… BUT with the rise of online entrepreneurs, most people feel as if they are doing business all over the US.
When looking at where you are doing business you need to think about a few things: Where do you pay taxes? Where is your desk or office located? Where is your home located? If the answer to these questions is all the same State, then State is where you are doing business in.
If you are doing business in one state, but open up an LLC in another, then you could be found to be illegally transacting business in another State… oops!
A lot of times people are “doing business in” the State where they reside, but file their LLC in a neighboring State. If you do that, you can incur some pretty hefty fines! You home State’s Secretary of State will soon enforce its laws and send you a citation with a fine.
In order to remedy the citation, you will have to now file a new LLC in your home State, register it as a “Foreign LLC” and pay an additional filing fee to your home State. Now you have TWO LLCs… one in your home State as a “Foreign LLC” and one in Delaware.
On top of the Foreign LLC filing fee, you will also have to pay a tax every other year to maintain the Foreign LLC.
This now means that to file a Foreign LLC in Delaware (if you do not live in Delaware) will cost you $90 for the initial filing fee, a fee to your home State to register as a Foreign LLC, $300 annual Delaware franchise tax, $125 to register an agent for Delaware (since YOU don’t live there so it can’t be you) PLUS a tax to your home State… this means that a Delaware LLC if you are NOT a Delaware resident will cost you more than the $390 you thought. Eeek! That $800 California tax isn’t looking too bad anymore.
Don’t think that the State you live in won’t want their cut of the cash! For SURE they will!
So the way that taxes work is taxes are paid where the money is made, rather than where your LLCs is filed. This means that you can be liable for sales and use tax, business entity tax, withholding tax, corporate business tax, net income tax, franchise tax, property tax, and more. PLUS, you are also liable for the federal and state income taxes for your home State since that is where you will be filing your income tax return.
Even if you run your business form home or online, you are still a resident of your home State and still technically transacting business in that State. There’s no real getting around that…
I know this was incredibly confusing! That’s kind of the point, lol. Filing a LLC in Delaware when you reside in another State is incredibly confusing and can end up costing you more than it would if you just filed in your own State.