Creating an LLC or corporation is a major venture that opens up doors for you and your partners to generate wealth and opportunity. One of the most crucial decisions you’ll face is where to establish your business. This choice influences and is influenced by the location(s) your business operates, the structure of your business, and privacy.
While many entrepreneurs default to their home state for incorporation, there are a number of options that could be more beneficial depending on your business’s purpose and circumstances. It’s important to make informed decisions early on so you aren’t left questioning those decisions down the road.
Forming Your Business in California
Forming your business entity in your home state is often the most straightforward and cost-effective approach when creating an LLC or corporation. You know the region and its regulations, you operate the physical location there, and you benefit from access to local officials, contractors, and vendors.
If your business is physically located in California, generates income in your home state, and operates most or all business in your home state, you should start there. Additionally, if you’re actively doing business in California then banks and lending institutions will have fewer reservations about working with you.
However, in cases where you conduct business across state lines, have real estate, or other investments elsewhere, there are opportunities to create your LLC or corporation in those other locations depending on certain factors and determinations.
Creating an LLC or Corporation in Another State
So, when is the right time to consider creating your LLC or corporation in another state? The answer lies in the unique legal implications that vary from state to state. Businesses that operate primarily in a different state than where the owner resides will generally find more benefits in forming their entity where business is being done.
States like Nevada, Delaware, and Wyoming are among the most attractive locations for formation for various reasons. Nevada and Wyoming offer relief from personal and corporate income taxes, as well as franchise taxes, but those benefits are primarily related to income generated by residents of those states (this will not help you if you are, for example, a California resident and/or have offices in California). Delaware, on the other hand, is renowned for its protective measures and privacy for LLCs, along with a highly advanced and flexible General Corporation Law for corporations. Most venture capital investors prefer Delaware for its long-standing and clear laws for investors and Board of Directors.
We could go through a list of 50 states and debate the pros and cons of each, but the truth is that your own business circumstances will dictate what your best option is. It’s essential to understand the various costs and benefits before making a final decision and moving forward.
Piercing and Reverse Piercing of the Corporate Veil as a Factor
A key factor that we’ve covered in recent months is the piercing of the corporate veil (or reverse piercing). Some states provide additional protections for owners of LLCs or corporations when faced with a lawsuit.
In the case of piercing, a business owner is exposed to personal liability when a lawsuit targets their business interests. Most states provide protections to multi-member LLCs, but states like Florida and New Hampshire do not provide the same liability protections to single-member LLCs.
Reverse piercing is far less common, but California is one of a handful of states that allow the courts to pursue the business interests of an individual owner who is unable to pay off debts incurred through litigation. States like Nevada and Wyoming have laws that eliminate or limit the ability of courts to reverse pierce. If you form a business in a state that protects against reverse piercing, California courts do not have jurisdiction to reach into business interests owned outside of the state.
Make the Right Choices at FormationDeciding where to establish your LLC or corporation sets the foundation for your business’s future. Each option, whether within your home state or elsewhere, carries its own set of advantages and drawbacks. At Dahl Law Group, we are committed to guiding you through these pivotal decisions, ensuring your business is positioned for success right from its inception. For sound legal counsel and assistance in making these critical choices, contact our offices to get started.
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