You are taking the first step to financial freedom–you have started your own real estate investment business. After researching the next step, you've decided to form a Limited Liability Company (LLC). That's a good idea because an LLC provides some personal liability protection if your business is sued.
You care about protecting your assets. Do you want to make sure your real estate investing business is protected? Start with our investor quiz, and we'll help you find ways to protect your assets.
Your home state is the state in which you conduct your business. For example, if your real estate investment business is in Texas, you should form your LLC in Texas.
How do you know if you are "conducting business" in a state? Here is a list of things that characterize "conducting business" in a state and should influence your decision about where to form your LLC:
You can choose to form an LLC in another state, but then you have to register your LLC in your home state. This is problematic because you will:
In most cases, your home state offers the cheapest and safest route for registering your LLC.
A single-member LLC is a type of incorporation that recognizes the LLC as having one owner. It has all the same benefits and drawbacks as a multiple-owner LLC.
The best state for forming a single-member LLC is Nevada. Nevada is the top choice for a single-member LLC because:
The importance of anonymity for your LLC cannot be overstated, so Nevada (which provides total anonymity) might be the right choice for you.
One downside to incorporating in Nevada is the negative perception associated with the state. Nevada is stigmatized by the persistent belief that a business incorporated in the state but conducting business elsewhere is a front for organized crime.
Negative perceptions notwithstanding, Nevada is also the best state for LLC asset protection. The state's heightened asset protection dictates that your business liability is kept with the corporation.
In most other states, your LLC will protect against liability. These protections are not complete–some states provide avenues for liability to affect your assets if your corporation causes damages. Nevada does not.
However, Nevada does not require you to list your company's assets for the state. Coupled with the robust privacy laws, incorporating in Nevada provides the best protection to your privacy and assets.
Delaware, Nevada, and Wyoming are business-friendly states. If you decide to incorporate in one of those three states, you have the opportunity to benefit from the states' tax benefits. You don't have to live nor operate your business in Delaware, Nevada, or Wyoming to reap the rewards.
Here are some reasons why you may want to incorporate in one of the three business-friendly states:
You may wish to have the optimal tax situation but loathe the idea of relocation. It might be a good idea to incorporate in Delaware, Nevada, or Wyoming if that's you.
A little more than half of all Fortune 500 and publicly traded companies are incorporated in Delaware. They can't all be wrong!
There are myriad benefits to incorporating in Delaware, especially if you are a large organization.
Delaware offers lots of flexibility. That flexibility makes it easier for larger companies to set up shop. For example, if your business is large enough to need a board of directors and officers, those officers do not need to live in Delaware to work for your business.
Delaware has strong privacy laws. As an LLC, you don't need to provide many details about the members of your business for incorporation.
Delaware has efficient courts. Judges, not juries, decide corporate legal issues. Your judge will be an expert in corporate law, and the process is fair, objective, and efficient.
Delaware has attractive tax benefits. For instance, you do not have to pay state income tax if you incorporate in Delaware, but your business is physically located elsewhere.
Delaware is fantastic for big businesses, but smaller corporations might not get the same mileage out of those benefits. The cost and hassle of incorporating in Delaware might not be worth it for smaller companies.
Wyoming is the cheapest state to form an LLC. The benefits include:
An LLC provides some but not complete asset protection.
In general, it is best to incorporate it in your home state.
If certain conditions apply, Delaware, Nevada, or Wyoming may be your best bet for incorporation.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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