In our last article, “What is the Best Business Entity to Protect Your Assets?” we learned why it is critical for entrepreneurs to establish an entity (incorporate) to protect their personal assets. We also provided several practical examples for real estate, partnerships and “payroll” companies.
Today, we will address the next logical question of what state to incorporate in.
There is a lot of debate about this topic. Some push to only use Nevada or Wyoming; while others say it’s always best to incorporate in the state the business will operate in.
Let’s go through the facts and myths about this debate.
“Always Incorporate in Nevada or Wyoming.”
I get so tired of hearing that boilerplate sales pitch by so many online attorneys looking to sell their services in their home state.
Yes, it is true that Nevada and Wyoming have business-friendly laws.
They both offer you anonymity. The business can be set up without listing your name. So, if an attorney does search to find the owner of a business for a potential lawsuit, your name will not be shown. Additionally, if there’s a search for businesses that you own, they won’t be shown.
Another big benefit of these states is they have some of the best charging orders in the country. Charging Order Protection Entity (COPE) provides an extra level of protection for lawsuits. If you’re sued, and a lien is placed on the businesses it protects the remaining members from having to dissolve the business or be forced to take them in a business partner.
The creditor has no voting rights or control of the business. They only collect payments when distributions are made to the partners of the business. If there are no distributions, there are no payments to the creditor.
This is the reason most attorneys won’t touch lawsuits in states with this level of charging protection. Their chance of being paid in a timely manner is greatly reduced or essentially eliminated.
“Always Incorporate in Your Home State”
I agree with this statement if your company is operating in your home state. This will keep things simple and save you fees.
If you elect to open your company in another state, but you do business in your own state, you will still be required to register the business in your home state as a “foreign company”. Then, you will have to pay filing fees in both states, annual fees in both states, pay for a registered agent and manage 2 LLCs.
There are, however, reasons you may not want to have the company incorporated in your state.
Real estate is a good example. I always incorporate my real estate LLCs in the state where the property is located. This is where the business occurs and where the taxes and other fees need to be paid.
Another example is a Holding Company. A Holding Company is a parent company that owns other companies. If structured properly, you can gain the benefits of a Nevada or Wyoming company while still owning other companies in your home state. This may also provide additional liability protection, simplify your tax returns, and save on taxes.
This is an advanced strategy we will cover in more detail in a future article. You definitely need to work with a qualified attorney when structuring Holding Companies.
What is a Registered Agent?
A Registered Agent is a person or company that receives legal mail and documents on behalf of the company. Most states require a physical address (not a PO Box). This does NOT need to be an attorney! So, don’t feel like you must pay an annual fee for this.
You can use a reliable friend or relative’s address that lives in that state. If you do not know anyone that is reliable, then yes, hire a registered agent (normally $125-$200/year).
If your entity is formed in your home state, you are your own registered agent.
What’s the Best Strategy?
While you should consult with an attorney and/or tax advisor before making that decision, let me shed some light on my approach.
Real Estate: I always incorporate in the state where the property is located.
Operating Company: I always incorporate in the state where I live.
Holding Company: I personally like Wyoming due to their low expenses, anonymity and charging orders. Again, more on this advanced strategy in future articles.
If you want charging order protection, it may be available in your own state. Check out NOLO’s article on asset protection and charging orders. They do a great job of breaking it down for each state.