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Your LLC’s life begins when you file articles of organization with the secretary of state or its equivalent. Several factors will guide you in deciding which state is the best for your organization. Those factors include:

• The state or states in which your business operates

• State taxation

• Initial LLC filing fees

• Annual filing fees and annual reporting requirements

• State-specific advantages, such as privacy rights and members’ rights

As a general rule, if your business is small and operates and sells only in one state, then you should organize in your state of operation. This advice will apply to most LLCs and your inquiry should go no further. As discussed above, states generally require a foreign LLC to register and pay fees if it operates within their borders. These registration rules limit the benefits of organizing out of state, because you’ll likely need to register in your home state anyway.

If, however, your business operates in several states or if you expect to expand nationally, then you should consider organizing in the state that is most favorable for you.

You’ve likely seen advertisements touting the benefits of Delaware and Nevada corporations and LLCs. These states certainly aim to be business-friendly, and there are some benefits to larger entities.

There are many benefits to organizing in Delaware, including the following:

• Delaware law permits LLCs to liberally shield their managers from personal liability resulting from their actions as managers.

• Delaware has a separate court system, the Court of Chancery, that specifically litigates corporate and business entity matters. The Court of Chancery is widely respected and has developed a sophisticated body of corporate law.

• Delaware permits LLCs to operate with a great degree of anonymity.

• No minimum capital investment is required to form a Delaware LLC.

• The Delaware Division of Corporations is easy to reach on the telephone, although its web site needs improvement.

• Delaware organization offers some degree of prestige.

• Delaware offers incorporation on a few hours’ notice (for a fee, of course).

Delaware organization carries a few drawbacks:

• Delaware, surprisingly, has fairly poor customer services support.

• Delaware’s secretary of state’s department has developed, over the decades, dozens of unwritten, idiosyncratic rules and procedures that stifle even the most experienced business attorneys.

Nevada has emerged recently as America’s most popular corporate and LLC haven, and its features deserve mention. However, Nevada is not perfect.

The initial organization expenses in Nevada (about $280 for a bare-bones organization) far exceed Colorado’s $50 organization filing fee or Florida’s $70 filing fee. Nevada has recently nudged its fees upwards and, judging from that increase, one can reasonably expect that it will continue to do so. Also, Nevada requires organizers to name at least one member or manager in the articles of organization. This appointment then becomes part of the entity’s public record, ultimately searchable by anyone over the internet or through the secretary of state’s office. Despite this, Nevada is otherwise generally a “privacy state,” one that offers its owners (but not necessarily its managers) a great degree of anonymity. We’ll discuss Nevada’s privacy rules at length below.

But why has Nevada become America’s hottest corporate and LLC haven? Advertisements touting Nevada’s advantages appear everywhere, from airline magazines to e-mail spam. The answer is that over the last few decades, the Nevada legislature has undertaken a conscious, deliberate, and effective program to make the state business-friendly.

Organizing in Nevada offers many benefits, among which are the following, and all of which are described in detail below:

• Nevada does not tax corporate or LLC profits. Nevada has no personal income tax. So naturally, Nevada has no income tax division or department. As a result, Nevada does not have any information-sharing agreement with the Internal Revenue Service.

• Nevada does not tax corporate shares or LLC ownership. Some states (not many, mind you) tax individual shares in a company.

• Nevada has no franchise tax, although it requires an annual filing fee, along with an annual statement of LLC managers or members.

• Owners of a Nevada LLC are not a matter of public record: members can remain completely anonymous.

• Officers and managers of a Nevada LLC can be protected from personal liability for lawful acts of the LLC.

• Nevada LLCs may purchase, hold, sell, or transfer shares of their own stock.

• Nevada LLCs may issue stock for capital, services, personal property, or real estate, including leases and options. The managers determine the value of any of these transactions—and their decision is final.

• The Nevada secretary of state provides excellent customer service and excellent web support.

Nevada enjoys a windfall of tax revenues from its most notable industry: gaming. As a result, Nevada’s residents and businesses enjoy some of the lowest state taxes anywhere. Unlike many other states, such as New York and California, Nevada does not impose a tax on corporate profits. California even imposes a 1.5 percent income tax on LLCs (with a minimum of $800 per year). It should be noted that California’s LLC income tax is presently the subject of several legal challenges. Ultimately, the LLC income tax may be abolished.

Nevada imposes no franchise tax. A franchise tax is a tax levied in consideration for the privilege of either incorporating, organizing, or qualifying to do business in a state. A franchise tax may be based upon income, assets, outstanding shares, or a combination. Put another way, a franchise tax is a tax for “just being there.” Many states impose franchise taxes on businesses.

While Nevada’s secretary of state touts the absence of a personal income tax as a benefit to businesses, this is more of a reason to reside in Nevada than a reason to organize there. Personal income tax is paid in an individual’s state of residency and not in the state where his or her entities are chartered. For example, a California resident who operates a Nevada LLC will be subject to California’s personal income tax on LLC income paid to him or her—the same as if he or she had chosen to organize in Delaware or Wyoming or any other state.

Nevada offers a tremendous degree of privacy to owners of businesses chartered there. However, this degree of privacy is not extended to managers, directors, and officers of Nevada entities. As mentioned above, Nevada has no information-sharing agreement (ISA) with the Internal Revenue Service—and Nevada is not afraid to boast about it.

The IRS has an ISA with 34 states. The purpose of the ISA is to combat abusive tax avoidance.

The IRS and the states that have signed the ISA will share information on abusive tax avoidance transactions and those taxpayers who participate in them. As reported by the IRS, the states participating in the ISA are Alabama, Arizona, Arkansas, Connecticut, Georgia, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Minnesota, Mississippi, Missouri, Montana, New Hampshire, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Washington, West Virginia, and Wisconsin.

Even if Nevada participated in the agreement, it would have no information to share. Because Nevada has no corporate or LLC income tax and no personal income tax, it has no corresponding tax forms and no corresponding tax department.

Along the same lines, owners of Nevada LLCs need not identify themselves in any public records. This makes it very difficult for the government, police, or third parties to determine who owns a Nevada entity.

Unfortunately, Nevada’s privacy protections are widely misused. By way of example, and not by way of recommendation, many individuals and businesses have improperly and illegally used Nevada business entities to hide assets from creditors and even their own spouses. The other obvious misuse is tax avoidance.

Despite occasional abuse, Nevada’s privacy protections do offer value to the legitimate and law-abiding businessperson. Probably the single greatest benefit of Nevada’s privacy protections is that they serve to protect business owners from unscrupulous creditors, aggressive attorneys, and frivolous litigation.

In my law practice, I have served as counsel to several companies that have been the victims of lawsuits that could only be fairly described as totally baseless. Often, the owners of businesses are dragged into suits as defendants simply as an intimidation tool. Frivolous lawsuits are an unfortunate reality in today’s business climate. Also, lawsuits are never win-win: they are always win-lose. The successful defense of a lawsuit following the time and expense of a trial is not a pure victory: it is a victory that comes at great cost.

The real victory is not to ever be sued. Experienced businesspersons and lawyers know this. Nevada’s privacy protections can go a long way toward achieving this goal by effectively hiding business owners from public view and thereby protecting them from litigation. Of course, Nevada’s privacy protections are not absolute. A good plaintiff’s lawyer with enough money and time (it would take a lot of both) could ultimately identify the owners of a Nevada entity. Overall, though, Nevada’s privacy protections are quite valuable.

The other obvious benefit of Nevada’s privacy protections for the businessperson is shelter from government prying. This benefit is obvious, even to a completely law-abiding company or company owner. Our government, police, and courts, while the finest anywhere, are capable of occasionally pursuing the innocent. Again, the successful defense of a criminal matter following the time and expense of a trial is a victory that comes at great cost.

Privacy, for lack of a better term, is good. I am quite comfortable advising my business clients to maintain their privacy as much as possible in their business affairs, regardless of the type of business they conduct. As a general rule, that which need not be disclosed should not be disclosed.

Nevada’s privacy rules have an important exception, however. They protect owners, but not company officers and managers. Nevada is one of a few states that require an organizer to appoint by name at least one initial member or manager in an LLC’s articles. The articles are a public record and anyone can request copies by paying a small fee.

Even worse, however, is the requirement that every Nevada LLC or foreign LLC qualified there file an “Annual List of Managers.” The oft-dreaded Annual List requires companies to disclose the full names of their managers or members. The information is then posted on the Nevada secretary of state’s web site and anyone can search it. This public database makes it remarkably easy for any member of the public to identify a Nevada entity’s management team. Nevada offers a great degree of privacy to owners: as long as they do not participate as managers, owners can easily remain anonymous. By comparison, Delaware and many other states do not so publicly reveal the identities of managers.

You should also consider the initial cost of organization, as well as periodic filing fees and periodic reporting requirements. The State Reference Information on the accompanying CD includes filing fees and periodic reporting requirements.

▼ Expert Tip

Nevada’s dual approach to privacy (complete anonymity for members, but complete disclosure of managers and officers) has produced an interesting new profession: the nominee director/manager. This is an appointed manager/officer who serves as the appointed public representative of an LLC or corporation. The nominee director/manager is often charged with a solemn duty: to serve as the guardian of an entity’s owners’ privacy. The entity’s owners “hide” behind the publicly disclosed nominee manager. A common use of a nominee manager is to protect assets: a Nevada entity owner that wishes to hide assets can assign them to the Nevada entity and can then appoint a nominee manager and direct that person to serve the owner’s interest. The use of nominee managers has little value to an ordinary small business, but it’s effective for asset protection.