My clients include a lot of startup companies. (I really enjoy working with and helping start-up companies.) One of the questions that I get frequently is: “I want to start a new business as an LLC, in what state shall I form the LLC?” Usually the underlying reason for the question is state income taxes.
Businesses file state income taxes based upon where business is done, not based upon where the LLC is formed. There is a concept called "Nexus". If a business has Nexus in a state (or NYC) the business is required to file income taxes in that state. Generally speaking, a business would have Nexus if you have any of the following in a state:
--assets, such as inventory, computers, etc.
If you were to form a Delaware LLC and have an office in NYC, you would have to file NY (and NYC) income taxes returns. If you had an office in NY and NJ, you would file business income taxes in both NY and NJ. In addition, there would be required to file annually a Delaware registration form
Please also note that if you did business in NY but claimed it was only in Florida (and did not file NY income taxes), this could be extremely problematic for you. The statue of limitations runs for three years from when a tax return is filed. If you never file a required tax return, 10 or 20 years from now, NY State could go back 10 or 20 years. And of course, the records would be hard to find and NYS would take the "worst case" position. Always file all required tax returns. Failure to do so, can make a small issue to become a "B-I-G" problem.
Where to form the LLC??
This is basically a legal issue. As mentioned above, where the LLC is formed does not automatically impact where it is taxed. In order to form a NY State LLC, there is a required legal advertisement, which generally may cost somewhere in the $400 to $500 range. Forming in Delaware does not require a legal advertisement in Delaware (and thus saves this cost). However if the Delaware LLC operates in New York State, it would have to obtain a NY Certificate of Authority and have to publish within 120 days. Accordingly, there may not be a cost savings for a Delaware LLC that also operates in New York.
Please see the NY Department of State website for more information. For frequently asked questions click onhttp://www.dos.ny.gov/corps/llccorp.html#fappauth.
IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with Treasury Department regulations, we inform you that any U.S. federal tax advice contained in this correspondence (including any attachments) is not intended or written to be used, and cannot be used for the purpose of (i) avoiding penalties that may be imposed under the U.S. Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.