As you’re deciding what entity to use for your business and investments, you also need to determine what state to form the company in.
In most cases, you’ll probably want to form an LLC. The few exceptions are if you’re planning to go public (in which case you want to use a C Corporation) or if you’re a professional (in which case you will probably be limited in the type of entity you can use.) There are a few other items to consider, such as whether a Series LLC is better for you, and so we recommend that you talk to an expert first. Unless you spend a lot of time getting to know all of the applicable state laws, Board certification requirements,
The next question is where you should form the LLC. Generally, speaking the LLC should be formed where the business is. In today’s virtual world, though, that might not be as transparent and you might think. For example, let’s say you have an Internet business. What state does the work actually occur in if there is no real bricks and mortar building, employees and all fulfillment is done via the Internet downloads, offshore or through contracted fulfillment agents.
The first part of the test is determining where there is clear nexus, or connection, to a state. For example, if you live in California and buy a rental property in Oregon, your nexus is Oregon. Your LLC will be a flow through entity (because you have appreciating property) and so it will be reported on your personal return. That means you pay California income tax and Oregon income tax, but the income won’t be double taxed. You don’t need to get your Oregon LLC authorized for California.
Generally speaking, if you have a rental property your entity should be formed in the state in which the property resides. If you have a business, form the entity where most of the work is done. That’s probably the state in which you live.
Choosing the wrong state for business can be a costly mistake to fix. Make sure you choose the state for your business and investments that reflects where you have nexus.