Pros and Cons of Forming an LLC in Nevada or Delaware

Business abbreviation. Word cloud illustration.
••• MattZ90 / Getty Images

New business owners often want to know about incorporating or forming an LLC in Delaware or Nevada, because they hear that somehow things are "more favorable" for corporations and other business types in those states. But does this favorable treatment make the additional costs worthwhile?

Benefits of Forming an LLC in Delaware or Nevada

More than 50% of all U.S. publicly-traded companies incorporate in Delaware, because of its "...modern and flexible corporate laws, ...highly respected Court of Chancery, a business-friendly State Government, and the customer service oriented Staff of the Delaware Division of Corporations." (from the state's business division site).

Based on the Delaware model, Nevada has gone even further to be business-friendly. Nevada's corporate website lists advantages of incorporating in Nevada, including no corporate income tax, no taxes on corporate share, nominal annual fees, no franchise tax, competitive sales and property tax rates, and minimal employer payroll tax.

Both states will allow you to incorporate or form an LLC in their state even if your business is physically located in another state.

Drawbacks of Forming an LLC in Delaware or Nevada

Attorney Susan Dawson says, "From a small business standpoint, there's very little reason to incorporate your business in a state other than the state where you are doing business. Consider these issues:

Dual Registration. If you are only doing business in one state, but choose to incorporate elsewhere, you will have to register in both states initially, and each year you will need to prepare two annual reports - requiring two filing fees each year instead of only one - to keep both registrations active.

Registered Agents. You will be required to maintain a registered agent in both states, again adding more fees and costs.

Your attorney (typically licensed in the state where you are doing business) will have to learn the laws of the other state to advise you on certain matters - this "learning" time may be charged to you.

Complicated Litigation. If your business becomes involved in litigation, the laws of both states may need to be applied depending on the various underlying issues. The result - your lawyer, will have to be familiar with the laws of both states, adding more cost and expense charged to you."

Susan concludes:

"While the state of incorporation will most likely have some laws/rules that are more beneficial to your business, there will be some other provisions that are less advantageous - many of which you may not learn of until it is too late to change. Don't make the decision based on one factor; be sure you understand all the pros and cons of a state's laws before deciding."

Information on Forming an LLC in Delaware or Nevada

If you do want to form an LLC in either Delaware or Nevada, here is detailed information on the process:

Disclaimer: Susan Dawson's comments and the discussion on the blog post and website are not intended to be legal advice. Each situation is different; consult with your own legal advisor before taking any actions.

Susan Dawson is a partner with Waltz, Palmer and Dawson LLC in the Chicago area.