Gilbert, AZ asked in Business Formation

Q: Does a business have to be incorporated in the state in which it operates? What is the benefit or cons?

I created a LLC in Wyoming (based on a suggestion, for some reason). However I will be doing 100% of my business in Ohio. I am working on registering my business with the OH Sec of State and am super confused. They said I essentially had three options: 1) File as Foreign LLC in OH, keep LLC in WY. 2) Register a domestic LLC in OH, which would be like an OH version of the WY LLC (?). 3) Convert my WY LLC into an OH LLC and then register that as a domestic LLC (might have to convert out of WY as well). What is the point of incorporating in another state? Will it affect taxes? What is implication

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1 Lawyer Answer
Michael Ray Smith

A: As always, answers to these questions should not be considered legal advice, and that applies to this question even more than usual because it cuts across state lines, and most lawyers are admitted in only one or a few states. Me, I'm admitted only in Indiana. So -- this is not legal advice but rather a discussion of the issue in general.

No, a business does not have to be incorporated or organized in a state in which it operates. Selecting the jurisdiction in which to set up your business involves a number of factors.

One factor is convenience. If you are setting up a business to operating in only your home state, it's more conveniet to organize it in that state, if for no other reason, if you organize it in another state, you'll have to hire a registered agent in that state, in addition to the registered agent in the home state.

There are, however, differences among the states in the laws that govern LLCs, corporations, and other entities, and a business may select a jurisdiction based on those differences. For example, many corporations are incorporated in Delaware because its law is generally viewed as being favorable to the management of corporations. There are a couple of different factors that sometimes drive the choice of jurisdiction in which to organize LLCs. One of them is whether the state permits "anonymous" LLCs, i.e., whether the articles of organization (or the equivalent filing -- different states have different names for it) requires the disclosure of one or more members or managers of the LLC. My guess is that Wyoming was suggested to you because it is one of the states that permits anonymous LLCs. There are others.

Another factor that may be important is the degree to which the state permits the creditors of an LLC member to execute a judgment against the member's interest in the LLC. Some states provide that the only recourse a creditor of a member has with respect to the LLC is to obtain a so-called charging order, i.e., a court order that tells the LLC to pay to the creditor any distributions that would ordinarily be paid to the member. As far as I know, all states permit that sort of order, but in some states that's the ONLY recourse a creditor has against the judgment debtor's interest in the LLC. The creditor cannot force a sale of the member's interest and cannot take over the member's voting rights. Those states are said to have "charging order protection." Some states have charging order protection for all LLCs; some have charging order protection only for LLCs that have more than one member; and some states have no charging order protection.

State taxes could also be a consideration, but that's an issue often best left to the business's tax advisor.

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