Crowdfunding Lawyers

In What State Should I Form My Entity?

March 26, 2019
In What State Should I Form My Entity?

I recently had a client that specifically asked me to form their entity in Nevada instead of the state where the property they were syndicating was located. Their reasoning was that Nevada had the best laws for entities like limited liability companies. Is that really true? And if so, does it really matter?

If you look online, you’ll find plenty of articles talking about how Nevada is the best state for forming your LLC. The main reason most people seem to recommend forming your LLC in Nevada is that Nevada has zero state income taxes. If your business is located in Nevada, or you have a lot of sales in Nevada, then it’d make a lot of sense to form your business there to take advantage of their zero taxes. However, if your business is located in another state, even if you form your LLC in Nevada, you’ll still need to register as a foreign entity in your state and pay your state’s income tax.

However, there’s another reason why many businesses choose Nevada: asset protection. Nevada is the only state that doesn’t have an information sharing agreement with the IRS. Furthermore, members of an LLC can remain completely anonymous since there’s no requirement that they be listed in public records. Many articles online reference these two points to argue that you can effectively protect your assets by forming an LLC in Nevada. That may be true to an extent but keep in mind two things: 1) you’ll never be able to shield yourself from liability arising from illegal acts and 2) almost every state allows you similar forms of asset protection in their own LLC laws.

In the real estate syndication world, there are other factors that may come into play as well. Most syndications involve creating an LLC to hold the property sometimes referred to as a special purpose entity (SPE) or special purpose vehicle (SPV).  Even if you form the SPE in Nevada, you’ll need to file as a foreign entity in the state where the property is located. While this may give you more insulation from liability, you have to consider the extra costs involved. There are initial filing costs for both Nevada and registering as a foreign entity as well as yearly fees for maintaining an active status in both states. These costs can definitely add up, so you need to analyze whether the added protection is worth it.

Whether or not it will be worth it for you to file in Nevada first and then register as a foreign entity in the state of your property will depend on your individual circumstances. To find out more or to ask any questions from one of our attorneys, schedule an appointment today here.

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