Business locations, whether it be new or an existing business undergoing renovation, may be subject to state building codes, local zoning requirements, and Americans with Disabilities Act public access requirements. These regulations can vary with each business location, depending on the type of business, number of employees, public access, type of structure, and location. In Kentucky the Department of Housing, Buildings, and Construction administer building code enforcement and inspections of existing public buildings for compliance with fire safety codes.
When forming an LLC the location of the business entity is crucial, as location can impact a variety of factors. Before we take a look at some key considerations when selecting a state, it is important to first clarify the LLC meaning. The Really Useful Information Company defines an LLC as follows: “An LLC is a US business structure that offers personal liability protection of a corporation with the pass-through taxation of a sole proprietorship or partnership.”
Now that we have a clearer understanding of what exactly the LLC is, it becomes apparent that limiting liability in a business structure involves choosing the best organizational form. However, selecting an apt location for the business is a significant consideration that has the potential to dictate an entrepreneur’s future success.
A General Overview
Regardless of the state the entrepreneur chooses to file their LLC in, some general steps remain the same. These are: fling articles of organization with the appropriate agency for that state and designate a registered agent within the chosen state. Formation paperwork is usually filed with the Secretary of State and a fee (may vary in each state) is required at the time of filing. Failing to file means the LLC or business entity does not exist, therefore the owner is operating a sole proprietorship or general proprietorship. This could potentially spell disaster if the business encounters financial hardships or if the entrepreneur experiences personal finance issues as the entrepreneur’s assets are at risk.
Additionally, if a company does business outside of the state of formation it must be registered in all the states in which the entrepreneur does business in. This process is referred to as “foreign qualification”. Fortunately, the process is quite straightforward as in nearly all cases it requires filing out a simple form and paying a fee to the Secretary of State.
Scrutinize State Fees
The simplest (and sometimes cheapest) choice may not always be the best choice. State fees to form an LLC may often be lower than the fees charged to form a corporation, but this is not always the case. In Nevada, for example, the fees charged by the state are the same whether the entrepreneur forms a corporation or LLC. Some states charge significantly higher fees for forming and renewing an LLC than for a corporation. Some states may also impose a “publication fee.” New York, Nebraska and Arizona require that an LLC publish the information from its articles of organization in a newspaper. In New York this information must be published once a week, for six weeks in two different papers. This expense can amount to or even exceed $2,000, and could make the LLC a cost-prohibitive option.
Know the Scope of Protection
When choosing a formation state it is important to bear in mind that the internal affairs and liability of the owners for a LLC or corporation are governed by the state where the business is formed. Not the state where it does business. Some states offer significantly greater asset protection and other benefits. Delaware and Nevada have a reputation for developing a body of law and court system that is favorable to the business owner. These states model their LLC statutes on the charging order found in the Revised Uniform Limited Partnership Act.
Some states only offer a limited form of protection, known as limited shield protection, owners of Limited Liability Partnerships (LLP). This means that the owners of an LLP will have some limited liability with respect to the actions of their co-workers.
A Final Consideration: Series LLCs
The Delaware LLC statute provides flexibility and simplicity when forming and operating and LLC. It allows the forming of an entity within an entity, eliminating the need to form separate LLCs for each operating activity carried out by the business. Each entity within the LLC can have their own accounting system, assets and be liable for their own debts as if they were separate LLCs. The Series LLC was reportedly pioneered by Delaware, however other states (Texas, Tennessee, Utah, Nevada, Illinois, Iowa, Oklahoma) have followed in Delaware’s footsteps to allow the creation of Series LLCs. It should be noted that California does not allow the formation of Series LLCs under state law, necessitating entrepreneurs to take a careful look at state requirements when choosing a state for business formation.