We recently reviewed the best states to form an LLC, which include Delaware, Wyoming, and New Mexico. In this post we will review the worst states due to cost, duration, burdensome filing requirements, taxes which must be paid, lack of asset protection/anonymity features, and the regulatory climate. Two of the three worst states would be easy to guess and most people would agree with those states being on this list, the third may be slightly controversial. But that’s alright, the blog is simply an opinion, and anyone is free to disagree. Certainly some people must form in the worst states, and some of those may even have had positive experiences forming and operating their companies in any given state.

The worst state of all, probably to conduct any type of business activity (unless you have substantial capitalization), would have to be New York. LLC formation is an arduous process here for many reasons, and may take four to seven weeks total, involving a myriad of regulatory obstacles as well as reporting requirements and high taxes. After selecting a company name and registered agent, the owner must file the Articles of Organization, which are only $200 but must be followed by a highly onerous Tammany hall extortionist-like mandate to publish, within 120 days of forming the LLC, in two newspapers (1 weekly & 1 daily) a copy of the articles of organization or a notice related to the formation of the LLC.

The newspapers must be designated by the county clerk of the county in which the office of the LLC is located, as stated in the articles of organization. After publication, the printer or publisher of each newspaper will provide the organizer with an affidavit of publication. The total fees for publication in NYC range from $1500-$2000, depending where the LLC’s principal office is located. There are workarounds for this requirement but it is nonetheless highly troublesome and unnecessary.

Although reports must be filed biannually, franchise taxes must be paid annually and range from a few dollars to $4500, depending on income, and the form must be prepared by a 3rd party licensed tax preparer. This is in addition to state, county, city taxes and special taxes based on industry. Many types of businesses need permits or licenses to operate. If you can avoid it, don’t go into NY is the advice given to this Firm’s clients.

The second worst state would easily be deemed to be California, in this author’s opinion. The formation process is relatively straight forward with the filing fee only being $70, but the hazards lie in the cost of maintaining an LLC in this state which stands at $800 upon formation and each year thereafter. Additional taxes may be owed depending on the LLC’s income. This is in addition to the state, county and local taxes to which the LLC  or its owner may be subject, as well as potential business licensing costs. In addition the asset protection aspect of such an LLC from a privacy standpoint is not beneficial since one is required to file a “statement of information” soon after formation disclosing all LLC managers’ or members’ names and addresses.

Another significant hazard of residing in California is that the state has an overly aggressive take on its right to reach into the pockets of its residents who own foreign LLCs and do not register them and do not pay the annual franchise fee. Generally California will deem that any resident who owns a foreign out-of-state LLC has sufficient business presence in that state to be required to register their LLC with the state and pay the tax, even if such LLC does not actually conduct any business in California. This take on ‘minimum contacts’ with California is almost certainly unconstitutional, unfortunately it has yet to be challenged in federal court.  There are workarounds this erroneous and egregious mandate as well, please inquire with the Firm. California’s oppressive regulatory climate and high costs make this state undesirable for the carrying on of business activities, if it may be avoided.

The third worst state on this would surprisingly be Nevada, in our opinion. There are a number of reasons for this, but certainly Nevada has generally been deemed as one of the best states for LLC activities due its legendary privacy laws and low cost. Unfortunately the heydays are gone with new legislation which has greatly reduced privacy rights and increased the costs of formation and operation, as well as imposed unnecessary regulatory burdens. The new requirements generally surprise people who expected a simple and cheap formation and operation process.

First off, the Articles of Organization require the name and address of each manager or managing member, so any privacy protections are non-existent. There is also a mildly burdensome requirement to attach a registered agent consent form or the agent’s signature directly on the filed Articles; wholly unnecessary requirements only adding cost to the formation process. There are numerous additional forms as to how the filing should be handled: there are two possible forms depending on the filing speed the organizer requires, a separate payment form, and an ‘order instructions’ form. The best LLC states generally require two, one page forms to be filed, while Nevada’s formation packet, including instructions is nine pages long.

Cost wise, the filing fee is only about $100 including a certified copy of the Articles, however soon after formation an additional fee of $350 is due for the Initial List, which must again list all managers or managing members, and for the Business License which is required for all LLCs. Entirely unnecessary filings and burdensome demands. Some of privacy burdens may be resolved by use of an out of state company as the manager of the Nevada LLC, adding to business costs, although the costs of Nevada formation may not be reduced. The $350 amount along with both forms is an annual requirement. Other licenses and permits may be necessary depending on the type of business conducted by the LLC.

On the bright side, Nevada is one of only a very few states that does not have a personal income tax or a corporate income tax. Consequently, for most LLCs, including those that may have elected to be taxed as corporations, no state income taxes are due. Moreover, because Nevada also doesn’t have a personal income tax, LLC members generally will owe no state tax on income they earn from a Nevada LLC within Nevada. Of course there may be other taxes due such as employer taxes and sales and use taxes. So the point is that while Nevada may still be an decent state to form and do business in, it is not the best or even at the top of the list, contrary to popular myth.

So here we have a brief outline of the states which are generally difficult or undesirable to conduct business in either due to regulatory burdens, lack of asset protection features, or costs, or all the above. Some of the obstacles may be mitigated by professional planning strategies, but the negative climate of a burdensome state will always remain. Please don’t hesitate to contact this Firm if you have any questions or require any LLC related services.