You’re getting ready to start your business, but there’s just one hurdle left: where is the best state to form an LLC for real estate investing? For many private lenders, entity formation goes beyond paperwork; it’s a strategic decision that impacts taxes, liability, and long-term business growth.
Below, we’ll cover why states like Delaware and Nevada are common choices for new lenders, and what is the best state to form an LLC in for your business needs.
Why Delaware and Nevada Are So Popular
Big businesses overwhelmingly form in Delaware, and with good reason. According to the Delaware Division of Corporations, more than 66% of Fortune 500 companies and over 80% of public companies are incorporated in the state. Delaware’s General Corporation Law is famously flexible, and its specialized Court of Chancery resolves disputes quickly and cost-effectively.
Nevada also attracts businesses with its lack of state corporate income tax and privacy-friendly rules, not requiring directors or officers to reside in-state.
However, what works for billion-dollar companies may not work for private lenders or smaller real estate firms. Most investors and operators don’t benefit from Delaware’s legal framework unless they have hundreds of shareholders or complex capitalization structures.
The Hidden Costs of Forming Out of State
If you’re operating primarily in California (or any other state), forming your LLC or corporation in Delaware or Nevada means you’ll likely need to register as a foreign entity in your home state. That means double the compliance: you’ll pay filing fees, registered agent costs, annual franchise taxes, and maintain dual reporting.
In California, you must register as a foreign entity if:
- Your business makes over $500,000 or 25% of total sales from California.
- You own over $50,000 or 25% of total real or tangible property in the state.
In essence, if you’re doing business in California, you’ll be taxed and regulated by California, even if you form elsewhere.
Where Should You Form Your LLC?
If you’re a private lender, real estate investor, or small business owner without a complex shareholder base, the best state to form an LLC for real estate investing is typically the state where you’re doing business.
Yes, Delaware may lend an air of legitimacy, particularly if you’re fundraising and your investors prefer Delaware corporations, but that prestige comes at a cost. And unless it significantly improves your access to capital, it’s usually not worth the extra compliance.
You can read more about how Fortra Law helps real estate investors and lenders structure their businesses properly on our Entity Formation Services page.
Key Takeaways On The Best State to Form An LLC For Real Estate Investing
Choosing the best state to form an LLC for real estate investing ultimately depends on your business goals, where you operate, and how you plan to grow. While states like Delaware and Nevada offer certain advantages, they often come with added costs and compliance burdens for those primarily doing business elsewhere.
If you’re unsure which route makes the most sense for your lending or real estate operation, Fortra Law can help you make the right decision from day one. Contact us today to get started.
