People starting an online business in the US have many choices for the location and type of company to form. I won’t say too much because everyone’s situation is different and I don’t want anyone to think this is a recipe,¹ but here was my thought process when I formed Serial Comma LLC.

Entity Type

The most common choices for doing business are a sole proprietorship, a partnership, a C corporation, an S corporation, and a limited liability company (LLC).

The two key factors in my choice were liability exposure and tax status. I wanted an entity that would shield me from personal liability and that would not be taxed separately. Regarding liability, I do not expect the business to be involved in risky work, but one never knows. There is no point in taking on unnecessary risk. So a sole proprietorship was out (as a partnership would have been if I had a partner for this business).

Regarding taxation, the profits of a traditional corporation (a ‘C corporation’ in US tax-speak) are taxed twice—once at the corporate level and again at the shareholder level when dividends are distributed. Even though I don’t anticipate huge profits from the business, I saw no reason to have them taxed twice. An S corporation solves this problem by turning a C corporation into what is called a ‘pass-through’ entity. In other words, an S corporation is a C corporation whose profits are passed through to the shareholders and taxed only at the shareholder level.

An S corporation would have been my choice if an LLC didn’t present an even more attractive option. C and S corporations are still corporations and have fairly rigid structures and rules to protect shareholders from each other and from the directors and managers of the business (one of the defining characteristics of modern corporations is the separation of ownership from management). But in my case, as is true for many small businesses, there is no need to protect shareholders from each other and there is no separation between owners and managers. So the protections (and baggage) that come with traditional corporations is of no value to me.

The LLC structure makes the most sense for a single-owner business like mine. It’s not just that it’s the least worst option—there are positive advantages of LLCs, too, such as less paperwork and fewer annual compliance requirements.

Jurisdiction

If I were starting a brick & mortar business, I would form my LLC in the state where the business would be located. My business will be exclusively online, however, so I can look to other factors when choosing the state of formation.

Delaware is by far the most popular choice of jurisdictions for incorporating traditional businesses, but it seems to be behind the curve for LLCs. The competition today seems to be between Nevada and Wyoming. State corporation tax is not an issue because of the pass-through status of the LLC, and Wyoming appears to have lower formation and annual maintenance fees. Wyoming it would be.

Registered Agent

Although it would have been possible to register the new company myself with the Wyoming Secretary of State, I chose to use a registered agent instead. Like all states (that I am aware of, least), Wyoming requires all companies to have a registered agent in the state to accept service of process (ie, notice of a lawsuit filed against them), so I would need to hire a registered agent in any case since I don’t live in the state. To save the hassle and for a little peace of mind, I paid a small fee to the agent to form the company for me.

There are many choices of registered agents in Wyoming. I can’t pretend my selection process was scientific: I spent about an hour looking at the professionalism of their websites, comparing their fees, and looking for negative reviews about them online. I chose Wyoming Registered Agent Services LLC. They charge a $25 fee to file the necessary papers and their annual fee is also $25 for their base agent service (which is all I need for now). They have an online portal for retrieving and filing documents so it’s convenient to manage remotely. Given that the business will be dormant for a while, the low fees are attractive.

Forming the company was straightforward. Other than providing the name of the company and some contact details, the only decision to make was whether the LLC would be member managed or manager managed. I chose member managed because I am the only member and there will not be a separate manager to run the business. This choice is reflected in the LLC operating agreement that the agent prepares, and can be changed in the future if the need arises. After I submitted the formation instructions to the agent, I received a confirmation the next day that the company was formed. The birthday of Serial Comma LLC is 10 February 2020.

You may wonder why I formed the company now if it won’t conduct business for a few years. There are three reasons: first (and most important), I wanted to secure the company name; second, I want to begin incurring expenses in the name of the company; and third, I want to begin getting a handle on the accounting and tax aspects of managing a business.

For Further Reading

Advantages of an LLC

Piercing the Corporate Veil: When LLCs and Corporations May be at Risk

Small Business Basics: How S Corps and LLCs Pay Taxes

Compare Forming an LLC in Wyoming or Nevada

The Benefits And Pitfalls Of Incorporating In Delaware, Nevada And Wyoming

Notes