Forming your LLC in Nevada: does it really work?(Headline)

If you've done a lot of web research about setting up a limited liability company, or LLC, you've seen the advertisements that tout Nevada. The pitch is pretty simple. Because Nevada doesn't levy an income tax on individuals or corporations, you should form your LLC in Nevada. The implied promise is that you'll save big on state income taxes.

Don't get me wrong--I like saving income taxes as much as the next tax accountant. But the Nevada LLC formation question is trickier than most new entrepreneurs seem to understand.

Unless all of your business activity is in Nevada--and it probably isn't unless you're a Nevada resident operating a business in Nevada--you'll need to apportion your business income among the states where you operate.

This apportionment amounts to a three-step process; to make the steps concrete, let's assume that your business makes $300,000 a year.

Step #1: Apportion One-Third Based On Payroll

One-third of your income gets apportioned to the states where you operate based on payroll. In other words, if your business makes $300,000 a year, $100,000 of the profit is assigned to states based on the payroll expenses that your business incurs.

If your payroll were split evenly between California and Arizona, this would mean that $50,000 of your profit would be apportioned to California and another $50,000 would be apportioned to Arizona entirely on the basis of payroll. Notice that no profit has been assigned to Nevada.