LLCs Off To the Races?

The last post examined which states tend to keep their corporations incorporated in state and which states tend to lose their corporations to other states. There was a wide discrepancy between the top states and the bottom states, with some states chartering about 90% of the corporations physically located in the state (e.g., Delaware) and other states losing over 90% of the corporations physically located in the state (e.g., Massachusetts and Connecticut).

In this post, we look at the same data for LLCs. Are LLCs that are physically located in certain states more likely to organize out-of-state than are LLCs physically located in other states? If so, this may be an indication that entrepreneurs tend to avoid incorporating locally in states that have unfavorable corporate law climates.

The following table lists the top five and bottom five large states at retaining LLCs in state. Large states are defined as those with 100 or more LLCs physically located in the state (plus Delaware, even though it has fewer than 100 LLCs physically located there). Because the table only shows large states, there are small states that are better than the top five and worse than the bottom five (see the paper for complete details on these).

States	In-State LLCs	Located and Organized In-State	As % of All LLCs In-State	Located Elsewhere But Organized In-State	As % of All Out-of-State LLC Organizations
Top 5 Large States
DELAWARE	36	33	91.67	3380	84.97
KENTUCKY	171	148	86.55	14	0.35
WISCONSIN	174	149	85.63	7	0.18
INDIANA	163	138	84.66	11	0.28
OREGON	137	113	82.48	5	0.13
NEVADA	121	97	80.17	123	3.09
Bottom 5 Large States
ILLINOIS	473	190	40.17	11	0.28
NEW YORK	905	360	39.78	13	0.33
NEW JERSEY	189	74	39.15	6	0.15
MASSACHUSETTS	337	112	33.23	8	0.2
CONNECTICUT	262	87	33.21	10	0.25

 Overall, there are significant differences from the data for corporations in the last post. LLCs organize locally (in-state) at a higher rate than corporations, especially toward the bottom of the scale. Whereas the worst states at retaining corporations (Massachusetts and Connecticut) retained only about 6% and 10% in-state respectively, the worst states at retaining LLCs (Massachusetts and Connecticut again) retained about 33% each. Clearly, something is going on in Connecticut and Massachusetts that make them extremely unattractive venues for entrepreneurs, but more so for corporations than for LLCs.

As was the case for corporations, Delaware does the best job of retaining LLCs in state and attracting them from out of state. It retains about 92% of the LLCs physically located in Delaware and attracts about 85% of the corporations that incorporate outside of their own state. Nevada also does reasonably well retaining its own LLCs and attracting them from other states, but not nearly as well as Delaware.

There is another similarity to the data for corporations. The fact that a state is good at retaining its own LLCs does not necessarily translate into an ability to attract LLCs physically located in other states. In fact, Delaware and Nevada are the only states in the top five that attract a significant number of out-of-state LLC formations. Excluding those two states, the last column of the table, which is each state’s share of the out-of-state incorporation market, is about the same for the top-5 states as for the bottom-5 states. Thus, the big home-town advantage in organizing corporations and LLCs doesn’t seem to translate into attracting other companies to incorporate in that state.