Incorporator The Journal of U.S. Formation
Start Free Quiz
Editorial 8 MIN READ

North Dakota in April 2020: the quietest formation state in the country

A $135 filing, a $50 annual report, and a tax code that keeps more money in the operator's pocket than almost anywhere else

The Editors
Staff, Incorporator.org
8 min read Updated
Contents 7 sections
  1. The mechanics
  2. What it costs to keep it alive
  3. The tax picture
  4. Where a North Dakota LLC actually makes sense
  5. The April 2020 overlay
  6. The quiet part
  7. Sources

North Dakota LLC costs $135 to form through the FirstStop portal and $50 a year to keep. There is no franchise tax, the income tax is among the lowest in the country, and the statute governing the entity (the North Dakota Uniform Limited Liability Company Act, N.D. Cent. Code Ch. 10-32.1) has been in force since 2015.

That set of facts has been true for a while. What is different at the end of April 2020 is the operating environment. The CARES Act was signed March 27, the Paycheck Protection Program opened April 3 and burned through its first $349 billion appropriation inside thirteen days, and oil at the Bakken wellhead is trading below the cost of lifting it out of the ground. Entities being formed this month in Bismarck are either very small and scared, or very large and opportunistic. The middle has gone quiet.

The mechanics

Formation is done through FirstStop, the Secretary of State's business services portal at firststop.sos.nd.gov. You file Articles of Organization (not a Certificate, North Dakota uses the older nomenclature), which must state the name of the LLC, the character of its business, the address of the registered office, the name and address of the registered agent, and whether the LLC is member-managed or manager-managed. The agent must be a North Dakota resident or a commercial registered agent authorized to do business in the state.

The online filing fee is $135. Paper filing is also $135; there is no discount for doing the Secretary of State's work for them. Expedited service, where it is offered at all, is handled informally through the Business Division and is not a published menu the way Delaware runs its tiers. Most online filings clear within one to two business days in normal times. April 2020 is not normal times: the Heritage Center in Bismarck is closed, and staff are working through a backlog, so budget a week.

You will also need an EIN from the IRS (Form SS-4, issued online in the time it takes to read the instructions), a registered agent consent on file, and, if you intend to transact in any business requiring state licensure (real estate, construction, contracting, oil and gas services), the relevant sector license. North Dakota does not require you to file an operating agreement with the state. It expects you to have one and will assume the statutory defaults in Ch. 10-32.1 against you if you don't.

Ch. 10-32.1 replaced the older Ch. 10-32 in 2015 and brought North Dakota into rough alignment with the Revised Uniform Limited Liability Company Act (RULLCA). The change that matters most to operators is the default treatment of fiduciary duties and the default rule on transfers of transferable interests; both are closer to the uniform act than what practitioners were used to under the old chapter. If you have an operating agreement drafted pre-2015 and you have not had counsel look at it since, have them look at it now.

What it costs to keep it alive

North Dakota requires an annual report from every domestic LLC, due November 15 each year, with a filing fee of $50. Foreign LLCs file the same report at a higher fee ($50 for domestic, with separate schedules for foreign entities). The report is short: registered agent, principal office address, governance structure, names of managers or member-managers. Miss November 15 and the entity goes into "not in good standing"; miss it long enough and the Secretary of State will administratively dissolve it, after which reinstatement costs more and involves paperwork the founders never thought they would have to do.

There is no franchise tax. There is no capital stock tax. There is no minimum tax on the entity itself. Whatever your LLC earns flows through to the members and is taxed at whatever rate the member pays, federally and at the state level, and there is no separate annual tribute to the state for the privilege of existing as an LLC.

That is the part that does not get said enough about North Dakota. The recurring cost is a $50 piece of paper once a year. Delaware charges $300. California charges $800 minimum plus a gross-receipts tier. Massachusetts charges $500. The North Dakota number is not a rounding error; it is a fundamentally different posture toward the entity.

The tax picture

North Dakota's individual income tax is graduated in five brackets, running from 1.10% at the bottom to 2.90% at the top, with the top bracket starting above $433,200 of taxable income for a single filer in tax year 2020. The corporate income tax is also graduated, at 1.41%, 3.55%, and 4.31% across three brackets. Both rates are among the lowest in any state that has an income tax at all; only a handful of states beat them, and most of those achieve it by having no income tax, which North Dakota does have.

For a pass-through LLC, the practical effect is that the operator's North Dakota state tax bill on business income is usually smaller than the self-employment tax they pay to the federal government on the same dollar. That is an unusual ratio. In California, the state bite can equal or exceed the federal SE component on marginal dollars. In North Dakota, the state bite is background noise.

The oil patch context matters here. North Dakota's tax system was designed in an era when severance and production taxes on Bakken crude were financing a large share of general-fund revenue. With WTI trading where it is this week (sub-$20, and the May contract went briefly negative on April 20), severance receipts are collapsing. The legislature is not in session; the Governor has already directed agency cuts. None of that changes the LLC fee schedule for 2020, but it is the reason a thoughtful founder should ask, before filing, whether the rates they are relying on now are the rates the state can still afford in two years. The answer is probably yes, but it is not automatic.

Where a North Dakota LLC actually makes sense

Three kinds of entities belong in North Dakota right now.

The first is any operating business physically located in the state. This is the uncontroversial case. If you run a restaurant in Fargo, a farm-equipment dealership in Minot, a contracting firm in Williston, or a software consultancy in Grand Forks, you form at home, pay $135, pay $50 a year, and get on with it. There is no scenario in which Delaware or Wyoming is a better answer for a business whose customers, employees, and real property are all in North Dakota. The foreign-qualification fees and the second set of compliance obligations wipe out any theoretical benefit of filing elsewhere.

The second is the oilfield-services LLC operating in the Bakken play. The sector has specific reasons to appreciate a state whose Secretary of State is responsive, whose filing infrastructure is modernized (FirstStop was rebuilt in 2018), and whose tax code does not tax the entity itself. A drilling-support partnership with members in Texas, Colorado, and Minnesota can form in North Dakota, operate in North Dakota, and never answer to anyone's franchise tax. In 2020 that sector is bleeding, and a lot of those LLCs are being wound down rather than formed. For the ones surviving the year, the North Dakota home-state posture is correct.

The third is a holding vehicle for a family with significant North Dakota real estate, mineral, or agricultural interests. The state's trust and LLC statutes interact cleanly, probate avoidance is straightforward, and the recurring cost is small. For families in this position, forming out of state adds friction without adding protection.

Where North Dakota does not obviously make sense is the case Delaware is designed for: a venture-scale C-corp (or an LLC intending to convert) anticipating institutional capital. Institutional investors will push for Delaware. The North Dakota case law on LLC governance is thin compared to Chancery's, and while that thinness is not a problem for a well-run entity, it is a problem at the moment of a disputed exit. If you expect to raise a priced round, form in Delaware and qualify as foreign in North Dakota. Pay both fees. It is still cheap.

The April 2020 overlay

Two PPP-specific points, because founders forming this month are asking. An entity needs to exist on February 15, 2020 to be eligible for a PPP loan under the CARES Act as currently written, so forming a brand-new North Dakota LLC in late April does not make it PPP-eligible retroactively. If the business is real and has been operating as a sole proprietorship, the Schedule C operator can apply in their own capacity using 2019 net earnings; formalizing the entity afterward does not change that application's eligibility either way. The LLC is for the going-forward structure, not a way into the program.

Second, the Economic Injury Disaster Loan program at SBA is accepting applications from eligible small businesses including LLCs, and its $10,000 advance provision (intended as a forgivable grant) is being administered on a per-applicant basis, which has produced confused outcomes when multiple related entities apply. An operator consolidating a sole proprietorship into a North Dakota LLC this week should assume the EIDL advance cannot be doubled by virtue of the new entity.

Neither of these is a North Dakota issue; they apply equally to an LLC formed anywhere. They come up here because the volume of formation questions in April is dominated by founders trying to reason about federal relief, and the federal relief is not routed through the state-formation question.

The quiet part

North Dakota is not trying to win the formation-state beauty contest. There is no Secretary of State op-ed titled "Why We're the New Delaware." The FirstStop portal works, the Business Division answers the phone, the fees are posted on a page that looks like it was designed by a state employee rather than a marketing firm, and the statutes are in force and not being rewritten every session to chase somebody's preference. For an operating business with North Dakota connections, that is exactly the posture you want from a state of formation: unglamorous, cheap, competent, and indifferent to your growth trajectory.

If you are forming this month and the business is local, file on FirstStop this afternoon, pay the $135, put the November 15 annual report on the calendar, and move on. If you are forming and the business is national with North Dakota as one of several operating states, the same advice holds. If you are forming and the business is going to raise venture capital, go read the Delaware guide instead; this is not the state for that conversation.

Sources

Keep reading

More from the journal.