Choosing Where to Form Your Corporation

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Once you have got your share structure determined and shareholder issues decided, now it’s time to think about some other things, such as your corporation’s business nexus and any privacy issues.

Where you form your corporation is going to depend on a few things:

The location of your business operations and any taxation issues that may arise as a result of its location

Your privacy goals

Individual state laws

Location and Taxation

Believe it or not, taxation doesn’t play a large role in determining your corporate jurisdiction. First, everyone pays federal tax, no matter where a business structure may be formed. So, disregard all of those planners and incorporation services who tell you that forming structures in Nevada or Wyoming allow you to escape paying taxes. It simply isn’t true.

Second, if your business is earning money in a state that levies state income tax, then your entity will be liable for paying that tax. This is called having a business “nexus.” You can’t use a C Corporation formed in Nevada to operate a business located in California and claim that your corporation shouldn’t have to pay California state tax because it was formed in Nevada. Your business nexus is California, and so California’s tax laws apply. So, from a strictly tax-related perspective, forming your corporation in the state where your business or property is located is the way to go.

In today’s economy, the issue of how internet-based businesses should be taxed has become a front-burner issue. In this instance, there may not be a physical storefront, and the work may be created and delivered in cyberspace. A website designer, for example, may sit at a desk in Oregon designing a web site for a business based in Florida, which is hosted on a server located in Nevada. So, where is the website designer’s business nexus? Some would argue that because the server is in Nevada, that’s where the nexus is. But realistically, the IRS will look at who was doing the work and where that person was located. You may host your websites on a Nevada-based server, but at the end of the day, you’re sitting in Oregon doing the work, and that’s going to be your nexus point, 99% of the time.

We’re looking at nexus from a business location perspective. But there’s much more to learn more about tax nexus in general, and how states are pushing tax boundaries like never before, you may want to pick up a copy of our product, State Nexus: The Big Issue for Business Owners in 2010, available at (If you use the coupon code Nexus50 at checkout, you’ll get a 50% discount off this product).

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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