Where is the Best State to Incorporate?

My partner over at US TaxAid, Diane Kennedy, and I did a webinar this past Saturday, all about C Corporations, and why we think they’re about to become a critical tax-planning tool, no matter who wins the election. If you’d like to watch the webinar replay, go to www.CCorporationTax.com (it’s free!)

One of the questions that came up during our after-webinar Q&A session was how to determine the best incorporation state. Now for years, you’ve probably heard about Nevada, Delaware and Wyoming as being the best states. But respectfully, I disagree in many cases. Here’s why:

When your business provides a service or sells a product it creates nexus for taxes in the state where the work happens. If you’re the one doing the work, and you live in New Jersey, there’s not a lot to be gained by setting up in a state outside of New Jersey. You will still have a requirement to register your business into New Jersey. You’ll still likely have a NJ payroll (assuming that you plant to pay yourself, at the very least). If NJ is where you sit and do the work that brings in the income, then your tax home is NJ. Setting up in Delaware in this instances means you will pay two times the filing fees, two times the maintenance fees, two resident agent fees … and you won’t get any tax savings. Just because you incorporate in Delaware doesn’t mean your income isn’t still subject to New Jersey taxes – at least in this example.

This is a big one to understand. Taxable income happens where the sale of the product happens, or where you provide the services. If you travel a lot, that could potentially even mean you’ll pay taxes in more than once place. Depending on how long you’re in a state, and that state’s tax nexus laws, you could wind up filing multiple returns.

You also can’t depend on those old strategies that say, open up a bank account in NV, or have a virtual office in DE anymore. Those are long gone, too. Unless you’ve got real business operations going on in these states, think twice before you enter into some expensive virtual-office-phone-bank solution.

So are Nevada, Delaware or Wyoming non-starters? That depends. There are times when being incorporated in one of these states can help you. Affiliate marketing is one example – there are states that have enacted goofy nexus laws trying to force Internet retailers to register if they have state-based affiliates. Having an entity set up elsewhere may be what saves your business.

And what about California? That’s a question I answer all day long. Back in 2011, California passed some very tough nexus laws that basically lay claim to a portion of your income no matter where it’s earned, if you live in CA. The state also now claims that if you are the owner of a business that is located elsewhere, but you work on the business in CA, then you have a responsibility to register your business into CA and pay that nasty $800 franchise privilege tax. CA’s law is a really tough one to get around if you’re the only owner, or if you and your partners all live in CA. I wish I had an easy answer for California. There are some solutions out there, but they depend on everyone’s unique situations.

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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