Where Should You Form Your Company?

Generally speaking, from a tax perspective, the best place to form your LLC or Corporation is the state where it’s going to do business. For a real estate LLC that means where the property is located. For a business corporation that means where the business is located. If it’s an online business look at where you are located, or where the work is actually being done. It’s also important to look at privacy concerns, asset protection and state laws.

Location and Tax Nexus

Taxation is going to play a major role in determining your company’s jurisdiction. Taxation happens wherever your business has nexus.

Nexus is a term that means presence and liability for taxes. Your business can have nexus for income tax, or it can have nexus for sales tax … or both, depending on individual state laws. A nexus determination is entirely dependent on state laws, which are evolving at a furious pace. You can learn more about nexus and what is happening with the states over at www.NexusNegotiator.com.

For example, if your business has a physical location in a state, it has nexus in that state. A physical shop in New Jersey means New Jersey nexus. Owning real estate in a state means automatic nexus in that state.

Those are the easy ones. But nexus can also be created in many other ways. If you have an employee who works from home in a separate state, you could have nexus in that state, depending on state law and the employee’s role. In some states, the existence of the employee will trigger nexus. California is one such state. In others, nexus is triggered only if the employee provides service to customers in that state. So a bookkeeper who just works for your business may not trigger nexus, whereas a salesperson who services your customers, inevitably will.

You can also trigger nexus by going into other states. If you cross state lines to provide service, maintenance, or deliver goods personally, you’ll create tax nexus.

Beware anyone who tells you that you can avoid tax by incorporating in Nevada or Wyoming. It’s not true. Think about it for a minute. If it was true that forming a business structure in Nevada or Wyoming meant you never had to pay taxes, then why aren’t all businesses formed in those two states?

Here are some other ways you can create nexus for your business, depending on the state:

  • Advertise in a state, including phone books, billboard, or having a local phone number or answering service,
  • Attend trade shows, whether or not you sell products or simply give away information
  • Enter into affiliate relationships with sellers who will promote your products in Colorado, Oklahoma, New York, North Carolina or Rhode Island (this list is growing)
  • Store goods in a warehouse, or have a drop-ship relationship with an existing warehouse operation
  • Own physical property in a state
  • Live in a state
  • Hire independent contractors to help you out in a state, particularly if you are their main source of income
  • Earn a certain percentage of your overall income in a state
  • Sell digital downloads into a state

In fact, depending on the type of business you have, you could wind up having nexus for taxes in multiple states. We’re seeing this more often, as revenue-hungry states look to expand their sphere of influence beyond their borders. Make sure that talking to your CPA or tax advisor is part of your pre-planning process. Tell your advisors about your business, what it’s going to do, and where. If you’ve got multi-state issues to consider, it’s far better to know what you’re getting into ahead of time while there are still plenty of planning opportunities to minimize the tax hit.

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