This week's e-mails are from folks who have a corporation or
limited liability company (LLC) that is doing business in more than
one state.
My husband and I live in Pennsylvania, where we have a small
service business. We also own some land in Wyoming and intend to
retire there in a few years. Last year we formed a Wyoming LLC for
our business. I got a federal tax ID number and opened a checking
account for the LLC with a bank here in Pennsylvania. My customers
write their checks to us personally. We then endorse them over to
the LLC and deposit them in the LLC checking account. My accountant
recently told me that we, and not our LLC, will have to pay
personal income taxes in Pennsylvania on everything our business
did last year. Is she right?
Your accountant is absolutely correct. As your business has no
legal presence in Wyoming (such as an office or mailing address),
there was absolutely no reason for you to form an LLC there. What
is worse, by forming your LLC in Wyoming, you probably will have to
file a state tax return there (for sales, use and other business
taxes) even though you did not actually conduct business in
Wyoming.
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What's more, you never registered your LLC as a
"foreign" LLC in Pennsylvania, where it was actually
doing business. Every business, no matter where it is incorporated
or organized for legal purposes, has to have at least one
"real" place of business and must register in the state
where that place is located. In your case, it is Pennsylvania.
Finally, even if you had registered your LLC in Pennsylvania,
you are not conducting business under your LLC name, so it would
not offer you any legal protection anyway. When people write checks
to you personally, they are not writing them to your LLC--heck,
they may not even know your LLC exists, unless they read the
endorsements on the backs of their canceled checks, and who does
that? So, if anything bad happens to them, they will be able to sue
you and your husband personally.
You and your husband should file a partnership tax return with
the IRS for last year, and state tax returns in both Pennsylvania
and Wyoming. In addition, you should call a lawyer, have him or her
register your business legally in Pennsylvania, and let all your
customers know that in the future they have to make all checks out
to your LLC, not to you personally.
I want to form a company for a new software product that
I'm really excited about. Having been sued once in the past,
however, I want to be darn sure it never happens again. I
understand that if I incorporate my new business in Nevada, I am
totally "off the radar screen" such that nobody can ever
sue me personally, and I also save a bundle on taxes. Is that
correct?
Sandy Botkin, a CPA and former IRS agent, points out some of the
myths of incorporating in Nevada in his new book Lower Your
Taxes--Big Time! (Click here for more tax-saving
tips from Botkin.) Here they are:
Myth No. 1: Your costs are lower. "Nothing could be
further from the truth," writes Botkin. "It's usually
cheaper to incorporate in your home state. The reason is that
Nevada has a number of fees that many states don't have, and
although Nevada has no corporate income tax, you usually have to
file a corporate tax return in the states where you're doing
business as a nonresident."
Myth No. 2: You will save taxes. Similarly, Botkin says
that if you are doing business anywhere other than Nevada, you will
still have to pay taxes in the states where you are doing business.
Because most states charge out-of-state companies slightly higher
rates and fees than they do domestic companies, you may actually
end up paying higher taxes than if you had formed a company in your
own state.
The biggest reason for incorporating in Nevada, according to
Botkin, is that Nevada offers corporate directors and shareholders
tremendous protection against personal liability. In his book,
Botkin reports that in the past 23 years, Nevada courts have only
once imposed personal liability on a corporation's shareholders
for corporate debts!
In addition, the directors and shareholders of a Nevada
corporation are not named in public records, and Nevada is less
willing than many other states to share information about its
corporations with other states and with the federal government
(although Botkin points out this has changed significantly in the
wake of the 9/11 terrorist attacks). As a result, Nevada has become
a haven for celebrities, movie stars and other highly visible
individuals (such as big company CEOs) who seek anonymity when
conducting their business and investment activities.
Sad to say, for the same reasons, a lot of con artists also find
Nevada an ideal place to hide behind their corporate
"shells," to the point that a wealthy investor friend of
mine says, "When I get a business plan in the mail from a
company that's incorporated in Nevada but has its mailing
address in another state, I think 'Fly by night' and chuck
it in the wastebasket." An unfair prejudice, to be sure, but
one that is increasingly widespread in the business community. The
bottom line: Unless you are actually doing business in Nevada,
don't set up your company there.
Cliff Ennico is host of the PBS television series
MoneyHunt and a leading expert on managing growing companies.
His advice for small businesses regularly appears on the
"Protecting Your Business" channel on the Small Business
Television Network at www.sbtv.com. E-mail him at cennico@legalcareer.com.