When Your Business Crosses State Lines
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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.
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 email@example.com.