When Your Business Crosses State Lines The legal and tax implications of doing business in more than one state
By Cliff Ennico
Opinions expressed by Entrepreneur contributors are their own.
This week's e-mails are from folks who have a corporation orlimited liability company (LLC) that is doing business in more thanone state.
My husband and I live in Pennsylvania, where we have a smallservice business. We also own some land in Wyoming and intend toretire there in a few years. Last year we formed a Wyoming LLC forour business. I got a federal tax ID number and opened a checkingaccount for the LLC with a bank here in Pennsylvania. My customerswrite their checks to us personally. We then endorse them over tothe LLC and deposit them in the LLC checking account. My accountantrecently told me that we, and not our LLC, will have to paypersonal income taxes in Pennsylvania on everything our businessdid last year. Is she right?
Your accountant is absolutely correct. As your business has nolegal presence in Wyoming (such as an office or mailing address),there was absolutely no reason for you to form an LLC there. Whatis worse, by forming your LLC in Wyoming, you probably will have tofile a state tax return there (for sales, use and other businesstaxes) even though you did not actually conduct business inWyoming.
What's more, you never registered your LLC as a"foreign" LLC in Pennsylvania, where it was actuallydoing business. Every business, no matter where it is incorporatedor organized for legal purposes, has to have at least one"real" place of business and must register in the statewhere 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 wouldnot offer you any legal protection anyway. When people write checksto you personally, they are not writing them to your LLC--heck,they may not even know your LLC exists, unless they read theendorsements on the backs of their canceled checks, and who doesthat? So, if anything bad happens to them, they will be able to sueyou and your husband personally.
You and your husband should file a partnership tax return withthe IRS for last year, and state tax returns in both Pennsylvaniaand Wyoming. In addition, you should call a lawyer, have him or herregister your business legally in Pennsylvania, and let all yourcustomers know that in the future they have to make all checks outto your LLC, not to you personally.
I want to form a company for a new software product thatI'm really excited about. Having been sued once in the past,however, I want to be darn sure it never happens again. Iunderstand that if I incorporate my new business in Nevada, I amtotally "off the radar screen" such that nobody can eversue me personally, and I also save a bundle on taxes. Is thatcorrect?
Sandy Botkin, a CPA and former IRS agent, points out some of themyths of incorporating in Nevada in his new book Lower YourTaxes--Big Time! (Click here for more tax-savingtips from Botkin.) Here they are:
Myth No. 1: Your costs are lower. "Nothing could befurther from the truth," writes Botkin. "It's usuallycheaper to incorporate in your home state. The reason is thatNevada has a number of fees that many states don't have, andalthough Nevada has no corporate income tax, you usually have tofile a corporate tax return in the states where you're doingbusiness as a nonresident."
Myth No. 2: You will save taxes. Similarly, Botkin saysthat if you are doing business anywhere other than Nevada, you willstill have to pay taxes in the states where you are doing business.Because most states charge out-of-state companies slightly higherrates and fees than they do domestic companies, you may actuallyend up paying higher taxes than if you had formed a company in yourown state.
The biggest reason for incorporating in Nevada, according toBotkin, is that Nevada offers corporate directors and shareholderstremendous protection against personal liability. In his book,Botkin reports that in the past 23 years, Nevada courts have onlyonce imposed personal liability on a corporation's shareholdersfor corporate debts!
In addition, the directors and shareholders of a Nevadacorporation are not named in public records, and Nevada is lesswilling than many other states to share information about itscorporations with other states and with the federal government(although Botkin points out this has changed significantly in thewake of the 9/11 terrorist attacks). As a result, Nevada has becomea haven for celebrities, movie stars and other highly visibleindividuals (such as big company CEOs) who seek anonymity whenconducting their business and investment activities.
Sad to say, for the same reasons, a lot of con artists also findNevada an ideal place to hide behind their corporate"shells," to the point that a wealthy investor friend ofmine says, "When I get a business plan in the mail from acompany that's incorporated in Nevada but has its mailingaddress in another state, I think 'Fly by night' and chuckit in the wastebasket." An unfair prejudice, to be sure, butone that is increasingly widespread in the business community. Thebottom line: Unless you are actually doing business in Nevada,don't set up your company there.
Cliff Ennico is host of the PBS television seriesMoneyHunt and a leading expert on managing growing companies.His advice for small businesses regularly appears on the"Protecting Your Business" channel on the Small BusinessTelevision Network at www.sbtv.com. E-mail him at cennico@legalcareer.com.
