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Nexus - or Can I Form a NV Corp and Never Pay Taxes?

Discussion in 'Asset Protection/Taxes/Legal' started by Diane Kennedy, Jan 11, 2008.

  1. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    You've seen the ads, you heard it from seminars, maybe even from your friends: Form a NV corporation and avoid state income tax.

    Is that true? Probably not.

    The issue is something called "Nexus." Nexus (in this case) means where do you do business. If you have a corner grocery store in California, you have a California business...no ifs, ands or buts. If you form a corporation in NV for your corner grocery store, you'll have to first pay the NV formation fees and then have it authorized to do business in California...and pay the California fees on top of that.

    The corner grocery store, or any bricks and mortar storefront for that matter, are easy examples of what Nexus is. But, what about a virtual company? Like, say, an eBiz? Now it gets tricky. You need to determine where most of the work is occuring. Where is the product or service fulfilled from? Where is the money collected? Where is the bookkeeping done? And if there isn't one answer that is jumping out, finally, where are you located?

    There is one more consideration - changing nexus to a state other than your home state only works for C Corporations. Everything else is a flow through entity, which means the income flows through to you on your personal tax return. If you make money in a NV S corporation and it flow through via K-1 to your personal California return, you're still paying California income tax. You haven't saved a thing.

    A lot of people talk about Delaware corporations as well. Delaware is an expensive place to have a corporation, but they have great law and especially case law. Most people who are planning to go public, do it through a Delaware corporation.

    So, what is the best state for your business? Consider the type of business structure (S Corp or C Corp). Consider nexus. Consider the case law and protection the incorporating state will give you.

    And, ask a professional, especially if you're going to use a state outside of your regular home state.
     
    andviv, John and bflbob like this.
  2. bflbob
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    bflbob Bronze Contributor Read Millionaire Fastlane Speedway Pass

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    Great post Diane!

    I hear too many people use the NV example incorrectly.
    It's even tougher to sort out which state you're "in" when it comes to the other taxes.

    Can your NY employees collect PA unemployment when they no longer are working in PA?
    Are they entitiled to NY Disability when they've been working in CT for the past six months?
    Should you pay NY Sales Tax on the truck that they are driving in IN?

    Sometimes it takes longer to straighten out these issues than it's worth.

    Similarly, I hear too many people start an LLC "so I'm protected if I can't pay the mortgage".
    It doesn't work that way folks!

    Anyway, thanks again for the great posts, and for sticking with us. Rep+!
    Too bad we can't meet when I'm in Phoenix in March.
    It would be a pleasure.
     
  3. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    I'm doing a seminar in San Diego during the same time as the meet-up in Phoenix, so can't make it.

    I just dealt with the state income tax issues...but when you add in employees it gets even more difficult. In fact, if you have employees in your home state, chances are you won't be able to escape the state income tax from that home state.

    BFLBOB - I've been meaning to mention that my husband was born in Buffalo, went to college in Alfred and his sister lives in Binghamton. Everyone BUT him complains about the heat in the summer in Phoenix. In fact, when someone from outside Phoenix asks him how he stands the heat, he just says, "You don't have to shovel sun." I figured you'd relate, especially this time of year....
     
  4. DavyB
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    DavyB New Contributor

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    I know this is slightly off-topic but I am looking for a place to start. If I live in CA and am investing in property out-of-state, what entities/structures are best to have in place to minimize taxes and maximize asset protection? I feel like I remember hearing LLCs for each individual prop and a parent corp (S or C??) in which to hold the LLCs. Can NV LLCs be used for this purpose? Those of you that have done this, I'd appreciate the input, and what methods you have implemented.
     
  5. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    Generally speaking form an LLC in the state in which you have the property.

    So if you live in California and invest in AZ, form an AZ LLC. Otherwise, if you do a NV LLC, you'll have to authorize it to do biz in AZ - which means double fees.

    I wouldn't put an S or C into the mix. I think you might be thinking about the old strategy of LPs with an S as the general partner. Don't need to do that if you have an LLC. All member interests have the same asset protection like the limiteds do in an LP.
     
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  6. DavyB
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    DavyB New Contributor

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    Thanks for the reply. So the double fees that would make a NV LLC authorized to do business in AZ, or any state, would be more expensive than not paying AZ state income tax because of the NV LLC?
     
  7. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    LLCs are flow-through entities. Take a look at post # 1 above, forming in NV to save state income taxes ONLY works on C Corporations
     
  8. Corrado79
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    Corrado79 New Contributor

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    This is the approach I have taken.

    BTW, excellent thread Diane. This is important info. Too many people are jumping on the NV LLC "bandwagon" under incorrect assumptions.
     
  9. Strategy
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    Strategy New Contributor

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    Hello Diane, great thread here...

    Like I've said before and still really haven't really solved the issue yet...

    location is in alabama (home), its mainly all internet business...

    I registered a C-corp (planning to elect s-corp soon) in ga because I planned on being in ga by the first of the year...

    what exactly would I need to do to remain compliant at all angles and what all would I be paying? would you have to pay state income tax for both states or what?
     
  10. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    Right now, today, you are probably not in compliance. You need to get your GA corp authorized to do business in AL. You'll then pay AL state income tax.

    For this past year, if you have income, you need to file and pay in GA. AL could possibly come after you for taxable income as well, because you aren't in compliance.

    I know it's been said a lot in this thread and others, but it really is true. There are frequently complications in tax law that aren't immediately obvious. You (and everyone else) really should invest the time and money to meet with an expert when you're setting your business structures up. (I also think you should never prepare your own tax return, but that's simply because I see the business returns that individuals do themselves - and overpay by 10%, 20% or even more) Your corporation is a prime example where, if you had made a lot of money, you might have gotten stuck paying a lot of excess tax because you didn't follow the rules. And, unfortunately, ignorance of the law is no exception.

    But, it is what it is. Fix it now for this year.
     
    taichijedi likes this.
  11. Strategy
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    Strategy New Contributor

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    Definitely. I have a CPA I have been referred to and am trying to get everything into order..

    so by getting authorized in alabama, I know I would have to pay the alabama fee's also but if everything is generated in alabama with nexus would you have to only pay alabama's state tax or ga's too being that its filed in ga
     

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