What State Should YOU Setup YOUR Online Business In?

[TaxGuy]

QUESTION: "I run an online business, what state should I setup my LLC in?"

This is a tricky question and not quite as straight-forward as it was a few years ago. It used to be as simple as "setup in ANY one of the few states that do not have a corporate income tax such as NV, WA, WY and SD or even TX(they have a "franchise tax")." And there are even companies that love to incorporate in DE due to their laws which are favorable towards privacy and protection, however, to squash the myth that there is NO corporate income tax there, this is directly from the State of Delaware Department of Revenue site:

Q. What entities must file and/or pay Delaware corporate income tax?A. Every domestic or foreign corporation doing business in Delaware, not specifically exempt under Section 1902(b), Title 30, Delaware Code, is required to file a corporate income tax return (Form 1100 or Form 1100EZ) regardless of the amount, if any, of its gross income or its taxable income. The taxable status of a corporation in Delaware follows the federal treatment of the corporation.

The question is much trickier now thanks to "Nexus". This is the provision that many state tax boards are invoking to collect tax revenues lost due to businesses who setup out of state or off-shore corporations to avoid state income taxes.

Generally, you should be setting up in the state that your business is located in and you are liable for paying income tax in any of the states which you operate/receive business.Here's the official wording of the "Nexus" provision:

States are not permitted to tax income of a corporation unless four tests are met under Complete Auto Transit, Inc. v. Brady:

• There must be a substantial connection (nexus) between the taxpayer's activities and the state

• The tax must not discriminate against interstate commerce

• The tax must be fairly apportioned

• There must be a fair relationship to services provided

Most eCommerce stores try to argue against the first test since business is conducted online and it should be difficult to determine which state the activities are performed(the seller's state? the buyer's state? the state the web-hosting servers are located in?).

This has been big news in the last year mainly due to Amazon closing down many of its affiliate operations as a result of this very issue. Essentially, Amazon affiliates need to be compliant with the state in which they are LOCATED despite Amazon being based in WA(a state w/o individual OR corporate income tax) and having servers located in TX(another state w/o individual OR corporate income tax). Instead of becoming compliant and keeping the "hand that feeds them" happy, Amazon cut off affiliate operations in many states. Overnight, many legitimate affiliates(or "hitch-hikers" as MJ likes to refer to them as ) closed down b/c Amazon was too cheap/lazy to become compliant.

ANSWER: In conclusion, what state should you setup in?

This is dependent on many factors unique to YOUR business and is a service we provide(see sig for link to our site), however, if you do choose to go elsewhere, I highly recommend another Fastlane regular, GlobalWealth.

Just please do NOT setup through LegalZoom or any online "legal setup" service.

It's better to do things right the first time and pay a little more up-front than having the "sticker shock" of a huge state income tax bill w/ added interest and penalties that could end up costing 10x what proper legal setup costs would've in the first place.

 

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[nipsid]

This is dependent on many factors unique to YOUR business and is a service we provide(see sig for link to our site), however, if you do choose to go elsewhere, I highly recommend another Fastlane regular, GlobalWealth.

Just please do NOT setup through LegalZoom or any online "legal setup" service.

Why should you not use LegalZoom? What do you charge to set up an LLC? I think LegalZoom is about $300ish. I assume you charge over $1k?

 

[Vigilante]

You're going to have to make a strong(er) case as to why to not use LegalZoom, or just go to the Secretary of State of your targeted incorporation and pay zero fees.

 

[TaxGuy]

Why should you not use LegalZoom? What do you charge to set up an LLC? I think LegalZoom is about $300ish. I assume you charge over $1k?

No, our fees start at $200 for business startups.

It's like changing your oil, most people can do it themselves, but you've got more important things to do. It is important to make sure that the paperwork is filed properly!

Either way, that's not what I was hoping to be the "take-away" from this post. I wanted to throw it in as a "by the way, if you need help we can provide it". As far as going the LegalZoom route, if you feel comfortable defending yourself in court then by all means go ahead and use it, but just like doing your own taxes, it comes with the risk of not having an added layer of protection.

For example, with a legal matter we're currently dealing with I could've looked up the answer online or even gone to Lawyers.com to get "advice", but I felt better suited developing a relationship with a real attorney since EVERY business will need one eventually. In fact, I picked the attorney based on a recommendation from a fellow Fastlaner.

But back to the topic... do you guys have eCommerce stores? If so, what states are they setup in and why?

 

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[TaxGuy]

or just go to the Secretary of State of your targeted incorporation and pay zero fees.

lol, what state can you file for an LLC for "zero fees"?

In AZ(where we're registered) it's $50 and IL(where we're from) it's $500(+$300 for name reservation if you need it).

As RealOG once told me, you're paying $50 for the "hourly rate" and $150 for the years of experience/know-how/education, even if you just look at it as "you're only filling out a piece of paper."

 

[Vigilante]

By zero fees, I meant zero ADD on fees. For example, in MN... you can file directly with the Secretary of State and not pay a premium to a company like LegalZoom. Nearly any agency you ever work through will charge $$ + "State filing fees...," or you can just go to the state directly, fill out the same paperwork as LegalZoom does, and pay no one-off fees. Just filing fees.

 

[Tiger]

So are you saying there are ways or circumstances where you could setup an ecommerce business in a state or territory other than the one the ecommerce business owner resides?

Would fulfillment or dropshipping that occurs in another state affect taxation?

I'm developing several ecommerce businesses that will utilize SaaS services (shopping cart, customer service, etc.) in several states as well as fulfillment in yet another. I might even use another service located in another country.

I'll operate from my home state as well as from other states as I travel.

 

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[Vigilante]

Correct me if I am wrong, but from a tax standpoint it is less about where the business is incorporated, and more about where your residency is. If I draw my income from an S-Corp in Minnesota, it doesn't matter where the incorporation of the business is because I am still paying taxes on a pass through basis to my personal income, with my residency in MN. Isn't the state of residency more important than the state of incorporation for tax purposes?

 

[nipsid]

No, our fees start at $200 for business startups.

It's like changing your oil, most people can do it themselves, but you've got more important things to do. It is important to make sure that the paperwork is filed properly!

Either way, that's not what I was hoping to be the "take-away" from this post. I wanted to throw it in as a "by the way, if you need help we can provide it". As far as going the LegalZoom route, if you feel comfortable defending yourself in court then by all means go ahead and use it, but just like doing your own taxes, it comes with the risk of not having an added layer of protection.

For example, with a legal matter we're currently dealing with I could've looked up the answer online or even gone to Lawyers.com to get "advice", but I felt better suited developing a relationship with a real attorney since EVERY business will need one eventually. In fact, I picked the attorney based on a recommendation from a fellow Fastlaner.

But back to the topic... do you guys have eCommerce stores? If so, what states are they setup in and why?

So what do you do that LegalZoom doesn't do? Why am I going to be in court defending myself if I use LegalZoom? Is there really a reason (I'm interested to know) or not? I just get the feeling there isn't a big difference, if any. Especially for an eCommerce store. It really sounds like that is the case when you talk about developing a relationship with attorneys. If that is the case. Why are you posting it?

Either way, that's not what I was hoping to be the "take-away" from this post. I wanted to throw it in as a "by the way, if you need help we can provide it".

You actually gave the answer to the title of the thread as

ANSWER: In conclusion, what state should you setup in?

This is dependent on many factors unique to YOUR business and is a service we provide(see sig for link to our site)

 

[TaxGuy]

I meant zero ADD on fees. For example, in MN... you can file directly with the Secretary of State and not pay a premium to a company like LegalZoom. Nearly any agency you ever work through will charge $$ + "State filing fees...," or you can just go to the state directly, fill out the same paperwork as LegalZoom does, and pay no one-off fees. Just filing fees.

So what do you do that LegalZoom doesn't do? Why am I going to be in court defending myself if I use LegalZoom? Is there really a reason (I'm interested to know) or not? I just get the feeling there isn't a big difference, if any.

Good questions, to answer the first one, there is a fee for using LegalZoom so would you rather pay a "one size fits all service" or a "one size fits YOU service". This can be ANY competent income tax professional that you trust, either a CPA, Tax Attorney, EA, etc. As far as filling the forms out yourself:

1) What address do you want to put down for your registered business address? Keep in mind that most states require that your articles are publicly posted online, in the local newspaper and cannot be a PO Box address. - THIS IS A PRIVACY CONCERN, ESPECIALLY FOR ECOMMERCE BIZ RUN OUT OF YOUR HOME.

2) Will you be a member or manager? THIS AFFECTS YOUR TAXATION STATUS

3) What is your listed purpose for business? THIS ALSO AFFECTS TAXATION AND HOW CLOSELY THE IRS WILL LOOK AT CERTAIN DEDUCTIONS

If you can answer all those questions yourself with certainty then you can go ahead and file your own LLC. Additionally, do you think that LegalZoom would ask the right questions to make sure you're setup properly?

To answer the second, what could you end up in court for....

1) Choose the wrong status(member or manager) and when you get sued you'll learn that the proper status could be the difference between just paying court fees and filing bankruptcy.

2) Choose the wrong "purpose" and set yourself up for a possible IRS audit.

It would be nice if GlobalWealth could chime in on this as well because he's seen more extreme cases of improper LLC setups that have resulted in devastating litigations, some of which were PERSONAL suits that were able to claim BUSINESS assets b/c the LLC was not properly structured, either b/c the business owner did it themselves or got the wrong advice.

 

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[TaxGuy]

So are you saying there are ways or circumstances where you could setup an ecommerce business in a state or territory other than the one the ecommerce business owner resides?

Yes. Taxation is usually based on where the income is derived which is tricky for online businesses and it takes a tax professional to prove in the case of Nexus that your income is derived from the states with the most favorable state income tax laws, i.e. if you live in MN, a majority of your customers are in IL and the servers for your site are located in WY then you would want someone who could prove that the income was derived from WY b/c they have the most favorable state income tax laws(no corporate income tax).

As far as pass-through(S-Corp), this usually only works up to about $25k in net taxable income(and depends on the business itself), anything larger and you will most likely need to draw a salary otherwise you're asking to be audited.

but from a tax standpoint it is less about where the business is incorporated, and more about where your residency is.

NO!

See above, it's about where the income is derived, with an eCommerce business it could either be where YOU are located, where YOUR CUSTOMERS are located or where YOUR WEB HOSTING SERVICE is located.

 

[Vigilante]

OK. Carry on. None of this would then apply to us as we have high revenue, national customer base and I see you were aiming this at the startup decisions. Carry on! Sorry to confuse things in your thread.

 

[TaxGuy]

I'm sorry, I'm not following your response. Please explain?

 

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[RE Taipan]

Hello everyone....been awhile....great to see the forum has grown as it has.

My better half, Being Chewise, has been reading this thead (and others) to me as we work during the day and I have been following with interest and curiosity. So I thought that a post I made back in, 2007, might have a bit of value and offer some assist to those facing the issues of this thread in their own businesses. This is how our businesses run now, including an eBay business, and it is working well. a couple of points to add:

-- I agree on the existence of the nexus issue, but for us at least when I was in SoCA, this has always been an issue, and we designed the Corp structure to address and take care of this issue.
-- On the issue of using an atty, Legal Zoom or doing it yourself....you can go the less costly route, but as MJ says in his book, the choices you are making today can have huge impacts down the road which might not be apparent now. By hiring a competent atty...one who TRULY understands how to set up a corporation.....YES TRULY set one up...you can save yourself from tons of headaches down the road when you need the protection the most.
-- Also, consider this, unless laws have changed, you always want to have your atty hire your accountant...why?...well if there is ever a need to talk to your good Uncle Sam...then the accountant is covered under the atty client priviledge which only allows them to ask legally relevant issues as provided in the IRS Code. If you hire your accountant directly, these protections do not apply and the IRS can, and very well might use this to their advantage.
--Does this cost a bit more to do in terms of time and some additional fees? That might friends is a matter of perspecitve....if your business has a shipping aspect and you hire someone to do...is it not also something that you could just as easily do too and save the $$...but you hire someone to do it so you can devote your energies to working on more critical elements of your business...it is the same here...chioces--think, are you being penny wise and pound foolish?
--A word about liability...it comes in many forms....not just someone being injured...the goal of a business is to make those who own it money...that is what the Fastlane is all about....so while you might not have a high liability business in the sense of potential injury from whatever you are"selling"...you might have liability from other areas....tax liability...or even liability if someone is injured....or claims they were injured...by you while you are driving (like a sit and squat scammer, or like here is PHX, where everyone has gravel for a yard and some goof falls and breaks a hip...oh yeah, they are thinking Lotto, Lotto, Lotto!!!)...and they find out that you have a very profitable business....that my friends is the kind of liablity that can sneak up on you from out of the blue.....and take everything you have worked so hard for. Fastlane to no lane with one judgement.

Here is the link so that you can read all of the thread...the initial posting is provided here for those that are interested:
https://www.thefastlaneforum.com/general-business-discussion/765-incorporating-2.html

From 9/15/2007:

I offer this for the purpose of corp structure example of what I did for a very high liability exposure business which worked out quite well.

Was formerly in the logistics business as an asset based operation operating out of a major US seaport area. A necessary component of that was operation of a significant number of large over the road 18 wheel trucks hauling pretty much anything you can think of, hence the significant liability exposure. It was daunting exposure despite the $1M liability policy we had on each vehicle, the $500K cargo policy and the $10M umbrella policy. Before we started ops, the exposure was a major concern and it took approx 3mos longer to start than it could have but for my need to limit exposure. I did not want to bust my butt building this business to have it all taken away by one single act or omission to act that was largely out of my control.

Here is how I finally structured the business:

1 CA Corp whose stock was 100% owned by a NV LLC.
1 NV Corp with 3 divisions. All stock in NV Corp was held by a trust.
1 NV LLC

NV was chosen as it does not swap info with the IRS (I believe that WY is now the same way also) whereas DE does swap with the IRS.

Each corp was a C corp.

CA corp did business in CA and received income in CA from all operations it conducted.

NV Corp Div 1 owned all of the rolling equipment that produced income for CA Corp. It leased the equipment to a CA Corp under a standard commercial vehicle lease agreement. NV Corp Div 1 secured these leases with a UCC-1 interest in the rolling stock and the receivables of CA corp. CA Corp was billed monthly by NV Corp Div 1.

As a startup CA Corp had no credit history when the lease was entered into. With 18 wheeler tractors (power units) ranged in value from $40K to $60K per power unit, the credit risk to NV Corp Div 1 was understandably, quite high. This risk to NV Corp Div 1 justified higher than normal lease rates paid to it by CA Corp. This was in fact legit as CA Corp had previously applied for, and been declined, by 3 other commercial leasing companies (which decline letters were kept on file with CA Corp) before turning to NV Corp Div 1 for its leasing needs.

NV Corp Div 2, owned the non-income producing equip such as pick-up trucks, computers, desks, printers, etc of CA Corp. You name it, if CA Corp needed it, NV Corp Div 2 owned it. It leased all of this to CA Corp. NV Corp Div 2 also secured these leases with a UCC -1 interest in the equipment and the receivables of CA Corp. CA Corp was billed monthly by NV Corp Div 2. This too was legit for the same reasons as with the vehicle leases above.

NV Corp Div 3 was a management and staffing agency who contracted with CA Corp to staff the business. Under its management agreement with CA Corp, NV Corp Div 3 managed the day to day affairs of the logistics business. CA Corp was billed monthly by NV Corp Div 3. NV Corp Div 3 also secured this agreement with a lien on the receivables of CA Corp.

The lease arrangements allowed income (profit) received by CA Corp to be turned into expenses which were paid to the NV Corps' address in Las Vegas, NV (a mail business box (not a PO BOX) which provided an actual address (eg 123 Main St, Suite 600, Las Vegas, NV), and ultimately deposited into NV Corp's Div 1, 2 or 3 bank account in NV as appropriate. NV Corps Divs each also instituted an EFT option providing for a 1% payment discount for using the EFT for payments. CA Corp, being a good steward of its money, always took advantage of this "feature" to help reduce expenses.

 

[Vigilante]

Taipan. Has this somewhat complex corporate structure effectively shielded you from any planned aggression against the corporation? Has the shield served it's purpose? Seemingly in a lawsuit, all of this would be discoverable, right?

 

[RE Taipan]

Vigilante,

At the very first B&P in 2008, I explained this in detail....let's see if I can recall how I set it up....(This is really a simple set up, especially if you have a high $$ value business operation or expect to have one ...or a high liability business....or a lot to lose...say a $10MM house that is paid for -- but wait, you don't own it...a corp does -- as an investment of course and you just serve as the groundskeeper at $10K a year + free rent and use of the property...oh yeah, it also owns the Lambo and Aston Martin Vantage in the garage, but lets me drive them for just the cost of the gas I burn ...to make sure the cars are always in tip top shape -- protecting the investment of course..and on and on and on)....

Keep in mind that in the eyes of the law, a corporation is a living breathing entity just like you and me, all unto itself.

CA Corp has one of the trucks it operates have an accident and run into a school bus full of kids, causing a serious and deadly crash..ok, I would never want that to happen...obviously....but for illustration purposes, let's run with this set up. CA Corp owns nothing, they lease all of their equipment from NV Corp Div 1. Those leases are secured via UCC-1 filings. As a result of the accident, CA Corp ceases operation as their insurance co is notified and terminates their insurance policy. Since CA Corp is not paying on their lease, NV Div 1 moves to repossess all of it's equipment based on the default of CA Corp. NV Corp Div 2, which has all of the office equip, also secured by UCC-1 filings also is defaulted on....so just like NV Corp Div1, they come a knocking to repo everything..right down to the paint on the walls and the No2 pencils in the the desk cups. NV Corp Div1 and NV Corp Div2, now have all of the stuff that allowed CA Corp to operate back safe and sound...this is no different from what Volkswagen Motor Credit would do if MJ had financed his Lambo and stopped making those payments every month.

Now, what does CA Corp have....hmm...a name, a corp entity....'bout it...CA Corp can now either BK and go away or wait for the judgement and BK then...result is the same....claimants have judgements which are worth....lining a birdcage. Even if this was found out in an action....CA Corp and NV Corp are each individual entities......when was the last time Volkswagen Motor Credit was able to be sued and have a judgement against it for injuries sustained by the negligent driver of a Lambo they financed? I have thankfully never had a suit (or accident) with any of my guys that was their fault....but I have been involved in suits where people did not have this kind of protection and I know what we were able to do to perfect judgements and wipe them out if that helps any?

Now NV Corp Div 1 and NV Corp Div 2 have assets that they need to put to work and will look for places to do that.....oddly enough, there happens to be a new business NewCorp which is amazingly similar to CA Corp which just happens to be looking for some of the very equip which NV Corp Div 1 and NV Corp Div 2 happen to have avail to lease. Being a good business entity and wanting to make the most of its available resources, NV Corp Div 1 and NV Corp Div 2, will enter into lease agreements with NewCorp to lease the equip which used to be leased to CA Corp.

I timed it once...and not including changing the door signs...the above scenario was a 22 minute process.

Also...note something else that this structure allows....CA Corp owes all this $$ every month to NV Corp Div 1, NV Corp Div 2 and NV Corp Div 3......this allows virtually all of the income earned in CA by CA Corp to become an expense owned in payments to NV Corps where there is no state corp income tax....

Does this 100% judgement proof a person/business...no, but other than death and taxes, what is 100%?...but this goes a long way to protect you/your business from the grubby group that wants what you have.

 

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[RE Taipan]

Another thought....

When you have a business that is making $50K, $60K a month whatever or you have $3MM, $10MM sitting in the bank and you use Legal Zoom, et al., for incorporating your business....it's kind of like owning a Lambo and deciding you need tires before doing the PHX to Vegas trip across the Mojave Desert....you can get the Pirelli P-Zero Corsa's ....or you could go to Pep Boys and grab on to one of those buy 3 get the 4th one free deals....after all, tires are tires, right -- round, black, hold air, what's the difference.

Like MJ says.....it's all about choices and the effect that your decisions have on your life.

Am I ever vigilant about my biz structure? Yes I am....there is no wall that is too high to prevent others from taking what I have away from me and my family. I have and always will gladly pay my fair share to my good Uncle....but I will also avail myself of the laws and statutes which have been passed by our govt.

One last thought....Most of us know that GE's motto/tag line is "Imagination at Work"....how many realize that the best and brightest at GE don't work in their engineering, design or research areas, but in their legal and tax depts -- where they have more former IRS people working than anyplace else outside of the IRS itself....and their job is to constantly look for ways to use, twist and/or manipulate what they do, the income they make or the tax code however they can to reduce GE's tax liability and the liabilities which their operations might incur.

 

[TaxGuy]

Already rep'd you for this. Thanks so much for giving a real business owner's perspective as opposed to my "shameless self-promotional" POV

One last thought....Most of us know that GE's motto/tag line is "Imagination at Work"....how many realize that the best and brightest at GE don't work in their engineering, design or research areas, but in their legal and tax depts -- where they have more former IRS people working than anyplace else outside of the IRS itself....and their job is to constantly look for ways to use, twist and/or manipulate what they do, the income they make or the tax code however they can to reduce GE's tax liability and the liabilities which their operations might incur.

So this is why they pay so little in taxes. I figured it was b/c their "imagination at work" in investing in Wind energy and getting a ton of tax breaks for that. Then again, that's probably what their "bean counters" advised them to do in order to pay as little in taxes... smart business practices and something all of us Fastlaners can learn from. Also something us in the tax biz can learn from as our mission is to provide the 1% level of tax service to the working/middle class who cannot afford the resources that GE or some of the other F500 utilize to make insane profits and pay little to no taxes.

 

[TaxGuy]

it's kind of like owning a Lambo and deciding you need tires before doing the PHX to Vegas trip across the Mojave Desert....you can get the Pirelli P-Zero Corsa's ....or you could go to Pep Boys and grab on to one of those buy 3 get the 4th one free deals....after all, tires are tires, right -- round, black, hold air, what's the difference.

I think MJ's gonna use that in his next book... or if he does a 2nd Edition

It beats the explanation he already has as to why you need an Accountant with a Fastlane-mindset as opposed to just a "one-size fits all" Accountant.

 

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[CommonCents]

In the case of online biz, where does international business entity/hosting/nexus etc.. come in? Should you do this from the get go or wait until you have some proof of concept of on online biz before incurring expense of offshoring?

 

[TaxGuy]

Depends on how much you have to invest. If you read RE Taipan's post, specifically:

When you have a business that is making $50K, $60K a month whatever or you have $3MM, $10MM sitting in the bank

That appears to be the threshold to where you want to start investing in restructuring your business.

For initial startup though, you just want to make sure that you are setup in the proper state(i.e. the state you operate in OR the state where you plan to have the most business from... this'll take some due-diligence and market research to figure out though).

Back to his post, if you just got into racing and you're driving a Honda Civic, you don't need the Pirelli P-Zero Corsa tires(aka the exotic off-shore asset protection plan like GlobalWealth offers). On the other hand, you probably don't want to get the Walmart "Buy 3, Get 1 Free" deal either(aka the LegalZoom package).

 

[RE Taipan]

CommonCents,

A national, international, whatever business entity is more an issue of liability and protection of assets than anything else. Having said that and not knowing anything about your business/operation, the need for an international business entity should be a genuine one and not "just because" it is cool to have one (I'm not at all saying that you are, just making the point) ....this is primarily because of the US IRS requirement to identify if you have any interest in foreign accounts, etc....one can assume if you have a foreign business entity that it would also have some type of financial device.

For example...

If my business was cleaning office buildings in the US...then while there is potentially considerable liability, an international business entity might not be called for in this instance.

On the other hand, if I had an air cargo business which had flights which went from say Ho Chi Minh City (Saigon) to Hong Kong (as well as US domestic and international ops), there could potentially be significant liability exposure as well as a need for an international entity to effectively run the business.

If you are sourcing product outside the country and importing it into the country, unless there is a significant import duty reduction or some other situation, an international business entity might not be worth the hassle as keep in mind that the foreign locale will no doubt have it's own sets of laws and taxation which you will have to keep abreast of, or pay someone to keep abreast of to make sure you do not run afoul of the laws there.

Another good use of an international business entity would be as follows I...err, my corp, (I own nothing -- but get the keys to a whole bunch of cool stuff...lol) owns a Gulfstream G500. On paper the owner is in St. Kitts under a Leasing company there. The St. Kitts company leases the G500 out just the same as any jet leasing company would....and gets paid the same...well ok better b/c of the level of "personal service" it provides. This in turn provides a legitimate way to take US Corp profits and get them out of the US and into a more tax favorable environment.

Keep in mind that if the goal/objective here is to protect the business (and shareholder(s)) from liabilty and protect assets....this means that your individual situation could well be such that you want to fly the "5 Flags" for asset protection....also keep in mind that there are a number of domestic (US) tools which can provide a significant amount of protection....for example....a Corp w/ stock held by a NV holding Corp w/ their stock held by trust....the list goes on, but I think you get the idea...

...any questions, please feel free to ask...hopefully some "common cents" advice..no pun intended

 

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[GlobalWealth]

You're going to have to make a strong(er) case as to why to not use LegalZoom, or just go to the Secretary of State of your targeted incorporation and pay zero fees.

This is really a planning decision. If you are starting a small business with limited or no upside then setting up your own entity is perfectly acceptable.

Many people think that setting up an LLC is a DIY project. In some cases, it is. In most cases, it is not.

For example, if your business owns significant assets, then the state of registration matters. If you need privacy, the state of registration matters. As Clint stated, even determining if you are member-managed or manager-managed makes a difference.

Maybe more complicated structuring is necessary. If your business owns equipment or machinery, then it is possible to split those assets into other C-corps. in no tax states like NV to minimize your tax burden and segregate the risk associated with the equipment.

From a tax perspective, the default LLC classification is partnership, which means all income/loss flows through to the members. So the residency state of the member is what matters for state taxation. But you can structure the LLC with the same tax election as a C corp. giving you potential tax benefits with the liability protection of the LLC.

On the topic of liability protection - different states treat LLC's (esp. single member LLCs) differently. Most states disregard SMLLC for liability purposes and attach the member's assets. Two states (NV and WY) provide the same protections as MMLLC's.

As for offshore companies - as RE Taipan stated, you really need a reason to set up your business offshore. There are many reasons and viable business candidates for that, but 'being cool' isn't one of them. You are risking a lot of trouble if you aren't careful.

With that said, offshore entities are highly encouraged for diversifying your assets outside of your home country. They are also very useful in structuring internet related businesses if done properly. Again though, caution is advised. This is not even close to a DIY process.

I will echo Clint's statement about hiring someone to register your LLC's. You can do it yourself just like you can changer your oil or mow your grass. But if your time is valued at $200/hour why would you mow your own grass when you can pay someone $35/hour?

If you weren't aware of some of the topics I mentioned above, then you likely need to seek competent advice for structuring your business. If you screw it up there can be significant negative consequences.

 

[GlobalWealth]

So are you saying there are ways or circumstances where you could setup an ecommerce business in a state or territory other than the one the ecommerce business owner resides?

yes, and sometimes for very good reasons.

I'm developing several ecommerce businesses that will utilize SaaS services (shopping cart, customer service, etc.) in several states as well as fulfillment in yet another. I might even use another service located in another country.

It could be a good idea depending on your business, where you clients are, and your product.

 

[GlobalWealth]

Correct me if I am wrong, but from a tax standpoint it is less about where the business is incorporated, and more about where your residency is. If I draw my income from an S-Corp in Minnesota, it doesn't matter where the incorporation of the business is because I am still paying taxes on a pass through basis to my personal income, with my residency in MN. Isn't the state of residency more important than the state of incorporation for tax purposes?

In your case yes. But not always. If you had a C corp or LLC taxed as C corp, registering your company in a state like NV could be very good taxwise.

 

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[GlobalWealth]

So what do you do that LegalZoom doesn't do?

I am not specifically answering for Clint, only a generalized answer. LZ does not provide you with any advice to proper structuring. If you know what you need (and are 100% certain of it) then LZ may be a good option. If you need to make sure you are setting your business up properly, then LZ is not your best option.

 

[GlobalWealth]

In the case of online biz, where does international business entity/hosting/nexus etc.. come in? Should you do this from the get go or wait until you have some proof of concept of on online biz before incurring expense of offshoring?

Typically I would only recommend someone using an offshore structure for their online business if they either 1-live outside the US or 2-the majority of their customers are outside the US.

For a startup, I always recommend proving your concept, but if you have extensive business experience and this is just another rung on your ladder, then by all means set up the offshore structure from the get-go as it will make things easier down the road. Of course this is assuming your business fits the profile.

 

[GlobalWealth]

more an issue of liability and protection of assets than anything else

In many cases, yes. Offshore planning is frequently part of asset protection planning.

If you are sourcing product outside the country and importing it into the country, unless there is a significant import duty reduction or some other situation,

I just helped a client in this exact situation. The offshore company was set up in a tax free jurisdiction to be the official import/export agent for his product. This cut his cost of production (due mostly to import duties) in less than half.

Another good use of an international business entity would be as follows I...err, my corp, (I own nothing -- but get the keys to a whole bunch of cool stuff...lol) owns a Gulfstream G500. On paper the owner is in St. Kitts under a Leasing company there. The St. Kitts company leases the G500 out just the same as any jet leasing company would....and gets paid the same...well ok better b/c of the level of "personal service" it provides. This in turn provides a legitimate way to take US Corp profits and get them out of the US and into a more tax favorable environment.

Excellent example and duplicatable for many different assets.

 

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[RE Taipan]

In many cases, yes. Offshore planning is frequently part of asset protection planning.



I just helped a client in this exact situation. The offshore company was set up in a tax free jurisdiction to be the official import/export agent for his product. This cut his cost of production (due mostly to import duties) in less than half.






Excellent example and duplicatable for many different assets.

Thank you Global....indeed, there are a variety of situations which these techniques can be applied to if one is in a position to....and has the requisite knowledge to properly utilize them....often times however, people will base their actions on what sounds cool or sexy as opposed to what is appropriate for their situation...case in point..

...when I was 17, I owned an auto parts store on the So Side of Chicago. My primary interest in this endeavor was so that I could purchase aftermarket hi-perf parts for my own vehicle. Invariably everytime there was a drag race on ABC's Wide World of Sports on Sunday, we'd have kids coming in on Mon-Tues asking for some uber-exotic part like Arias pistons, a Hi Lift Crower cam, etc for their rusted POS 70 Malibu with the 307 Small Block....I would always ask why they wanted a set of (then) $2500 pistons for their 87K mile small block....in addition to the usual answer I'd also get ....b/c Tom McKewen , Don Garlits, Don Schummacher runs them...or the best one I heard alot...so I can beat (insert local PD here).....to which I would respond...you might be able to beat their 72 Polara Interceptors...but you still won't be able to beat Motorola...

...so much like the Arais pistons...they sound good and sexy and offer some bragging rights...but if they do not fit the need they are being applied to....it is not the right thing to use.

 

[RE Taipan]

Depends on how much you have to invest. If you read RE Taipan's post, specifically:



That appears to be the threshold to where you want to start investing in restructuring your business.

For initial startup though, you just want to make sure that you are setup in the proper state(i.e. the state you operate in OR the state where you plan to have the most business from... this'll take some due-diligence and market research to figure out though).

Back to his post, if you just got into racing and you're driving a Honda Civic, you don't need the Pirelli P-Zero Corsa tires(aka the exotic off-shore asset protection plan like GlobalWealth offers). On the other hand, you probably don't want to get the Walmart "Buy 3, Get 1 Free" deal either(aka the LegalZoom package).

TaxGuy....
I can undedrstand what you are saying but I see it more fundamentally than that.

If the business is set up properly, you can run from pretty much anywhere and shift money any place else. For example, if I am in CA and have a corp that domiciled in NV, there are tons of ways to shift just about every dollar out of CA (or never have it go there in the first place) and into NV. I could have all of my bank accts in NV, all payments to the biz made to the NV Acct, etc. This allows me to call anyting in CA a branch office, a Dist Center, whatever and not have any of it become taxable in CA, and all of it taxable in NV

Ever notice how so many of the credit card issuers have you make payments to a PO Box in The Lakes, NV?? ....which is a suburb of Las Vegas...by forcing you to make your payments in NV, the issuer's income is "earned" there for purposes of a taxable event....obviously there are many more issues here than this....but it illustrates the point.

So when you are starting a business...regardless of the size...and regardless of where you "do" business...if care is taken at the outset, the laws are there to legally move things where they need to be moved to, if you know how to do it.