Sunday, February 24, 2008

Incorporating Out-of-State

For my first few posts, I have decided to address questions that frequently come up during my initial consultations with new clients. Here are a few common questions/misconceptions about forming a corporation or LLC in a different state than you live in:

Q: I am a New York resident and business owner. I have been told that I can save a great deal of tax each year if I establish my company in a tax-free state. Is it really this easy to avoid New York State income taxes?

A: No, it is not that simple. The way New York handles multi-state tax issues is by allowing a credit against NY income taxes equal to the amount of income taxes paid to other states. If you are a full-year or part-year resident of NY and if any part of your income was taxed by another state, local government, or the District of Columbia, you may claim a credit against your NY State tax. Therefore, if your income is not taxed by the other state, your credit against NY income tax equals zero and you end up paying the full NY income tax rate.

Q: What about other benefits of establishing my business in another state such as the anonymity provided by Nevada Limited Liability Companies (LLCs)?

A: Though Nevada is heralded as a state that provides business owners anonymity, this only holds true for shareholders of a Nevada corporation, not a Nevada LLC. Members and managers of a Nevada LLC must be disclosed on annual reports that immediately become public information. Additionally, if you are involved in arms-length transactions with your clients and/or customers, they meet you face-to face and they know who you are. Therefore anonymity is only valuable in certain industries where that face-to-face contact is not prevalent. Further, by establishing your New York-based business in Nevada, you will have to undergo additional filing fees in order to do business and report your business activity in NY.

Q: With all the talk about establishing entities out-of-state, what is my best course of action?

Unless you are operating a large business, most small and mid-size companies are better off establishing their business in the state that they plan to do business in. This ensures that you do not have to shoulder the burden of additional reporting requirements, administrative provisions, state filing fees, accounting fees, and legal fees. Consult with both your attorney and your CPA before going online to setup a company in a different state.


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