LLCs

October 26, 2004 2:55 PM

I'm looking at nolo press' site for info on LLCs, and the simple ~$300 method of creating one online at corporation.com, but I seem to recall reading somewhere that LLCs incorporated in Delaware and Nevada are the only ones that are tax-free when money goes into them -- that money going into another state's LLC does get taxed, and when money goes into your personal bank account it gets taxed in both cases. So aside from Delaware and Nevada, money going into an LLC would be taxed twice. Is that correct? Are there any drawbacks to making a Delaware or Nevada LLC as opposed to your home state?
posted by mathowie to Law & Government (13 answers total)

Yeah, the drawback is that it's just a shitty way of evading one of your primarily duties as a citizen, which is to pay taxes. It's the more genteel, domestic version of incorporating offshore to avoid paying federal taxes.

If you want to avoid double-taxation, incorporate as a subchapter S. Works for me.
posted by waldo at 3:57 PM on October 26, 2004

LLCs, in California at least, have pass-through taxation (you get taxed on the income once, at your individual rate.) Same with S-corporations (again, in California, at least).

If you're still confused, or expect there to be a significant income stream so that double taxation makes a large difference, your best bet is to contact a lawyer in the state in question.
posted by spacewrench at 4:05 PM on October 26, 2004

(I'm not a lawyer...........)

Matt,

Check out http://www.bizfilings.com/learning/detailedstateinfo.htm for a great comparison of the incorporation regulations and tax laws for each of the 50 states.

http://www.state.de.us/revenue will give you a good overview of the tax details for Delaware and http://tax.state.nv.us/ for Nevada. (A note of caution on Nevada: A new law there requires a two-tiered Live Entertainment tax. So, if you were planning on opening MetaFilter Ranch or something to provide your loving readers with companionship, you might want to think twice!)

And remember: incorporating somewhere is the easy part. Keeping up on all of the legal statements required on an ongoing basis is the pain in the ass, and is where most people get in trouble.

Should we be expecting MetaFilter Inc. soon? :-)

On Preview:

Waldo, you're nuts. Not paying your taxes is not paying your taxes. Legally operating a business under the laws of the state of incorporation as well as the state where you do business is perfectly legal. Delaware is very aware of what they have open, and what you're overlooking is that the tax advantage exists only if you don't do any business whatsoever within the state.

The minute you do, Delaware does more than its fair share to get the money that's due to them...
posted by NotMyselfRightNow at 4:07 PM on October 26, 2004

IANAL, but I have dealt with this. If it is a small business, you will probably want to be an S-corp or an LLC taxed as a partnership. However, the state of incorporation is not necessarily what determines what tax you must pay. If your "principal place of business" is your home state, you generally (depends on state) have to pay a registration fee with your state as a foreign corporation transacting business in that state. Additionally, you may have to pay state taxes, often called a "Franchise tax" on the income of the business. This means that the S-corp/LLC may have to pay taxes directly on business income, even though the federal government does not tax you as a corporation. You may want to talk to a lawyer or an accountant about this first.
posted by cameldrv at 4:21 PM on October 26, 2004

At the risk of hijacking Matt's thread, doing what is "prudent" is altogether different from doing what is right. The prudent path for a corporation is the path of greatest profit, hence American companies reincorporating offseas, laying off Americans have moving manufacturing to third-world countries. But, hey, they're doing their bare minimum that they're legally obligated to do in order to be citizens of the United States, so they're "prudent."

My businesses have all been incorporated in Virginia, because I'm in Virginia. I'm not about to pretend that I'm in Delaware any more that I'm going to pretend that I'm in Bermuda. Screw prudent. I want to do right by my state.
posted by waldo at 6:22 PM on October 26, 2004

If you incorporate in state X, you can also be sued in state X, in addition to whatever state you do your main business in (presumably your home state).
posted by falconred at 6:27 PM on October 26, 2004

waldo, I thought it was an American's DUTY to avoid paying taxes at all costs... Or was I wrong about that whole thing?
posted by shepd at 6:52 PM on October 26, 2004

The partners/stockholders of LLCs and subchapter S corporations both pay taxes the same way: the net profits (or losses) are reported on the partners/stockholders personal income tax returns. There is no corporate tax at all in this case. All income is taxed at the personal level. In addition to limited liability, the main reason for operating as an LLC or S corp is to avoid double taxation. Losses (which many/most small companies may have for several years) will reduce your income tax burden. [IANACPA, but I am currently majoring in accounting and plan to become one after I graduate. I've also operated an S corporation since 1997.]
posted by AstroGuy at 7:12 PM on October 26, 2004

It is reasonable and prudent for a business operator to seek to pay their lawful income tax and nothing more.

I don't know. This seems so Friedmanesque -- ie, the only social responsibility of a corporation is to its shareholders.

Not that I don't seek to minimize tax payment, and not that doing so doesn't seem reasonable. I guess I object more to Friedman's statement than b1tr0t's.
posted by weston at 8:21 PM on October 26, 2004

AstroGuy: Believe it or not, this depends on what state you live in.
posted by cameldrv at 9:43 PM on October 26, 2004

You don't really pay taxes as money goes into your corporation. You pay taxes on your companies net income.

This means that many companies (mine included) wind up not paying taxes, or paying extremely minimal taxes because they don't make money.

I make money, my partners make money, our employees make money. But the company itself... not so much.
posted by mosch at 11:21 PM on October 26, 2004

Best answer: It's sounds like you are incorrectly jumbling a few concepts.

For federal purposes (and most states would follow suit), a single-member LLC is taxed as a sole-proprietership. If you have 2 or more members, you can elect to be taxed as a partnership or corporation.

As for the states, Deleware and Nevada have no corporate taxes. But this only matters to people that actually operate their business in one of those states. You can incorporate (or form an LLC) in either of those states, but if you actually do business in California, for example, you would owe CA (and the Feds) tax (either as an individual if you have a single member LLC or as a partnerhip or corporation, depending on your election). Caveat: a few states might still tax the LLC directly as a separate entity.

As an aside, most large corporations are incorporated in Deleware not for some tax dodge, but for the access to the Deleware coporate law because it is one of the most developed (predictable) and favorable.
posted by probablysteve at 9:56 AM on October 27, 2004

Best answer: What probablysteve said about incorporating in Deleware due to the legal structure there. Nevada's is almost as well-developed, and has the added benefit of protecting the privacy of members of a corporation -- it's not possible under Nevada law to force a corporation to disclose the names of its shareholders (or members, depending on structure.). You can't sue the members of corporations, you can only sue the corporation.

To incorporate in a state, you need an agent there -- someone who's a resident, and will forward your correspondence. You can only be sued in that state, with a few exceptions based on local or state law. California is a partial exception.

Other posters are correct in that various states do *not* recognize LLCs and Subchapter S corporations. I think California is one of those, and they're one of the worst states to incorporate in due to their personal liability law. The book I read basically said that if you're in California and you DON'T register your corporation in Nevada, you're and idiot due to the liabilty laws in the People's Republik of Kalifornia.

I really hate it when self-righteous liberals that don't know what they're talking about reply to business threads. My DUTY to be taxed twice on the same income? No thanks. If I get taxed twice, I want two votes.
posted by SpecialK at 12:03 PM on October 27, 2004