Does the Rule Apply to Real Estate? If you invest in and/or syndicate real estate what are the duties to your investors? You owe them a duty of loyalty. But how far does that go? The issue of corporate opportunities is important. I wrote a whole chapter on it (from...
A recent case has shed light on one of the riskiest retirement plan strategies put forth by promoters. In McNulty v. Commissioner (157 T.C. 10) a U.S. Tax Court brought clarity to the scheme of using self-directed IRAs for personal investments.
Piercing the Corporate Veil – How to Avoid It
50% of piercing the veil court cases nationwide succeed because owners are failing to properly follow corporate formalities. This exposes business owners to personal liability - meaning they can lose their possessions. What is the Corporate Veil? What is the corporate...
What is the Best State to Incorporate?
What is the best state to incorporate? Many people incorporate in the state where they do most of their business. And sometimes this is the best choice — but not always.
Where your business is located does not have to dictate where the business is incorporated. In fact, you might be better off choosing to incorporate in a state thousands of miles from your home office. Choosing where to incorporate is not a matter of ease of distance, rather it’s a matter of ease of business.
Corporations do not receive equal treatment across the country. Every state sets its own business laws and regulations. Some states are considered business-friendly. Others, like California, are almost anti-business. A decision as simple as where your business is incorporated can make a big difference to your bottom line and your peace of mind.
Where to incorporate depends on a few factors:
- Do you require a corporation, or can you use an LLC?
- What is the tax rate for each state?
- How much protection do you want and what are willing to pay for it?
Let’s go through each question and arrive at some conclusion for the best state to incorporate.
Should I Form a Corporation or an LLC?
Corporation and LLCs are the two most popular entities for conducting business operations and holding assets. For many, the LLC has the edge due to its more flexible management structure and, if formed in the right state, its better asset protection features.
The unique asset protection benefit offered by LLCs (and limited partnerships) formed in strong states is the charging order. When someone goes to court and wins a judgment against you, they naturally want to collect.
A judgement creditor can reach the shares of a corporation (with one exception we will discuss later). Shares can give the judgment creditor voting control – and the power to sell assets.
However, in an LLC formed in strong state (such as Wyoming or Nevada) all the creditor gets is a charging order, which is a lein on distributions. They can’t force a sale of the assets of the LLC (as they can in California, New York, Utah and other weak states). Instead, the judgement creditor only receives what is distributed from the LLC, which might be nothing.
Due to the benefit of charging order protection, many clients will select an LLC over a corporation. Know that the beneficial treatment of S corporation taxation, which allows for the minimization of payroll taxes, can be selected for LLCs. So for business operations, where salaries are paid, an LLC taxed as an S corporation is frequently used. For investment activities where no salaries are paid, an LLC taxed as a partnership works well. If formed in strong states, both feature charging order protection.
But what if you can’t use an LLC? For example, in California a real estate broker or agent cannot use an LLC for their brokerage activities. Only a corporation is allowed. This means you don’t have the benefit of charging order protection.
But remember, we said there was one exception. Nevada is the only state in the union that extends charging order protection to corporate shares. This makes Nevada the best state for corporations.
Which States Have the Best Tax Rates?
We don’t want to set up in a good state if we are going to have to pay any extra state taxes. Both Nevada and Wyoming do not have any personal income taxes. Wyoming doesn’t have a corporation tax either. Nevada changed their law last year. The state now has a gross receipts tax, which is an assessment on money coming into the business (not on profits). The tax applies to gross receipts of $4 million or more generated in Nevada. So, if you are operating outside of Nevada, this tax will not affect you.
Delaware is another low tax option. They tax entities doing business inside their state. But by setting up in Delaware, you would have the benefit of favorable corporate laws but be paying lower taxes compared to many other states.
Conversely, suppose you set up a California corporation to do business in Oregon. Not only would you have to pay Oregon taxes (because you are doing business there), but you would also have to pay California’s notorious $800 per year franchise fee because you incorporated there. For more information on incorporating, see my book, “Run Your Own Corporation”.
Which States Are the Best at Protecting My Personal Assets and at What Cost?
When considering the best state to incorporated in we have to factor in the extra fees. If your Wyoming LLC is going to hold real estate in another state, you have to qualify to do business in that second state. It is not hard to do. You simply get permission for the Wyoming LLC to conduct business in the second state. But now you have to pay the annual fees in two states, in Wyoming, and the second state. So we don’t want Wyoming’s fees to be high. (We are going to have to pay the second state’s fees anyway because that is where the real estate is located.)
Wyoming’s annual fee is less than $100 a year. You are required to have a registered agent in Wyoming to accept services of process (lawsuits), and we charge $125 a year for that service. So for just under $200 a year, you have much stronger protection than if your LLC was formed in a weak state.
Nevada’s annual fees are nearly $400 per year. With another $125 per year resident agent fee, the total is just under $500, or about $300 more than Wyoming.
As well, Nevada lists the names of LLC members and managers on its website while Wyoming does not list individual’s names, thereby maintaining your privacy.
Wyoming and Nevada both offer strong charging order protections. But with Wyoming offering greater privacy at lower cost, Wyoming is the best state for LLCs.
The best state to incorporate a corporation, conversely, is Nevada. While the annual fee is just under $700 a year, by being the only state to extend charging order protection to corporate shares, Nevada is the best state for corporations.
Read this article for more on why Wyoming LLCs are best for asset protection, with Nevada being a close second.
Ready to form an LLC? We can help!
Are You a California Resident?
Many people believe that as long as they are outside the state of California for six months and a day they are not residents of California. And thus don’t have to pay California’s high income taxes. But the state of California is both broke and arrogant. And they make the rules the way they want.
Design Your Asset Protection Plan
You design a lot of things in your life. The layout of your house, the flow of your business, the requirements on your children, and many more scenarios are all elements of conscious design. Asset protection is no different. There is an architecture, a cohesive...