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Incorporate First – Deduct Second

by | Mar 27, 2021 | Case Law, Forming an LLC, STARTING A BUSINESS

Should you set up a corporation or LLC before you start trying to deduct expenses? A recent case suggests you should.

Many think that they can deduct all of their start up expenses before formally incorporating a business. But in Carrick v. Commissioner of Internal Revenue (T.C. Summ. Op. 2017-56, July 20, 2017) the Tax Court ruled otherwise.

The Facts of Carrick

The taxpayer had a bachelor’s degree in electrical engineering. For approximately 15 years, he was employed in the oceanographic industry. Before the years in issue, and during 2013 and 2014, he was employed by Remote Ocean Systems (ROS), building underwater equipment such as cameras, lights, thrusters, control devices, and integrative sonar.

During the years in issue, ROS was experiencing financial difficulty. The taxpayer was provided some flexibility in his work schedule, and he began exploring business ventures with other individuals, using the name Trifecta United as an umbrella name for the activities, which he named Local Bidz and Stingray Away.

The Local Bidz activity involved creating a website with features similar to those of the websites of Angie’s List, Yelp, and eBay, which would permit people to bid on hiring contractors for products and repairs. The taxpayer first had the idea for Local Bidz in 2012, and he went “full force in the beginning of 2013,” spending time accumulating data and developing software and the website.

At some point in 2013 the web developer moved to Los Angeles and other individuals left the project. For some unspecified period in 2013, the taxpayer traveled weekly from his home in San Diego to Los Angeles to consult with the web developer. The taxpayer abandoned the Local Bidz activity before the end of 2013. Sometime in 2014, the taxpayer began the Stingray Away activity, which involved researching and developing a device to prevent surfers and swimmers from being injured by stingrays.

The taxpayer initially noticed that sonar devices might affect the behavior of sharks and other species, so he conducted research at beaches in La Jolla, where swimmers and surfers often were stung and bitten by stingrays. The taxpayer did not fully develop any devices nor list any devices for sale in 2014. He had had no gross receipts during 2013 or 2014 from either the Local Bidz activity or the Stingray Away activity.

The Decision in Carrick

In Carrick, the taxpayer asserted that his reported expenses were deductible as ordinary and necessary business expenses relating to the activities of Local Bidz and Stingray Away. The Tax Court noted that 26 U.S.C. § 162(a) provides the general rule that a deduction is allowed for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” The Tax Court stated that it was clear that the taxpayer was not “carrying on” a trade or business in 2013 or 2014 when the expenditures for the Local Bidz and Stingray Away activities were made.

Carrying on a trade or business requires more than preparatory work such as initial research or solicitation of potential customers; a business must have actually commenced. Expenses paid after a decision has been made to start a business, but before the business commences, are generally not deductible as ordinary and necessary business expenses. These preparatory expenses are capital expenditures.

The Tax Court pointed out that, while the taxpayer may have been conducting research in 2013 with respect to Local Bidz, or in 2014 with respect to Stingray Away, neither activity reached the point of actually commencing. There was neither sales activity nor evidence of the offering of products or services to the public. The taxpayer was still in the very early stages of research and development in each of these activities.

The Tax Court observed that there was nothing in the record indicating that the taxpayer had commenced any business activity as a sole proprietor. The taxpayer had not set up a formal business entity. Therefore, the Tax Court concluded that the taxpayer was not “carrying on” a trade or business in 2013 or 2014. See, 26 U.S.C. § 162(a); Frank, supra, 20 T.C. at 513-14 (1953); Shea, supra, T.C. Memo. 2000-179, 2000 WL 688593, at *5n. 10; Christian, supra, T.C. Memo. 1995-12, 1995 WL 9151, at *5.

Brief Discussion

If you’re preparing to open a new business, then you need to make certain that you understand the tax rules. It is crucial that you offer the product or service to the public and that you begin sales activity, because start-up expenditures, i.e., expenditures paid before a business begins, are not deductible in the years they are actually incurred. Instead, they are capital expenditures, which generally must be amortized over a 15-year period, once business begins, meaning gradually write off the cost over 15 years. See, 26 U.S.C. § 195. Thus, in order for an expenditure to be an ordinary and necessary trade or business expense, it must be related to more than a preparatory expenditure.

So, if the taxpayer in Carrick had opened his business first, then he might have been able to deduct his expenditures in the years they were actually incurred, instead of amortizing them over a 15-period.

Conclusion

The moral of the story is: Open your business first, and deduct later.

LLC vs Corporation

by | Mar 27, 2021 | entity types, Start a Business, STARTING A BUSINESS

LLC vs Corporation

Which is Best?

Choosing the right entity can be one of the most important decisions a business makes. Business owners and investors may find themselves asking which to pick, LLC vs Corporation. To help make your decision a little easier, we’ve compiled a list of helpful comparisons that will teach you the basic differences among entity types.

Who should use which entity?

LLC

LLCs are great for people who want an entity to hold real estate or other appreciating assets. They are a popular choice for investors and entrepreneurs because of the flexible taxation and great asset protection.

Corporation

C Corporations are great for businesses that sell products, have a storefront and have employees. Businesses that offer services may find the taxes of a C Corp to be too high because of specific tax laws applied to Personal Service Corporations (PSC). It’s also advised not to hold appreciating assets in a C Corp because of the tax treatment of asset sales.

S Corporations are a good choice for people who would like the protection and structure of a corporation, but would be classified as a PSC by the IRS. They are also great for businesses that have significant start-up costs because of their flow-through taxation.

Taxes

LLC

LLCs can choose how to be taxed – either as a disregarded single member entity (where the tax reporting flows directly onto the sole owner’s personal return) or as a multiple member partnership. LLCs can also be taxed as an S Corporation or C Corporation. No other entity has this flexibility.

Corporation

C Corporations

A C Corporation has the widest range of deductions and expenses out of all the various entity types. This is especially true in the case of employee fringe benefits. If you own a C Corporation, you can set up medical reimbursement and other employee benefits and deduct the costs associated with running these programs from your corporate taxes. It’s also worth noting that as a C Corporation you pay an initial rate of 15% on earnings up to $50,000.

While you have access to a wide range of deductions and the ability to set up fringe benefits without taxation, the biggest tax disadvantage of C Corporation is the “double-taxation” issue. Double-taxation can occur when a C Corp has a profit at the end of the year that it would like to distribute to its shareholders. The C Corp has paid taxes on the profit, but once it gets distributed to the shareholders, they also have to declare the dividends they receive on their personal tax returns at their own tax rate.

You may also want to consider an S Corporation if your company’s primary product is services to the public, as you will be taxed as a PSC with an initial rate of 35% instead of the 15%. The IRS does this to stop people from using a corporation to pay less in taxes for what is essentially a salary.

S Corporations

S Corporations are what is called a flow-through entity (similar to an LLC). Unlike a C Corporation, an S Corporation pays no tax on the corporate level. The shareholders only have to pay taxes on the individual level. This can be beneficial in some cases, but shareholders who make a high income from distributions will pay higher taxes. As far as benefits are concerned, S Corps may still write off the cost of benefits, but shareholders who control more than 2% of the entity must pay taxes on the benefits they receive.

S Corporations are commonly used to avoid the PSC tax rate set by the IRS. A corporation is considered to be a Personal Service Corporations (PSC) by the IRS if more than 20% of the corporation’s compensation cost for its activities of performing personal services is for personal services performed by employee-owners and the employee-owner owns 10% or more of the stock. Personal services include any activity performed in the fields of accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law, and the performing arts.

Since an S Corporation is a flow-through entity and shareholders pay taxes on the individual level, a modest salary with passive income may mean lower taxation. To determine what’s best for you and your business, you should always talk with your CPA or legal advisor.

Shareholders and Owners

LLC

An LLC does not issue shares, but it can have multiple owners (called members) who all share a percentage of the company.

Corporation

C Corporations

C Corporations allow for an unlimited number of shareholders, there is no limitation on who can hold shares and no restrictions on what types of shares can be held (such as preferred vs. common). A C Corp is perfect for a company looking to go public.

S Corporations

S Corporations are a bit more restricting. All shareholders of an S Corp must be Individuals (not entities) and they must be U.S. citizens. The company can only have 100 shares issued, and the shares can only be of one type.

Asset Protection

LLC

A key feature of the LLC is charging order protection. In strong states like Nevada or Wyoming, if the owner of a business gets sued, an attacker can only get a charging order (a lien to the distributions of the LLC). If there are no distributions, the attacker gets nothing. The charging order in most cases is contingent on the entity having at least two owners, but Nevada and Wyoming have protections for the single member LLC.

It should be noted that in some states, like California, Georgia and New York, the court may still order a sale of the businesses assets.

Corporation

A Corporation is an entirely separate and independent legal entity from its owners (or shareholders) and there is a separation between ownership and management. As such, the management and shareholders of a Corporation generally are protected from personal liability for the Corporation’s liabilities and obligations. Although shareholders of a Corporation may be liable for the amount they have invested in the Corporation, their own personal assets usually are protected. This limited liability feature also applies to directors, officers, and employees of a C Corporation.

However, there is an issue in the asset protection of a Corporation. If you own shares in a corporation and are sued personally (i.e. after a car wreck), a judgment creditor can reach your shares in the corporation. If you are the majority owner, the attacker now controls your business by virtue of share control. Nevada is the only state that extends charging order protection (as in an LLC) to corporate shares.

Foreign Investors

LLC

In general, whether you’re a foreign real estate investor or one in the U.S., the limited liability company is the best entity. The LLC is great for both asset protection and has flow-through taxation, and they are affordable to set up and maintain. Since they have flexible taxation, they can be set up for easier taxation management too. Often Canadians will use an LLC taxed as a C Corporation for ease of use, and Australians use them as-is for real estate investment of their retirement monies. It’s always best to consult your accountant about which taxation system would best fit your business.

Corporation

C Corporations

C Corporations are a good to foreign owners for the same reasons stated in the sections above, but It may be more popular with countries that have similar taxation. For example, most Canadians prefer to use a C Corporation because the taxation of a C Corporation most closely resembles that of their home country. When the systems are closely related, it makes them easier to manage.

S Corporations

S Corporations are the only U.S. entity that cannot be used by a foreign investor.

 

Questions?

Determining which entity is right for you can be challenging. You want to ensure that you are getting set up properly right from the start.

If you need help figuring out what entity is right for your business, set up a free 15-minute consultation with an Incorporating Specialist.

Schedule a Consultation

Ultimate Guide to Vetting a Business Partner

by | Apr 1, 2019 | Forming an LLC, RUNNING A BUSINESS, STARTING A BUSINESS

By Gerri Detweiler

After surviving several tumultuous business partnerships, Susan Nilon has learned to be more skeptical and cautious. In the past, she admits she was so excited about business possibilities that she “didn’t pay attention to red flags.”

She and her current business partner in a legal research firm, De Novo Law Services, not only have a formal partnership agreement, they’ve taken it one step further. She created an addendum to the agreement “writing out 10 steps on how to survive our partnership,” she says. This document spells out the things that are not normally called out in a contract, like how to handle disputes and what to do when the other partner is not pulling their weight.

Business partnerships can bring together individuals whose complementary skills and experience can help the venture succeed. And sometimes a partner can contribute valuable resources — including money — to help fund the business. But these arrangements can also result in headaches or heartache.

Here are nine ways to vet a potential business partner and (hopefully) avoid those headaches:

Do Your Own Recon

Spend some time researching your prospective partner online. Review their social media accounts. Do their tweets or Facebook posts jive with the person you think you’ll be working with? Do you want to be professionally associated with them? Be sure to go back a while in their timeline: there may be older information they forgot about that provides valuable insight into their thinking and character. And don’t overlook a social media platform just because you don’t use it yourself.

Similarly, when you conduct your online search into their background, don’t stick to one search engine. Dig a little deeper. “Different articles will be highlighted on different search engines,” says Nilon.

Have ‘The Talk’

“What do you really want out of this relationship?” It’s that awkward question that often comes up when dating. That question, along with “What do you really want out of this business?” can be just as awkward. But it’s essential you have that conversation.

It’s “truly like a marriage,” Nilon points out. Avoiding these difficult conversations can have long-term consequences. She compares it to a relationship where “you don’t talk about wanting children before you get married. If you find out your partner doesn’t want kids and you do, the relationship might not survive.” She adds: “Knowing how you see the future and communicating that to the other is a key step to avoiding disappointments.”

With more than twenty years of experience in human resources, Ben Martinez knows as well as anyone how crucial it is to find the right people to work with. But even he learned the hard way how challenging that can be. He runs two very different businesses — STS Talent (an HR and recruiting firm for high tech businesses) and Sumato Coffee Company.

When he founded Sumato Coffee, he brought in a business partner he had worked with in the past. She was smart and capable, but he discovered she was in a different phase of her life than he. It was soon apparent that she wanted to devote more time to building her corporate career. “We had to part ways,” he says. In hindsight, he wishes he had asked more questions about what she wanted out of the business and her life.

Another partner he brought in later loved the product but he discovered she wasn’t as excited about all the work that goes into building a business. “She was mainly in it for the money,” he observed. “She was passionate about coffee and ecommerce but the work ethic wasn’t there.” He parted ways with her, too.

Have a Money Talk

Figure out how to handle money up front. What do each of you bring the the table and how do you value that? How much do each of you get paid, and how long can each of you go without receiving a steady paycheck?

“In an LLC you can provide profits based not on the percentage of ownership but on the amount of time spent in the business,” explains Sutton. “And even with an S corp you could have a salary or bonus based on the amount of hours put in. The person that doesn’t contribute wouldn’t receive as much compensation. Then buy sell agreement could allow a partner to buy back the shares at low value” if one partner wants to get out.

Check Credit

You can check business credit on any business, so if your future partner is an entrepreneur, consider at least running a commercial credit check on their businesses. (This guide explains how to check business credit on another business.)

While there are dozens of places you can check your own credit for free, it’s not as easy to check someone else’s personal credit, and you’ll first need to get permission from your future business partner. In fact, unless your run a business that already obtains credit reports on job applicants, they will likely have to get their own report and share it with you.

Run a Background Check

Your local courthouse can be a source of information about lawsuits or other public record information. However, keep in mind this information will be limited to actions taken in that jurisdiction. And it may even be inaccurate. It’s not unusual for people with similar names to be mistaken for one another for example. (Millions of court judgments have been removed from credit reports recently because they couldn’t be thoroughly matched to the right person.) “Courts do not conduct criminal background checks,” warns the National Center for State Courts on its website.

For those reasons, purchasing a full background check that you both agree to review together may be a better bet. A background check that includes credit, criminal proceedings and other details will likely require the permission of the person on whom you request the report so be upfront with your request.

Every business owner interviewed for this article agreed that background checks can be useful. “Certain crimes could prevent you from raising money or obtaining government licenses,” points out Caton Hanson, cofounder and chief legal officer of Nav. And “IRS or states taxing authority problems could get you entangled with their problems,” he warns.

If you’re serious about the business and willing to spend the money, you may even want to hire a private investigator who can dig up more than you can likely find out on your own.

Do a Compatibility Check

Even if your partner is squeaky clean that doesn’t mean the two of you will work well together. Different personal and working styles can quickly drive a wedge in the relationship.

One big wedge driver: a partner who feels entitled because they came up with the idea for the business. “People put too much value on whose idea it was,” says Hanson. “Ideas are a dime a dozen. There are two things that matter: money and work. You can’t have a successful business without them.”

Hanson’s business partner Levi King and he have developed something they call the “St. George test.” It basically means asking themselves to imagine a 3-4 hour drive from Salt Lake City, where Nav’s primary office is based, to St. George, Utah with that person. “Could you do it and not go crazy?” Hanson laughs. “You need to really like your business partner.”

You can also use more formal assessments such as personality or work style tests. Consider springing to get them professionally administered and reviewed by an HR professional or someone trained to analyze and help interpret the results.

Hanson says King had him take a sales aptitude test and a personality quiz to “make sure we didn’t clash.” Martinez says these types of tools can be helpful to raise awareness of your partner’s styles or to find complementary work styles but it’s important to “get clear on what you are using it for.”

Try a Practice Run

If one of you has an existing business, consider hiring the other person for a project or limited period of time to see whether you work well together. It’s not foolproof, though, as Martinez learned. It’s probably more like dating than marriage — with both partners trying to make a good impression — but you will be able to get a better sense of how you might work together.

That’s what Hanson and King did. King hired him to work for him in a different company before they founded Nav together. “The work we did was almost like working together like business partners,” Hanson says. It gave them confidence that they could indeed succeed as partners.

Get it in Writing

If you’ve decided to proceed with a partnership, spring for a formal partnership agreement written by an attorney. Hanson shared the story of a business he knows that won an award that earned them a lot of attention, and eventually they were able to raise venture capital. The partners had no written partnership agreement, however.

“One of the partners was sitting at home playing video games,” he says. But because he owned shares in the company, the partners had to buy him out.

Even though you may still be in the starry-eyed stage, think through some worse case scenarios.

What happens if the partner dies, becomes incapacitated or needs to get a full-time job to support themselves or their family, for example. “You can create a buy sell agreement that says if one person abandons the projects they lose all their shares,” explains Sutton. “If they commit fraud they are out of the business. If they get divorced, only the person you entered the deal with can be an owner — the spouse can’t be granted those shares. A good attorney can prepare a buy sell agreement that can cover all these contingencies,” he advises.

About the Author — Gerri Detweiler serves as Head of Market Education for Nav, which provides business owners with simple tools to build business credit and access to lending options based on their credit scores and needs. She develops educational programs and content for small business owners, and works on advocacy initiatives. A prolific writer, her articles have been featured on popular websites such as Yahoo!, MSN Money, ABCNews.com, CBSNews.com, NBCNews.com, Forbes, The Today Show website and many others.

State Franchise Fees: Beware of Delaware’s New Rules

by | Apr 1, 2018 | Forming an LLC, STARTING A BUSINESS

Delaware’s New Rules Are a Cost To Consider When Forming Your Entity

Delaware recently increased the various fees assessed by their Secretary of State as Annual Franchise Tax Fees for Delaware corporations. While the changes do not apply to Limited Liability Companies (LLCs) or Limited Partnerships (LPs), and religious and charitable non-stock corporations remain exempt from the tax, the increased fees for corporations must be considered when forming an entity.

All corporations incorporated in the State of Delaware, irrespective of whether they actually do business in the State of Delaware, must file an Annual Franchise Tax Report and pay an Annual Franchise Tax. The Annual Franchise Tax is calculated on capital stock, and it is levied on corporations even if they are not producing any income.

The changes in the new law are fourfold: (1) the Franchise Tax Cap has been increased; (2) the Authorized Shares Method for calculating the Annual Franchise Tax has been modified; (3) the Assumed Par Value Capital Method for calculating the Annual Franchise Tax has been modified; and (4) the Late Penalty has been modified.

1. Franchise Tax Cap

Effective for Fiscal Year 2018, the Franchise Tax Cap has been increased to from $180,000 to $200,000 per year ($250,000 per year for some large corporate filers). It should be noted that LLCs and partnerships only pay $300 per year. But corporations with a large number of shares must take note.

2. Authorized Shares Method

There are two ways to calculate what you owe Delaware each year. The first focuses on how many shares you have authorized.

Under this method, the rate presently is $175 for a corporation with 5,000 authorized shares or less; $250 for a corporation with 5,001 to 10,000 authorized shares; and $75 for each additional 10,000 shares or portion thereof. Effective for fiscal year 2018, HB 175 has increased this rate from $75 to $85 for each additional 10,000 shares of portion thereof. For example, a corporation with 1,000,000 authorized shares now will owe $250 for the first 10,000 shares, plus an additional $8,415 ($85 times 99), for a total due of $8,665, plus $50 for the Annual Report Fee. These thousands of dollars compare with Wyoming’s annual fee of just $50.

3. Assumed Par Value Capital Method

Delaware also employs an alternative method for calculating the Annual Franchise Tax. This method is denominated as the Assumed Par Value Capital Method, and a taxpayer is free to use either method, and use whichever amount is less. The Assumed Par Value Capital Method is difficult to compare to the Authorized Shares Method because it necessarily makes certain assumptions about total gross assets. It is also difficult to calculate, period. Here is an example of how it works:

To use this method, you must give figures for all issued shares (including treasury shares) and total gross assets in the space provided in your Annual Franchise Tax Report. Total Gross Assets shall be those “total assets” reported on the U.S. Form 1120, Schedule L (Federal Return) relative to the company’s fiscal year ending the calendar year of the report. The tax rate under this method is $400 per million or portion of a million. If the assumed par value capital is less than $1,000,000, the tax is calculated by dividing the assumed par value capital by $1,000,000 then multiplying that result by $400.

The example cited below is for a corporation having 1,000,000 shares of stock with a par value of $1.00 and 250,000 shares of stock with a par value of $5.00, gross assets of $1,000,000.00 and issued shares totaling 485,000.

  1.  Divide your total gross assets by your total issued shares carrying to 6 decimal places. The result is your “assumed par.” Example: $1,000,000 assets, 485,000 issued shares = $2.061856 assumed par.
  2.  Multiply the assumed par by the number of authorized shares having a par value of less than the assumed par. Example: $2.061856 assumed par, 1,000,000 shares = $2,061,856.
  3.  Multiply the number of authorized shares with a par value greater than the assumed par by their respective par value. Example: 250,000 shares $5.00 par value – $1,250,000.
  4.  Add the results of #2 and #3 above.  The result is your assumed par value capital.  Example: $2,061,856 plus $1,250,000 = $3,311,856 assumed par value capital.
  5.  Figure your tax by dividing the assumed par value capital, rounded up to the next million if it is over $1,000,000, by 1,000,000 and then multiply by $400.00. Example: 4 x $400.00 = $1,600.00.
  6.  The minimum tax for the Assumed Par Value Capital Method of calculation is $400.00.

As you can see, the calculation is pretty complicated. Be sure to work with your tax advisor to get it right. Or maybe incorporate in another state without such rules and fees.

The new law increased the minimum amount of Annual Franchise Tax that is due and payable by a Delaware corporation under this alternative method. The minimum amount of Annual Franchise Tax for a Delaware corporation now is $400 per year, effective for fiscal year 2018.

4. Late Penalty

The new law has increased the Late Penalty from $125 to $250.

A COMPARISON

As noted above, the minimum amount of Annual Franchise Tax now payable by a Delaware corporation is $450 per year, effective for fiscal year 2018. It is informative to compare this $450 per year minimum amount of Annual Franchise Tax to similar taxes and fees in the States of California, Nevada and Wyoming.

1. California

California has taxes: corporate and personal income tax, California Alternative Minimum Tax, and California Franchise Tax. California Franchise Tax applies to LPs, LLPs, S and C corporations, and LLCs. All pay a minimum amount of $800 per year. But then other taxes kick in depending upon entity type. For S corporations, the California Franchise Tax is 1.5% of the S corporation’s net income, along with the minimum tax of $800 per year. For California LLCs, California Tax is a flat fee, based upon California gross income, plus an Annual Franchise Tax of $800 per year, regardless of income, calculated, as follows:

  • Gross income less than $250,000 – $0 + $800 = $800
  • Gross income from $250,00 to $499,999 – $900 + $800 = $1,700
  • Gross income from $500,000 to $999,999 – $2,500 + $800 = $3,300
  • Gross income from $1,000,000 to $4,999,999 – $6,000 + $800 = $6,800
  • Gross income over $5,000,000 – $11,790 + 800 = $12,590

California C corporations and LLCs electing to be treated as C corporations are subject to the $800 minimum fee plus the California State Corporate Tax of 8.84%, based upon California net income. As well, they are subject to a 6.65% California Alternative Minimum Tax (AMT), based on the Federal AMT, with modifications. If you do business in California, expect to pay some of the highest taxes in the nation.

2. Nevada

Nevada no corporate or personal income tax, and there is no franchise tax for corporations or LLCs; however, there are initial filing fees, renewal filing fees, and a business license fee.

The initial filing fee for a Nevada for-profit corporation is based upon the value of the total number of authorized shares, as follows:

  • $75,000 or less – $75.00
  • Over $75,000 and not over $200,000 – $175.00
  • Over $200,000 and not over $500,000 – $275.00
  • Over $500,000 and not over $1,000,000 – $375.00
  • Over $1,000,000
    • For the first $1,000,000 – $375.00
    • For each additional $500,000, or fraction thereof – $275.00
    • Maximum fee – $35,000.00

To get around these fees you can establish a value of $.001 per share. With 20 million shares at $.001 per share the value of the shares is just $20,000, well under the $75,000 threshold for increased fees. In Delaware you would pay much more every year for that many shares.

The renewal filing fee for a Nevada for-profit corporation is $650, calculated, as follows: (1) Annual List of Officers and Directors – $150; and (2) Business License Fee – $500. Nevada how also has a gross receipts tax on monies generated within Nevada. The tax starts on monies earned at $4 million per year and is dependent on what industry or business you are involved with. Work with your tax advisor to see if this tax would apply to you.

The initial filing fee for a Nevada LLC is $425, calculated, as follows: (1) Articles of Organization – $75; (2) Initial List of Managers of Members – $150; and (3) Business License Fee – $200.

3. Wyoming

Likewise, Wyoming has no personal or corporate income tax. Unlike Nevada, the Equality State has no gross receipts tax. Wyoming does have an Initial Filing Fee of $100, and an Annual Report License Tax for Wyoming for-profit corporations and LLCs, which is either $50 or two-tenths of one mill per dollar of assets ($.0002), whichever is greater, based upon the company’s assets located and employed in the State of Wyoming. For example, a Wyoming for-profit corporation or LLC with $1,000,000 in assets in Wyoming would pay an Initial Filing Fee of $100, a Registered Agent Fee of $25 per year, and $200 per year in Annual Report License Tax ($1,000,000 x 0.0002). For most of our clients the annual Wyoming fee for corporations and LLC’s is just $50 per year.

CONCLUSION

As demonstrated, the number of authorized shares greatly impacts the amount of Annual Franchise Tax for Delaware corporations. Small- and medium-sized Delaware corporations may wish to consider either recapitalizing, and thereby reducing their number of authorized but unneeded shares, or else changing from a corporation to an LLC or an LP.

As well, Delaware corporations can be ‘continued’ into Wyoming. Your original incorporation date and EIN remain the same, as if you had set up in Wyoming in the first place. 

In terms of starting a new corporation, the states of Nevada and Wyoming will generally offer much lower annual franchise fees than will Delaware.

What are Articles of Incorporation & Articles of Organization?

by | Jul 29, 2016 | STARTING A BUSINESS

Articles of Incorporation act as a charter to establish the existence of a corporation in the United States, and are filed with the Secretary of State where the business entity is doing business. They are sometimes referred to as the certificate of incorporation or the corporate charter, or if the business is Limited Liability Companies (LLCs) they are called Articles of Organization.

All corporations have paperwork that must be completed and kept on file to prove the business and its owners are acting as a corporation or LLC rather than an individual. C Corporations, S Corporations, LLCs and Limited Partnerships (LPs) all must have paperwork substantiating their existence as limited liability entities. Articles of Incorporation establish the existence of your corporation in your state, and set forth certain basic information about the new business.

The articles of incorporation set out:

  • the company’s name,
  • the initial board of directors,
  • the authorized number of shares,
  • the corporate purpose (usually stated in broad language such as “to engage in any lawful activity,” in order to avoid limiting the corporation’s business prospects),
  • the corporation’s name and address (principal place of business),
  • the name and address of your corporation’s registered agent, who will be authorized to physically accept delivery of certain legal documents (including lawsuits) on behalf of your corporation.

Because it is a matter of public record, specific, detailed, or confidential information about the corporation should not be included in the articles of incorporation. Articles of incorporation are one of many corporate formalities, or steps that must be taken for an entity such as a corporation or LLC to be considered a separate legal entity with the protections that limit the owner’s liability.

Why are Corporate Formalities Important?

The problem is that by not following the corporate formalities you open yourself up to unlimited personal liability if your corporation or LLC gets sued. If you haven’t met all the corporate formalities, you can be held personally responsible for the corporation’s claim. That defeats the whole purpose of setting up your entity! An entity exists largely to protect you from losing your personal possessions if the business is sued. If you set up and maintain the corporate formalities, there is a corporate veil, that protects you.

The crazy thing is that is an increasing common problem with business owner failing to follow corporate formalities and losing lawsuits as a result. In fact, 50% of business and real estate ventures are losing to this extremely common legal attack because they fail to protect against court decisions that pierce the veil. This means business and real estate venture owners are being held personally liable for lawsuits against their corporation, LP or LLC, and are vulnerable to losing their possessions.

What are Some of the Other Corporate Formalities Required?

To be protected you need:

The corporation is governed by rules found in its bylaws. Its decisions are recorded in meeting minutes, which are kept in the corporate minute book.

Without these protections, you as a business owner will be vulnerable to unlimited liability. If someone sues your business you could personally be responsible for the costs of what the judge decides should be paid out to the other party. So for these reasons it is essential to take the steps to set up and maintain the full protection that a LLC, C Corp or S Corp offer the business owner and shareholders.

Articles of Incorporation: Filing and Fees

In order to receive Articles of Incorporation or Organization, you need to file the proper application with your state’s Secretary of State office (or similar state agency that handles business registration).

In all states, a fee is required to file the articles of incorporation — ranging anywhere from $35 to $300, depending upon the state of incorporation. In some states, the filing fee varies if the new corporation is a non-profit rather than a traditional (for-profit) corporation. For example, in California the fee for filing articles of incorporation for a traditional “general stock” corporation is around $100, while the filing fee for a non-profit’s articles of incorporation is around $30.

Timing of receiving the articles is dependent upon the state as well. Some states provide them immediately online, and others send them through the mail. If you are using Corporate Direct to form your company, your Incorporating Specialist will be able to give you all the details according to your state in a free 15-minute consultation. 

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5 Step Checklist to Picking a Successful Business Name

by | May 18, 2016 | BUSINESS CREDIT, Corporate Direct, STARTING A BUSINESS

Could a business name affect your personal liability, business credit or even your ability to run your business at all. The answer to all the above is, “yes.” Read on to determine if your business name sets you up for success, or trouble down the road.

1. Is the Name Available in All States You Do Business In?

You cannot use the name of a corporation, LLC or LP that is already in use and registered with the state. If you’re going to organize in one state and qualify to do business in another state, the name should be available in both states. A corporate name should not be confused with a trade name or trademark.

2. Is the Name Trademark Clear?

Just because you can incorporate under the name ‘Coca Cola, Inc.’ in your home state doesn’t mean you could use the name in your trade or business. There is a big company in Atlanta that would put an end to that (and would be well within their rights to do so). So while you may be able to incorporate using one name, you will not automatically be protected in using your corporate name as a trade name, unless you file for trademark protection. See if someone has already trademarked it by doing a search at uspto.gov, the website for the U.S. Patent and Trademark Office. You don’t want to use a name that someone could (rightfully) demand you stop using because it infringes on their existing trademark. We also offer a free report on this issue, “Winning with Trademarks.”

3. Will the Name Affect Your Business Credit

Please choose your business name carefully! In our experience there are certain types of names that should be avoided for business credit building purposes. These include names like
XXX Holdings, XXX Mortgage, XXX Properties, XXX Real Estate, and the like. (It is not the X’s we care about but the words Holdings, Mortgage, Properties and Real Estate.) That industry is considered a high risk industry and with certain types of business credit, you are judged by the company you keep.

4. Using Your Own Name is a Poor Exit Strategy

Please try not to choose your own name as the name of your business, either, unless you really don’t care about growing your business to a point where you can cash out. Paul Newman
and Martha Stewart aside, owner named businesses can sound less professional. Which sounds more established: Kevin’s Landscaping, or Leisure Landscapes?

And if you do decide to sell the business do you want a new owner potentially dragging your good name through the mud? Take some time to think through your business name
and bounce it off some other businesspeople and potential clients. Run it through several search engines.

You don’t want to be stuck with a name you may later outgrow. A good name with an established reputation and clientele, trademark protection and domain names, is truly a
business asset.

5. Don’t Forget to Add These Letters to Your Biz Name

It is important to provide the public with notice that your business is a corporation, LLC or LP. To that end, you’ll use Inc., LLC, or LP, for example, on your letterhead as well as on all of your brochures, contracts, checks, cards, and the like. This is sometimes referred to as giving “corporate notice.” If you are incorporated but sign your contracts as ‘Joe Jones’ instead of ‘Joe Jones, President of XYZ, Inc.’ someone could assert they thought they were doing business with you personally (unlimited liability) instead of with a corporation (limited liability). Provide corporate notice wherever you can.