Tax Advantages

Tax Advantages

If a corporation or LLC is required to register in a taxing state, does this defeat the purpose of forming a Nevada or Wyoming company?

The issue here is the question of whether it is useful for a person to form a corporation(LLC) in a state like Nevada or Wyoming that does not tax its corporations. if the corporation would have to register in the home state of the owner and the home state does tax the income of  its corporations as well as that of “foreign companies” doing business in that state.

    What is necessary to constitute “doing business”  and thus triggering the registration statutes is not the subject of this discussion. This can be a complex issue but can generally assume that it requires some type of “presence” in the state such as employees, warehousing, etc.  Assume that the Nevada or Wyoming corporation is required to register in the state of the owner because it is “doing business” in that state; using California as an example.  The result of the registration is the requirement that the corporation pay taxes on money earned in the state of California.  The owner must now ask himself what advantage there is to being in Nevada or Wyoming. It would seem that if the only business that the corporation does is in California, then there is really no advantage.  However, if one intends that his company will sell products or services to people living in other states, then there is a decided advantage to remaining in Nevada or Wyoming for the following reasons.

    If one were to form a corporation in California, that state demands that the corporation pay income tax on all of its income, wherever earned.  There is one exception to this.  Where one must pay taxes on the same income in another state because of “doing business” in that state also, there is a complex interstate compact (agreement among all the states) that allows for credits so that a corporation does not have to pay taxes to two different states on the same income.  Now, assuming that the corporation is formed in Nevada or Wyoming, (two states that do not tax the incomes of their corporations), even if the corporation has to register in California and pay the income taxes for income earned in California, it does not have to pay taxes on income earned from sales going to persons in other states.  In other words, if the corporation is not actually “doing business” in other states but is really doing business through interstate commerce and has no presence in these other states, there will be no state income tax to the corporation from sales in those states.

The conclusion to be drawn from these facts is that there may be substantial tax savings to be obtained by forming a corporation in Nevada or Wyoming even if the company is required to register in a taxing state if the company will make sales in other states.