Some of my clients get ideas off the Internet and often present me with a “great idea” that they read about. This time the idea was the suggestion that they could save a lot of money in taxes if they formed a corporation in Nevada or Florida. My first question was why Nevada or Florida? I was told that Nevada (and four other states) has no corporate (or individual) income taxes.
Sounds too good to be true? That’s because it is not true.
While it is true that if you form a corporation in Nevada or several other states, you will not have to pay any corporate or individual income taxes in that state. The hitch…. You have to do business solely in Nevada or that other state. Once your corporation ventures out to do business in other taxable states, the other states will demand that you pay income tax on your earnings or profits.
When your Nevada entity does business in other states, for example in Illinois, the Nevada entity must register itself with the Illinois Secretary of State as a foreign corporation that does business in Illinois and of course will be charged a fee to register. Doing business in a state other than Nevada means that you may have an office, employees, business dealings in Illinois and the state will make sure that it collects tax dollars from your Nevada corporation. If you fail to register in the foreign state, you will not have rights or access to the courts or other state rights like an entity formed in that state and some states even consider failure to register a criminal act. In addition, using a Nevada corporation in another state will make it much harder to start a banking relationship in the other state even though most banks today do business nationally.
As you can see, even though you will not owe any tax in Nevada, you will owe tax in the state or states where your Nevada corporation does business. The result: No tax savings and many more tax returns to prepare and file.
“OK” he said “but Nevada has business friendly laws?” Again, great idea but if you are not doing business in Nevada, you cannot take advantage if its laws. The laws of the state where are doing business will govern.
My advice is that unless you will be doing most of your business in Nevada, there is no reason to form a corporation there. When it comes to incorporating, stick close to home.
Donald Kindwald is a business lawyer that practices in Chicago. If you would like to discuss your particular situation, he may be contacted at 312.229.1675 or firstname.lastname@example.org.