QUESTION: "I run an online business, what state should I setup my LLC in?"
This is a tricky question and not quite as straight-forward as it was a few years ago. It used to be as simple as "setup in ANY one of the few states that do not have a corporate income tax such as NV, WA, WY and SD or even TX(they have a "franchise tax")." And there are even companies that love to incorporate in DE due to their laws which are favorable towards privacy and protection, however, to squash the myth that there is NO corporate income tax there, this is directly from the State of Delaware Department of Revenue site:
The question is much trickier now thanks to "Nexus". This is the provision that many state tax boards are invoking to collect tax revenues lost due to businesses who setup out of state or off-shore corporations to avoid state income taxes.
Generally, you should be setting up in the state that your business is located in and you are liable for paying income tax in any of the states which you operate/receive business.Here's the official wording of the "Nexus" provision:
Most eCommerce stores try to argue against the first test since business is conducted online and it should be difficult to determine which state the activities are performed(the seller's state? the buyer's state? the state the web-hosting servers are located in?).
This has been big news in the last year mainly due to Amazon closing down many of its affiliate operations as a result of this very issue. Essentially, Amazon affiliates need to be compliant with the state in which they are LOCATED despite Amazon being based in WA(a state w/o individual OR corporate income tax) and having servers located in TX(another state w/o individual OR corporate income tax). Instead of becoming compliant and keeping the "hand that feeds them" happy, Amazon cut off affiliate operations in many states. Overnight, many legitimate affiliates(or "hitch-hikers" as MJ likes to refer to them as ) closed down b/c Amazon was too cheap/lazy to become compliant.
ANSWER: In conclusion, what state should you setup in?
This is dependent on many factors unique to YOUR business and is a service we provide(see sig for link to our site), however, if you do choose to go elsewhere, I highly recommend another Fastlane regular, GlobalWealth.
Just please do NOT setup through LegalZoom or any online "legal setup" service.
It's better to do things right the first time and pay a little more up-front than having the "sticker shock" of a huge state income tax bill w/ added interest and penalties that could end up costing 10x what proper legal setup costs would've in the first place.
This is a tricky question and not quite as straight-forward as it was a few years ago. It used to be as simple as "setup in ANY one of the few states that do not have a corporate income tax such as NV, WA, WY and SD or even TX(they have a "franchise tax")." And there are even companies that love to incorporate in DE due to their laws which are favorable towards privacy and protection, however, to squash the myth that there is NO corporate income tax there, this is directly from the State of Delaware Department of Revenue site:
Q. What entities must file and/or pay Delaware corporate income tax?A. Every domestic or foreign corporation doing business in Delaware, not specifically exempt under Section 1902(b), Title 30, Delaware Code, is required to file a corporate income tax return (Form 1100 or Form 1100EZ) regardless of the amount, if any, of its gross income or its taxable income. The taxable status of a corporation in Delaware follows the federal treatment of the corporation.
The question is much trickier now thanks to "Nexus". This is the provision that many state tax boards are invoking to collect tax revenues lost due to businesses who setup out of state or off-shore corporations to avoid state income taxes.
Generally, you should be setting up in the state that your business is located in and you are liable for paying income tax in any of the states which you operate/receive business.Here's the official wording of the "Nexus" provision:
States are not permitted to tax income of a corporation unless four tests are met under Complete Auto Transit, Inc. v. Brady:
- There must be a substantial connection (nexus) between the taxpayer's activities and the state
- The tax must not discriminate against interstate commerce
- The tax must be fairly apportioned
- There must be a fair relationship to services provided
Most eCommerce stores try to argue against the first test since business is conducted online and it should be difficult to determine which state the activities are performed(the seller's state? the buyer's state? the state the web-hosting servers are located in?).
This has been big news in the last year mainly due to Amazon closing down many of its affiliate operations as a result of this very issue. Essentially, Amazon affiliates need to be compliant with the state in which they are LOCATED despite Amazon being based in WA(a state w/o individual OR corporate income tax) and having servers located in TX(another state w/o individual OR corporate income tax). Instead of becoming compliant and keeping the "hand that feeds them" happy, Amazon cut off affiliate operations in many states. Overnight, many legitimate affiliates(or "hitch-hikers" as MJ likes to refer to them as ) closed down b/c Amazon was too cheap/lazy to become compliant.
ANSWER: In conclusion, what state should you setup in?
This is dependent on many factors unique to YOUR business and is a service we provide(see sig for link to our site), however, if you do choose to go elsewhere, I highly recommend another Fastlane regular, GlobalWealth.
Just please do NOT setup through LegalZoom or any online "legal setup" service.
It's better to do things right the first time and pay a little more up-front than having the "sticker shock" of a huge state income tax bill w/ added interest and penalties that could end up costing 10x what proper legal setup costs would've in the first place.
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