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How To Start Your Own Corporation: S-Corporations For Small Business Owners.

So, You Want To Form A Corporation (Part 2)

Deciding Upon A State Of Incorporation

One of the first things you'll need to do to form a corporation is decide upon a state in which to incorporate. As I discuss in How To Start And Run Your Own Corporation: S-Corporations For Small Business Owners, unless you plan to take your company public, you might want to select your home state as your state of incorporation.

Some people will tell you to incorporate in Nevada to save tax dollars (for C-corporations, Nevada has no corporate state income tax). Alas, saving state tax dollars doesn't occur simply because you incorporate in Nevada. Regardless of your state of incorporation, you'll be required to register to "do business" in any state in which your corporation has employees, generates sales, and owns property. Incorporating Your Business For Dummies has a good discussion of the concept of "doing business.")

Registering to do business means that you're fully subject to that state's tax laws, including needing to pay state income tax on your C-corporation earnings generated within the state. (Because S-corporations are pass-through entities from a tax-standpoint and all earnings pass through to the shareholders, S-corporations won't gain a tax savings by incorporating in another state. You'll pay federal and state taxes where you're a resident. So, for S-Corporations, there is little tax advantage to incorporating in any state other than your home state How To Start And Run Your Own Corporation: S-Corporations For Small Business Owners discusses S-corporation taxation in more detail and includes a sample 1120S tax return and K-1s for a fictitious company. I also discuss choosing between an S-corporation and a C-corporation.)

I came upon an interesting website that suggested the average entrepreneur needed no less than three Nevada C-corporations! One corporation, for example, was designed to provide marketing services to the main company. The argument was that this arrangement helped protect assets and lower taxes due to income splitting. (Income splitting means that you divide income among multiple taxable entities to reduce the incremental tax bracket into which income falls. Income splitting between multiple C-corporations is greatly overrated, as I mention in How To Start And Run Your Own Corporation: S-Corporations For Small Business Owners.)

Curiously, the company promoting all these Nevada corporations is in the business of helping people form Nevada corporations. Surprisingly, there is an entire cottage industry of people who provide incorporation services in Nevada. (If these organizations charge $100 to $200 to form a corporation and get 1,000 people to incorporate in Nevada each year, you can see they earn decent money. It's not that they don't have good intentions, just that they clearly benefit by believing Nevada is the best place to incorporate and that C-corporations are preferable to S-corporations.)

The Essential Corporation Handbook has a good discussion nullifying the argument that forming multiple corporations better protects assets (because each corporation only owns a portion of your total assets). It discusses well-known taxi-cab cases, where groups of taxis or individual taxis are each incorporated separately. The usual result is that if one of these companies is sued, all the corporations are treated as a single entity subject to the lawsuit. Further, a good attorney might be able to argue that the corporations were formed to explicitly avoid paying reasonable business liabilities. That could subject the owners to personal liability.

One case where incorporating in Nevada or Delaware might be useful is if the entrepreneur moves a lot between different states. If you live in Ohio, but will be moving to Wisconsin, there seems to be little reason to incorporate in Ohio. But, overall, be sure to examine your own state as a place to incorporate, especially if you are a long-term resident.

How To Start And Run Your Own Corporation: S-Corporations For Small Business Owners
How To Start And Run Your Own Corporation: S-Corporations For Small Business Owners

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