Tax Savings in Deleware
Many Americans have heard that the small east coast state of Delaware is the place to incorporate a business. If, as we have said, you intend to conduct a multi-state business, Delaware may well be the jurisdiction in which to consider your incorporation.That's because the corporation laws of Delaware have been tailored by the state legislature to fit the needs of businesses, large and small. Not only are Delaware corporation fees low, but its corporation laws are liberal, flexible and impose only minimal requirements on a business wherever it may be located physically.
There's also the advantages and certainty that flows from decades of Delaware pro-management judicial decisions defining the meaning of almost every aspect of business law.
The state requires no minimal capital investment, while many other states require at least an investment of $500 or $1,000 to start. Delaware allows an anonymous one-person incorporation process that can be achieved by fax, phone or mail without ever having to visit the state. The state does not tax Delaware corporations that conduct no business in the state. Annual franchise fees are as low as $50.00 in most cases. Stock in Delaware companies owned by people outside the state is also income and estate tax free. Stockholders and directors can operate by unanimous consent in lieu of formal meetings and dividends can be paid out of profits as well as surplus.
In other words, Delaware makes corporate life easy for business because it depends on attracting and holding a high volume of businesses that produce major revenues for the state, second only to the state income tax.
At one time Delaware corporation laws were the most liberal in the nation, allowing great flexibility in business operation. This was particularly valuable to major corporations with thousands of stockholders all over the country and the world. That's why so many "Fortune 500" companies call Delaware their corporate home.
But for small, closely-held or family businesses, these powers are essentially meaningless since they don't need them. then too, many other states have liberalized their own laws in order to compete with Delaware and keep their local business at home.
Nevada, for example, is even more liberal than Delaware in both taxes and corporation laws and has great popularity these days among businesses.
Tax Savings In Nevada
Nevada is one of several states that have no corporate income tax, no state personal income tax and no corporate franchise tax.Many large corporations use Nevada for warehousing because there is no inventory tax. That may seem beyond the reach of your small company, but if you organize all or part of your business as a Nevada corporation, you can contract with a local warehousing and fulfillment service to process and ship orders from Nevada.
Already such companies as Citibank and Porsche North America have moved their corporate headquarters to Nevada. For as little as $2,500 in corporate start-up fees, you can enjoy the same advantages as these corporate giants.
One of the major reasons for Nevada incorporation is the absence of a state income tax. If you live and do business in a high-tax state this can be the crucial factor. In California, for example, corporations pay a minimum of $9,600 on every $100,000 of taxable income.
If minimizing taxes is your concern, the strategy is to form a Nevada corporation and allow profits to accumulate there rather than in the high tax state in which you presently do business.
This is not difficult to accomplish. Suppose you have a small business with a major element of production or service that can be handled from Nevada. Locating a successful service corporation in Nevada means carefully avoiding rendering that service in a high-tax state. To do otherwise would subject the Nevada corporation to the high-tax state jurisdiction where it would have to pay. But a sales representative who travels a ten- state area can work for a Nevada distributor servicing those western states, paying salary and expenses out of the Nevada corporation and retaining sufficient commission to keep most of the profits in Nevada instead of the higher-tax state in which the rest of business is physically headquartered.
A company in a high-tax state can contract for sales management services from a Nevada corporation, paying that company a fixed fee in return for its employing your salesmen. Current employees can be switched to the new Nevada employer at the same salary and doing the same job. The only difference is the source of the paycheck.
The Nevada sales management company fee reasonably might be set at $75,000, a cool $47,000 more in management fees than your salesman's previously salary, meaning suddenly any net profit on his operation is cut to zero. That's good news because wiping out profit means no corporate income tax will be imposed in your own high-tax jurisdiction. Your Nevada corporate net profit is a non-taxable $47,000 and it's perfectly legal, so long as the invoicing, accounting and management of the sales activity is actually done by the Nevada corporation.
Transferring income and profit from high-tax jurisdictions to low-tax states is now common, and it works for any business sales or services other than those of a purely local nature.
Nevada corporate tax savings make incorporation there worth considering even if you have never incorporated before. Attractive tax benefits have spawned a whole new Nevada-based service industry to assist incorporation in that state. These are only corporate formation agents, not lawyers or accountants and any Nevada lawyer or accountant can perform the same service and render professional advice as well.
The most common pitfall in using a Nevada corporation is the temptation to cut corners, ignoring legal requirements. Unless all legal technicalities are strictly observed, directors meetings held, records kept, a company stands to lose not only tax savings, but the many other corporate protections offered under Nevada's liberal laws.
A professional incorporation service will be pleased to form your corporation in Delaware, Nevada, your home state or any other state you choose. I especially recommend the services of IncPlan USA who are small enough to give personal service, and can form corporations in all 50 states and the District of Columbia.
About the Author Adam Starchild has been writing on business and taxes for over 20 years, and is the author of over 20 books on these subjects. The above article is reprinted with permission from his book How to Save on Your Taxes Without Cheating.
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