This kind of thing comes up all the time
with the widespread interconnections of online
California is especially aggressive about demanding
tax money from companies operating within her borders.
MA seems to be easier - as long as you file the LLC as
a partnership for IRS tax purposes.
"LLCs are treated in the same manner as they are treated for
federal income tax purposes. Accordingly, a non-Massachusetts
single-member LLC will be disregarded as an entity separate from
its owner for Massachusetts income tax purposes (and thus treated
as a sole proprietorship, branch, or division of the owner) if
it is so disregarded for federal income tax purposes. "
Knowing that you will not be operating in Delaware,
(which means you don't have to file any tax returns there)
the basic question is, where will you really be operating.
Think in terms of:
1) Where is the bank account located?
2) Where are your servers physically located?
3) What is your mailing address (i.e. where do
you get your mail)?
4) If you want to bring a lawsuit, what state do
you want to go to file and attend court?
5) In order to operate, what is the most convenient
place for you to be?
6) When someone calls on the phone, where is the
person who answers it?
We're talking 'nexus' here.
To get an idea of the issue, read this article
from September 2001
Fundamentally, if you're really doing business in California,
you will end up having to register in California as a foreign
corporation. You will have to notify the Secretary of State
who is your agent for service.
As an LLC in California, you will get hit with a gross receipts
tax. As an S-corp, you won't. Your only tax would be on the net
profits of the company.
I've been through this with Nevada corporations of clients.
If you are operating here in California, you may as well register.
Otherwise, you have no recourse if you want to sue someone, either.
Rethink that LLC thing if you end up in California, though.
One of my clients with a $100,000 net operating loss in his
LLC was shocked when he was hit with over $10,000 in California
taxes because of his gross receipts.
Let me know if I can clarify anything.
Clarification of Answer by
14 Nov 2002 20:59 PST
P.S. Registering in California, where you are, will make
your life substantially easier in one more way.
You can get your mail directly at your address, instead
of waiting the additional time to get your mail forwarded
from Nevada, Delaware or Washington, wherever your company's
mailing address is for your Delaware corp. (Trust me on this.
It's made some of my clients look really unprofessional to
their customers due to the extra week or two of forwarding
to keep up the Nevada pretense.)
Request for Answer Clarification by
15 Nov 2002 00:38 PST
First off thanks for the GREAT feedback! Well I have learned more
about LLC, INC. in the past week than I wanted to know but that is OK
due to the fact I know this is a very importaint step. We had moved
away from the idea of Delaware, moved into the idea of Nevada but now
that 1 partner is in MA we had thought about doing the LLC there. But
based on your questions, the answers bring us back to Ca. The big
issue really is the Franchise Tax of 800 bucks here in CA. Do I
understand that correctly "no matter" how little (loss etc) or how
much we make in net income, I will still have to pay 800 bucks each
year? ( If we do the LLC here in Calif. ) And I think the 800 bucks
applies to a C and S corp. here in Ca. as well - am I correct on that?
By the way good points on the mail forward issues.... As a Web Hosting
Company we do not do much mailing's with clients - but good to know,
as Customer Service is really the number one thing that set's us
Take care ...
Let me know your thoughts on the above,
Clarification of Answer by
15 Nov 2002 07:23 PST
Good Morning Paragon,
Thanks for all the kind words.
That $800 minimum fee to Franchise Tax Board
applies to practically any entity - Limited
Partnerships, LLCs, LLPs, S-Corps and Corps.
Just about the only thing it doesn't apply to
is a general partnership.
What's interesting is that for new entities,
FTB waives the $800 minimum fee for the first
year. Your only tax will be based on the net
income of that entity (except LLCs, which will
be on the Gross Receipts).
They've also done away with the additional $800
we used to have to deposit with them when we
set up the corporations. (Aside from the payment,
it used to cause so much confusion because people
thought it was their first year's tax payment.)
You'll be able to see some of the specific fees
for the various entities, if you start here.
Ah, finally, and here are your fees for LLCs, in
addition to the annual $800 minimum
Now, here's an interesting thought.
You could form two LLCs or S-Corps in Nevada.
Set up a general partnership (GP) in California
(no minimum fees). Make the partners be the
two LLCs or S-Corps (since a partnership
must include two or more entities).
Run the whole business through the California GP.
You will have no State of California taxes.
You will have the liability protection you want.
You will pay an extra $75 or annually to Nevada
for the registration fee for the extra entity.
The tax returns for those two LLCs or S-Corps
will be easy, just the K-1's. You could practically
do them yourself.
And all the income will pass through to each
of you on the K-1's from your own LLCs or S-Corps.
How's that for an idea. Just saved you a whole
bunch of money and still made your day-to-day
Check with an attorney to make sure this will work.
P.S. See what happens when you flatter me.
You get me to be even more creative.
Request for Answer Clarification by
15 Nov 2002 23:10 PST
Wow, now that is some solution!
However we worked with my local CPA and since my partner is in MA, we
now have setup the LLC there. Lots to register there about 500 bills
but I have yet to find a real answer to the Min Tax there, I found
info on S and C corp. min tax is 454.00 or there abouts, but we have
just created a LLC there and not sure if that min tax applies to
LLC's... well I would not be surprised based on your expertise that
you may have some insight on MA ? - I promise you, I am not going to
have any more questions as I am really making my 20 bucks go far here,
But our corp. head Q. is pretty much based in MA as my partner is
doing the gig full time VS myself and the other partner here in CA
this is part time gig for us. So thus the justification for head
quarters based out of MA since most of the work will be there. But it
is a Hosting Company so our Market Place is the world....
Take care, I am on Vacation for a week but look forward to results on
this interesting thread!
Bye for now,
Clarification of Answer by
17 Nov 2002 20:38 PST
In readng the information in MA, it appears that
the minimum LLC tax, if any, will follow the rules
of the entity whose return you file.
An LLC can be filed as a partnership or a corporation.
If you file as a partnership, you won't have any
minimum tax. If you file as a corporation, you'll
have the corporate minimum tax.
Have your MA partner's local tax pro help you three
work out the best entity for your situation.
Good luck with the new business.
Looks like you're doing the right things.
Which state will the business (that is, the corporate
offices) actually be within?
For instance, in Delaware:
Corporations who are incorporated in Delaware and whose activities are
limited to maintaining a statutory corporate office and not conducting
business within Delaware, are exempt from filing the Delaware
Corporate Income Tax Return under Section 1902(b)(6) of Title 30 of
the Delaware Code.
They have further information on LLCs through the above link.
In general, LLCs don't pay taxes (that's one of the reasons
LLCs exist...) themselves as the income "flows" to the income
of the partners, and then individual state taxes are paid
based on their income as stated on their individual federal
If it is going to be a totally virtual company (that is, the
company will not actually have offices, not own the servers,
etc.) then the residences of the partners should not matter,
other than them paying their respective individual state
That said, it might not make sense to do an LLC, but rather
you might want to investigate doing a different corporate
structure (one where the income does not flow directly to
the partners) and incorporate that in one of the states that
do not have corporate taxes, such as (in different forms)
Delaware, Nevada, South Dakota, Texas, Wyoming, etc.
Nevada seems to be a real intersting place to incorporate:
1.) No Shares Tax On Corporations
2.) No Franchise Tax On Corporations
3.) No Succession Tax On Corporations
4.) No Personal Income Tax On Corporations
5.) No Corporate Income Tax On Corporations
6.) Minimal Reporting And Disclosure On Nevada Corporations
7.) No IRS "Info" Sharing On Nevada Corporations (Nevada Is Private!)
8.) Corporate Stockholders Are Private In Nevada Corporations