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anonymous
Posted over 2 years ago.

Great explanation. However a few follow up questions: What about the fact that Nevada has no Franchise tax or Corporate tax or at least no tax on corporate profits. Would this LLC be required to still pay tax on profits and franchise tax at a corporate level or just pay tax on profit distribution on a personal level?

What happens if the Nevada LLC files as an S-Corp such that the profit distribution isn't taxed but only the "reasonable" salary is taxed?

Lastly, by reading your message, it doesn't appear there's any benefit in incorporating outside the home state, so why do you prefer to incorporate in DE? Mostly because of the ease and the state laws being "corporation friendly" but there's nothing to gain taxation wise?

Thanks

Kenneth Allyn Sprang
Kenneth Allyn Sprang, Limited Liability Company (LLC) Lawyer - Washington, DC
Posted over 2 years ago.

Great explanation. However a few follow up questions:

/What about the fact that Nevada has no Franchise tax or Corporate tax
or at least no tax on corporate profits. Would this LLC be required to
still pay tax on profits and franchise tax at a corporate level or just
pay tax on profit distribution on a personal level?
/
Nevada has no franchise tax but there is an annual fee of $125 at least
plus other fees along the way. It is slightly more expensive than DE in
that sense.

A company, either corporation or LLC, organized in NV or DE pays no
income tax in either place. NV has none and DE assesses none unless you
operate there.

An LLC passes profits and losses through to its owner as earned income.
If the LLC elects S corp status, there is some self employment tax
savings depending on the reasonable salary applicable. An S corp has
the same result. In other words, your income will be reported on your
own 1040 in any event.

The LLC is a "disregarded entity" as is the S corporation, so only the
individual pays tax. You would pay in MD. You will also pay the MD
personal property tax or at least the filing fee.

/What happens if the Nevada LLC files as an S-Corp such that the profit
distribution isn't taxed but only the "reasonable" salary is taxed? /

That is not quite right. The reasonable salary will be taxed in MD and
by the IRS at regular income tax rates. Anything over the reasonable
salary is taxable. However it is not subject to FICA, which saves 15.3%
on the amount between the salry and $110,000. The non salary
distribution is subject to income tax in MD and with the IRS.

/Lastly, by reading your message, it doesn't appear there's any benefit
in incorporating outside the home state, so why do you prefer to
incorporate in DE? Mostly because of the ease and the state laws being
"corporation friendly" but there's nothing to gain taxation wise? /

If you are the only owner and if you have no plans to seek investment
capital, go public, get acquired, or take on new members or owners,
there is no reason to organize outside of MD. MD is slow and
inefficient at times, but once you are organized you just have some
annual filings to address and your accountant will do your 1040.

For clients wanting to go public, to sell to a larger company, or for
clients with many owners, DE has some logistical and administrative
advantages. For example, it is much easier to convert an LLC to a
corporation in DE than in many other states.

If I understand your circumstances correctly, at this juncture a simple
MD LLC may serve your purpose. Whether you elect S corp tax status is a
business/tax decision, of course. If you were to have other members, I
might give different advice. In a real sense, there is rarely a "one
size fits all" answer, of course.

Best regards,

Ken






/Kenneth A. Sprang
Cicero, Mehta & Sprang, LLP
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Direct Dial: (202) 677-4703 or (202) 683-4090
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anonymous
Posted over 2 years ago.

Thanks Ken,

Very thorough! Ok, so one last question following up from your advice:

We're a two people team, and want to incorporate a company. We are anticipating bootsrapping the company and while we're not expecting to either add shareholders, raise money or offer equity in the short term. In the long term who knows.

Is it beneficial to incorporate in DE or MD? Considering one of us is an MD resident, and the other is a NY resident and the business will offer a hosted communications service initially to residents of the tri-state area (VA, DC, MD) but who knows where/how the word of mouth spreads and it could go national.

I hear the MD yearly fee is $300 + they seem a bit slack and inefficient. Also, if the LLC is in MD it might have to pay its own taxes at the corporate level or is that never true in the case of an LLC/S-Corp regardless of the state?

Thanks in Advance