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Live In Maryland but Want To Create a LLC in Nevada

Lusby, MD |

I live in Maryland and have no plans to move but I want to create a LLC in Nevada for tax purposes. I am an affiliate marketer and make my living online through various websites I own.

I act as a middle man for different companies that sell services. I collect leads/traffic on my websites and send it to the actual provider of the service.

I file as a sole proprietor right now and do not have any employees nor do I plan on having any. I don't actually conduct any business in Maryland or sell any physical products, period.

I want to make sure I have no obligation to pay Maryland income taxes if I create a LLC in Nevada and it's 100% legal. I'm not looking to do anything shady just looking for LEGAL tax sheltering.

Kenneth I should have mentioned I don't have a physical business address in Maryland I work out of my home. If I have a LLC in Nevada and all the income from that business goes through a bank account registered in my Nevada business name are saying I will still have to pay Maryland income tax on that income? Nevada doesn't have state tax which is one reason I wanted to create the LLC there. * Also do you have an office in Southern MD?

Attorney Answers 3

Posted

I fear you may have received some unsound advice. There are no tax advantages of any consequence in organizing in Nevada. For many years Delaware has been the state of choice for many companies for both LLC's and corporations, as they are efficient, reasonable in cost, and provide awesome service. They also have good case law when legal issues arise and progressive statutes that favor business. I use Delaware for clients whenever I can.

In recent years Nevada has sought to be a competitor. Delaware allows a company to organize there without a physical presence in the state. One's registered agent fills that purpose and the company I use charges $50 annually for the service. I have not explored Nevada's fees, but I know Delaware's are relatively modest. One does not pay tax in Delaware for a Delaware company unless the business actually operates in Delaware.

If you operate from Maryland you will pay income tax on earnings in Maryland. You will also likely pay the state personal property tax. There is no way to escape the state income tax that I know of. Practically, by operating in Maryland your company takes advantage of MD services and therefore, like you and I, it pays taxes.

I am admitted in Maryland and represent a number of companies here. When possible I organize in Delaware and register as a foreign company in Maryland. However, that does not evade income tax in Maryland.

Finally, if tax savings is part of your goal you might be better off with an S corporation than with an LLC. There are potential tax advantages with the S corporation. You can achieve them with an LLC by electing S taxation, but it seems a bit cumbersome. As my accountant says, if you are going to be taxed as an S corporation why not be an S corporation. You may wish to read my Avvo article on the subject.

I would be happy to discuss if you like.

Kindest regards,

Ken Sprang
Cicero, Mehta & Sprang, LLP
ksprang@cmslawdc.com

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Asker

Posted

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

Posted

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 1000 Potomac Street 5th Floor Washington, DC 20007 Direct Dial: (202) 677-4703 or (202) 683-4090 Fax: (202) 677-4719 <mailto:ksprang@pkjlaw.com> / /ksprang@cmslawdc.com/ IRS CIRCULAR 230 NOTICE: /In compliance with IRS requirements, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties or in connection with marketing or promotional materials./ STATEMENT OF CONFIDENTIALITY: /The information contained in this electronic message and any attachments to this message are intended for the exclusive use of the addressee(s) and may contain confidential or privileged information. If you are not the intended recipient, or the person responsible for delivering the e-mail to the intended recipient, be advised you have received this message in error and that any use, dissemination, forwarding, printing, or copying is strictly prohibited/

Asker

Posted

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

Posted

I agree with attorney Sprang. You may have received bad advice, and/or have misconceived ideas about avoiding Maryland Tax if you live in Maryland. I have written computer tax programs for Maryland, and you can be sure that MD will tax your income from the entity you chose if you live there.

I also agree that an S Corp. may be your entity of choice if you are solely providing services. You should at least seek the counsel of an attorney for a consultation before you form your business entity. Sounds like attorney Sprang would be a good choice as he practices in DC!

THESE COMMENTS ARE NOT LEGAL ADVICE. They are provided for informational purposes only. Actual legal advice can only be provided after consultation by an attorney licensed in your jurisdiction. The answer to question does not create an attorney-client relationship or otherwise require further consultation. Mr. Smith is licensed to practice law throughout the state of California with offices in Los Angeles County. He is authorized to handle IRS matters throughout the United States, and is also licensed to practice before the United States Tax Court. His phone number is 323-292-4116 or his email address is philsmithjr@worldclasslawyers.com.

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Posted

If you reside in Maryland, you will definitely be taxed on your world-wide taxable income regardless of where it is earned. Even if Nevada has no income tax, your Nevada LLC income will pass through on your federal and Maryland returns. If you want to stop paying Maryland taxes you must relocate out of state formally. Good luck!

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