What is the best state to incorporate in for a foreign startup?

What is the best state to incorporate in for a foreign startup?

Answer by Wray Rives:

There are so many variables, all I can do is give you some general ideas about foreign nonresident owners of US entities and what states make “tax sense” for the non-resident owners. First I assume you that you want to set up a US based business entity that will be owned by non-US individuals. Following are some state specific things to consider.

Delaware

-The state you probably read about online the most for incorporation. (when I say incorporation, I equally mean forming a C corporation or formation of an LLC) There is probably more mis-information available online about incorporation in DE than reliable information. see https://www.linkedin.com/pulse/w… The pros are DE has favorable laws and court systems that appeal to outside third party investors. If you will have venture capital investors, they will probably appreciate your having a DE C Corp. If no outside investors, then DE is probably not your best choice.  DE has relatively high annual franchise tax and the potential to owe state income and/or gross receipts tax.

Wyoming

-There is no state income tax and essentially no sales tax in Wyoming. Added benefit is WY has a flat scale for annual franchise tax. The maximum WY franchise tax will probably be about 1/2 of the minimum for DE. For most small businesses annual fee will only be around $50 per year. Downside is WY is not very populated. If you want to use services in the state like virtual mail addresses and such, it can be a challenge to find service providers.

Nevada

-Another state with no state income tax and zero to fairly low annual franchise fees. Nevada does have a number of other business licensing regulations.  Depending on the type of work, it may not be worth the headache.

Texas

-Extremely business friendly state. Low regulations and low annual cost to keep your entity in compliance. TX is also the second most populous state in the US, so unlike WY, you can find anything you want from TX based service providers. Franchise tax rate is actually -0- until you have more than $1.3M in annual revenue. TX does have a substantial sales tax and might not make sense if you are selling tangible items or taxable services.

New York or California

-I get a number of non-US clients who think it looks more prestigious to be a CA or NY company. If you have strong business reasons to want to do this, I understand. You need to understand prestige will cost you. NY and CA have some of the highest state level tax burdens in the US.

Florida

-FL comes up occasionally as a state for non-residents to form their LLC and the state is not necessarily a bad choice. While FL has no individual income tax, it does have corporate income tax, which can be a problem if at some future date you convert your LLC to a corporation. FL just does not give me a compelling reason to choose it. If your brother lives in FL, then go visit him for vacation, but set up your LLC or Corporation in WY or TX.

Final Thoughts

Final advice is have a conversation with a US tax professional. There are so many variables that can change what is “best” for you depending on ownership, potential tax treaties and the type of business you will operate. We have not even touched on potential US federal taxes for your business. You need to consider the pros and cons of your specific situation because there is no “one size fits all” plan for non-residents looking to set up a business in the US.

 

When employing an independent contractor in CA establishes sales or income tax nexus for a Seattle company?

My answer to When can employing an independent contractor in CA establish sales or income tax nexus for a Seattle c…

Answer by Wray Rives:

Just using an independent contractor in California would not create nexus in CA; however, there are several common, potential issues that typically come up in this scenario.

  • If the independent contractor is authorized to act as an agent of the company. This could be as simple as being able to approve customer refund or authorize return of items sold. An agency relationship would create nexus.
  • If the independent contractor uses, stores or maintains any assets of the company in CA. Inventory, vehicles, equipment or samples for example.
  • If the company is determined to misrepresent the relationship between the company and the independent contractor. It is very common for companies to effectively use an independent contractor as an employee. Just the fact that you phrase your question as “employ an independent contractor” might be construed that you in truth consider the relationship to be that of employer/employee.

 

How is tax fraud detected?

The vast majority of fraud is detected by four methods:

  1. top secret algorithms that evaluate data from every tax return that is filed. Specifics are a very closely guarded secret, but generally they are looking for outliers or patterns that warrant additional investigation
  2. more simplistic data matching of numbers that get reported from multiple sources

  3. random selection of returns for audit

  4. whistleblower incentives (whistleblowers can receive up to 30% of tax collected)

The average taxpayer is much more likely to be the victim of a fraudulent tax return than the perpertrator, so you also might be interested in: Identity theft and fraudulent tax returns

Is it worth creating an LLC in Delaware while operating an e-commerce business out of New Jersey? What are the pro’s/cons?

Is it worth creating an LLC in Delaware while operating an e-commerce business out of New Jersey? 

Answer by Wray Rives:

Should you register you startup LLC e-commerce business in Delaware? If you operate the business in New Jersey, you will still have to register the LLC as doing business in New Jersey and pay New Jersey taxes. What you accomplish is having to file taxes in two states, DE and NJ, rather than in just one, NJ.

You see a lot of publicly traded businesses registered in DE. That is because of the state’s legal structure and court systems which are favorable to stockholders and boards of directors.  DE does not have an overly cumbersome tax structure for most businesses that actually operate from another state. It does have state level taxes, including a relatively high minimum annual franchise tax. You can probably avoid DE income tax and gross receipts tax, but you absolutely will be paying DE franchise tax. Add to that the fact that registering in DE, does not relieve you of the burden of registering and paying tax in any other state where your business operates and DE probably does not do much for you from a tax standpoint. It is appealing to outside investors, the one pro.

Venture Capital Investors

If you expect to have outside investors in your business, they will probably like that you are a DE entity; however, your outside investors will want you to be a DE corporation not an LLC. You may want to know that DE corporate franchise tax can be as high as $180,000 annually, depending on the size and capital structure of the corporation.

Unless you just like paying more tax or seriously expect to seek outside investors to your business in the near future, register in NJ.

See more at: Is it worth creating an LLC in Delaware while operating an e-commerce business out of New Jersey? What are the pro’s/cons?

How am I taxed as a non-US resident owning an LLC selling on AMZ?

My answer to How am I taxed as a non-US resident owning an LLC selling on AMZ?

Answer by Wray Rives:

As a general rule selling on Amazon is considered US sourced income and requires filing a US federal income tax return. In the case of one non-resident owning an LLC that is selling on Amazon, that means the owner files a form 1040NR with a Schedule C to report the income and expense of the business. If the LLC has more than one owner, then it will require filing a Form 1065 Partnership Return for the LLC and then each individual owner will file an individual non-resident US return.

You also have the option to elect to have the LLC taxed as a corporation, which in many cases will allow the individual owners to avoid filing a US return, but it means the LLC will file a separate US Corporate Tax Return, Form 1120. There are a number of pros and cons to this approach and I suggest you have a conversation with a US tax professional before making a corporate election to be sure you understand how that will impact your tax situation.

Depending on which state the LLC is registered in, you may also need to file a state income tax return and will most definitely need to file a state franchise tax return. In many cases the state franchise tax is coordinated with the state income tax or is simply an annual fee.

You will also probably have requirements to register and pay income tax, franchise tax and sales tax in several other states. FBA by Amazon creates an agency relationship with Amazon which gives the LLC nexus (Understanding nexus and sales taxes) in any other state where Amazon stores your inventory. That will require you to register the LLC with those impacted states and file tax returns with those states.

How am I taxed as a non-US resident owning an LLC selling on AMZ?

When flipping houses, does it make sense to set up a corporation?

 When flipping houses, does it make sense to set up a corporation?

Answer by Wray Rives:

From a US tax perspective absolutely not. When you flip houses, you are generally creating taxable capital gains. Individuals can often pay a lower rate of tax on capital gains, but for a corporation capital gains are just another item of ordinary profit and are taxed as such. If you are flipping houses on a constant short term basis, this benefit is mitigated, but in my experience it is not uncommon for a house flipper to hold properties for more than the required 1 year to receive long term capital gain tax treatment.

If you are concerned about liability protection, I suggest you consider conducting your activity through an LLC and buy a really good insurance policy.

When flipping houses, does it make sense to set up a corporation?

What are my tax duties as a non-resident-alien and LLC owner?

My answer to What are my tax duties as a non-resident-alien and LLC owner?

Answer by Wray Rives:

First off I need to give you a disclaimer that taxation of non-residents by the US is a complex topic.  I am going to give you general answers, but you really should contact a US tax professional and discuss all the details and specifics of your unique situation.  I am also required to say that nothing I tell you can be used to avoid paying income tax to the US that you are legally obligated to pay.

Now:  Generally having a checking account in the US does not subject you to US income tax.  You have to look to the nature of the income producing activities.  If you are not selling tangible goods and only performing a service and you perform all of that service outside the US, meaning you have no physical presence in the US, you should not have what is known as Effectively Connected Income (ECI) and should not owe US income tax.  NOTE:  a very small change, such as making a business trip to the US can easily change that.

Owning an LLC in the US is likely going to put you one step closer to having ECI but does not in itself mean you now owe US income tax.  If you are the sole owner of the LLC and choose the default tax designation for an LLC which is disregarded entity, then the IRS ignores the existence of the LLC and you continue to look at your income producing activity the same way you did as an individual discussed above.

Again it takes very little to change these circumstances.  Adding an additional owner, even another non-resident alien, makes your LLC a partnership and thus subjects all partners to US income tax on profits from carrying on your business in the US.

Finally you are absolutely correct that many people are not aware that in the internet age the US can actually be a great tax haven for US non-resident aliens because of how the US taxes non-resident non-citizens.  As long as the non US resident can avoid ECI, and choose carefully where they reside, they can greatly minimize their income tax while still providing services to the US market.

What are my tax duties as a non-resident-alien and LLC owner?

If I am using my earnings (W2 paycheck) to fund my own new separate legal business, what can I deduct (assume loss for tooling/prototypin…

My answer to If I am using my earnings (W2 paycheck) to fund my own new separate legal business, what can I deduct …

Answer by Wray Rives:

A2A, I concur with Mark Rigotti that if you are just at the tooling and prototyping stage in your business, you need to capitalize and amortize these initial cost to develop whatever it is you are going to sell. Once you actually are ready to start selling, then you can begin writing off these costs and deducting any normal and necessary business expenses to operate your separate business. If the expenses exceed your revenue, (which is common for a startup business) then those losses will generally offset your ordinary income from other sources and reduce your taxable income.

Note that you cannot continue operating at a loss indefinitely or you will be subject to rules that basically you must not be engaged in the business for the intent of making a profit. Is Your Hobby a For-Profit Endeavor?

If I am using my earnings (W2 paycheck) to fund my own new separate legal business, what can I deduct (assume loss for tooling/prototypin…

When is employer provided housing taxable to the employee? When can it be deducted fully by the employer?

My answer to When is employer provided housing taxable to the employee?  When can it be deducted fully by the emplo…

Answer by Wray Rives:

Generally the cost to provide employee housing is always a deduction for the business.  When it is taxable to the employee depends on several questions:
  1. Is the housing provided for the convenience or benefit of the business
  2. Is the housing on the business premises
  3. Is using the housing a condition of employment

If you can answer yes to all three, then the housing should not be taxable to the employee.

You may want to read the IRS guide regarding Fringe Benefits at Publication 15-B (2012), Employer's Tax Guide to Fringe Benefits

When is employer provided housing taxable to the employee?  When can it be deducted fully by the employer?

How much do self published eBook authors have to pay in taxes?

My answer to How much do self published eBook authors have to pay in taxes?

Answer by Wray Rives:

Since you say self published, I am going to assume you are receiving a percentage of the sales of your books and this is not a situation where you have sold the rights to your books and are receiving royalties.  Even if you do receive "royalties" on your published works, it is probably still self employment income to you as I can't think of circumstances where royalties for your original works would not be self employment income.  If you wrote one book and never intend to publish another or wrote the book for an employer then a royalty is a royalty, otherwise be careful that some may try to tell you that because royalties paid to a writer is called "royalties" it is reported on Schedule E and not on Schedule C, as this is just not the case.

Your income is considered self employment income.  You pay the same progressive income tax rate as any other taxpayer does, the only difference is on top of income tax, you also pay self employment tax equal to 15.3% of your net profits from writing and selling books.  This self employment tax is where you are getting the concept that you pay higher taxes than say someone with a W2 job.  The W2 employee is having Social Security and Medicare tax withtheld from a paycheck at the rate of 7.65% on the first $118,500 of gross pay.

The key term for you is net profits not gross pay, because you get to deduct reasonable and necessary business expenses incurred in your writing/publishing business

So for a writer/publisher, you should consider things like laptop that you use exclusively or at least primarily for writing and publishing.  Do you have a space in your home that you use exclusively for writing and publishing work, if so you might benefit from a home office deduction.  Other things like expenses to promote or research a book could all be a possible tax deduction.

The net profit after deducting expenses from your gross receipts is what your self employment tax is calculated on and is also the number that gets added to any other income to determine your income subject to income tax, using the same tax tables everyone else uses.

How much do self published eBook authors have to pay in taxes?