You Won't Save on Taxes by Incorporating In Nevada

If you look online you'll find many incorporation services that tout the benefits of incorporating in Nevada instead of your home state. Among these are lower taxes because Nevada has no corporate (or individual) income taxes. Can you really save on taxes by incorporating in Nevada? No.

It's true that if you form a corporation in Nevada you won't have to pay any corporate or individual income taxes in Nevada. That's fine if you just do business in Nevada. But, if you do business outside Nevada, you'll find that your corporation will be subject to other states' taxes.

Here's why: Your Nevada corporation must qualify to do business in any state other than Nevada (it will be a "foreign corporation" in that state). "Doing business" means you have an office in that state, earn revenue there, or have employees there.

Qualifying to do business in a state is a lot like incorporating in that state. You'll have to register with the Secretary of State and pay the same (or more) filing fees as a "domestic corporation"--that is, a corporation formed in that state.

If you don't register, your corporation will be subject to monetary penalties and likely be barred from suing anyone in that state--this means you won't be able to enforce any contracts in that state and people who owe your corporation money won't have to pay. Failure to qualify may even constitute a crime under the state's law.

Moreover, you'll have to pay state corporate taxes in the states where you have qualified to do business. How much tax you'll have to pay in any particular state where you have qualified to do business depends on your level of business activity there. The rules vary from state to state. If the state imposes a "franchise tax" on corporations for the privilege of doing business, your Nevada corporation will have to pay that as well.

So even though you won't owe any tax in Nevada, you will owe tax in the state or states where your corporation does business. The result: No tax savings.

People who promote Nevada corporations claim that they have other benefits that make them worthwhile. One common claim is incorporating in Nevada is a good idea because Nevada's corporation law is particularly business-friendly. For example:

• Nevada has minimal reporting and disclosure requirements
• shareholders are not a matter of public record
• directors can change the corporate bylaws,
• no minimal capital is required to form a Nevada corporation.

However, if the shareholders of the corporation don't live in Nevada and you do the bulk of your business in a state other than Nevada, there's a good chance you won't even be allowed to take advantage of Nevada's corporate law. This is the case, for example, if you incorporate in Nevada but a majority of your corporation's shares are owned by California residents and you do most of your business in California. Under California law, such a corporation is treated as a "pseudo foreign corporation" and the most important portions of California's less business-friendly corporation law are applied by California courts, not Nevada law. None of the Nevada legal benefits listed above would apply in California.

So, unless you'll be doing most of your business in Nevada, there is no reason to form a corporation there. When it comes to incorporating, stick close to home.

To learn how to incorporate your business, see Incorporate Your Business by attorney Anthony Mancuso.

April 2013