Why Your Nevada Corporation Might Not Save You Taxes
I frequently get a question that starts with “I formed a Nevada LLC (or Corporation) so I don’t have to pay state income taxes and …” I don’t even listen to the rest of the question since I have to stop it right there. That’s because a NV business structure generally does NOT save you taxes, no matter what the promoter who sold you one tells you. The reason is something called “nexus.”
Are You Gambling With a Nevada Corporation?
There are actually two big hurdles to escaping state income tax from your home state.
(1) You have to be in a C Corporation. Any other form of business structures such as an S Corporation, LLC (default tax structure) or partnership is a flow-through entity. That means if you live in a state other than NV, the income from the business or investment is going to flow through to you anyway.
(2) If you have a C Corporation, there still needs to be nexus for the business inside the state of Nevada, in order for the taxability to stay within the state. This is where it gets trickier.
So, let’s talk a little bit about what nexus actually is.
If a state only has contact through the solicitation for orders of tangible personal property, which are then approved outside the state and fulfilled outside the state, there is no nexus. So, if you have a home state call center and fulfill your orders through Nevada, you probably have nexus in Nevada.
Other court cases have modified the rule of nexus to include the following items which can cause nexus:
- Post-sale activities, including training, installation, consulting, etc. (activities clearly exceeding a request for orders or sales and therefore nexus-creating);
- Pre- (or post-) sale activities, including repairs to products, credit checks and investigations, customer services, inventory testing or analysis (again, activities that will likely exceed current nexus standards).
Additionally, if a taxpayer owns property and maintains more than a de minimis physical presence in a state, nexus Is likely.
The above related to sales of products. The rules for sales/performance of services is a little different.
You have nexus in a state if you: have:
- Performance of services, ownership of property (whether income producing or not, in most cases) or resident salespersons.
- Maintenance of an office (even if entirely dedicated to solicitation of orders), franchise contracts, some licensing arrangements, lease transactions or secured (or collateralized) property.
Nexus is getting tougher. States need money and the Internet has blurred the lines when it comes to physical presence. Some things to make sure you’re doing:
- Understand clearly whether you’re selling product or services within the state under question
- Thoroughly document the selected standard for a company’s facts and circumstances.
- Always provide a detailed response (never a “yes” or “no” answer) to a state’s nexus questionnaire.
- Hire a professional, like one at [www.DKAffiliated.com](http://www.dkaffiliated.com) to walk you through these murky waters.
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I’d like to form a Limited Partnership in Nevada. In order to enjoy all the benefits and protections that Nevada provides, what does my LP need to do in order to establish a proper presence in Nevada?
1) I’ve heard some promoters of Nevada entities insist that a virtual office is required in order to create a nexus with Nevada. Does my LP need to maintain an office / presence in Nevada?
2) Does my LP need a Nevada bank account?
3) Can my LP simply use a Nevada mail-forwarding service to create a presence in Nevada?
4) What else does my LP need to do in order to establish a proper presence in Nevada?
Ally, I’m glad you asked this question before you formed the LP.
First of all, because an LP is a flow-through tax structure, you’re going to have to pay tax on all of the income in your home state. The only NV entity that will save on state income taxes is a C Corporation, provided nexus is also in NV.
The next issue is what does the LP own or what does it do? For examle, if you own property in California, you will have to have the LP authorized to do business in California. You might as well have a CA LP in that case.
So…more info is needed before you can proceed. I STRONGLY urge you to contact Megan Hughes. Megan’s company, Business First Formations, specializes in exactly this and I think you’ll find her prices are much more reasonable than a lot of her competitors…plus she has years and years of experience.
Hi Ally,
Unbeknownst to you, you’ve just punched one of my really hot buttons. So …
Forming a Nevada Limited Partnership to hold property or a business that isn’t physically operated or located in Nevada will not save you any money in taxes. It will actually cost you money as you will have all the Nevada maintenance PLUS the costs to form that business in your home state.
A virtual office in Nevada is a FANTASTIC idea — for the promoter selling it to you. There is nothing about this set-up that creates a Nevada nexus under the IRS rules, so you won’t escape state taxes. Legally it’s not always clear. Yes, you created the entity in Nevada, but realistically, where is the work done? Where is the money earned? If someone doesn’t pay you, where do you sue them? The answers to those questions are more relevant to the legal nexus of your business structure. But you WILL get to pay your promoter lots of money each year to keep that office rolling!
If you set up a Nevada business structure, a Nevada bank account will be helpful, but again it doesn’t really go to prove nexus. It’s also getting harder to do, as many banks in Nevada are looking for proof that you and your business both live here.
The mail forwarding service doesn’t work to prove nexus any more than the virtual office set-up or bank account does. But it will add to your operating costs.
I’m sorry to be such a big party-pooper, but to me it’s just unethical and flat out wrong to sell someone an expensive “solution” to their tax and asset protection concerns that does nothing more than line the seller’s own pockets.
Having said all of the above, there are times when setting up a structure in Nevada is a great idea. Maybe privacy is a really big issue for you - you’re wealthy, or a celebrity, and you want to keep yourself off the record. A Nevada entity can work to your advantage here, because Nevada allows for nominees (people you name as figurehead officers and directors, while you still provide the day to day direction). Will you have some extra costs? Yes, but for you, those extra costs are far outweighed by the benefits you receive.
Another time Nevada is a good choice is if you move frequently and want a single operating entity you can take with you. If you start a business in Nevada while living in State A, the typical flow would be a Nevada entity, registered in your home state. When you move to State B, you would unregister from State A and register into State B. You don’t have to open and close businesses, get new Tax ID numbers, upset your vendor relationships, etc., or worse yet, cause an unanticipated tax consequence when closing one is considered a taxable event. You are just changing addresses as though you were moving across town, and for you, spending the few hundred extra dollars per year to maintain your business in more than one state is offset by the ease of moving things around.
Where real estate is concerned, using a Nevada entity can sometimes help, but it really depends on your unique circumstances. If you buy a house in Ohio through a Nevada LLC, for example, you’ll probably still have to register the LLC in Ohio to have proper legal standing there. If your tenant doesn’t pay, you have to bring eviction/collection proceedings in Ohio, because that’s where the debt arose. If the porch collapses around your tenant causing injury, a lawsuit will also be brought in Ohio, because that’s where the damage occurred.
So could you argue that as the property is owned by a Nevada company the lawsuit should be brought in Nevada? Sure, but your chances of winning aren’t great. Then again, lawsuits cost money, and the more money the other side has to spend, the more likely a negotiated settlement becomes.