New Startup - Feedback Wanted on LLC Plan

Discussion in 'Starting a Business' started by ChiefSuit, Sep 26, 2011.

  1. ChiefSuit

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    Sep 26, 2011
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    Hi All,

    I've been doing research on a business that I am setting up with a partner. My partner is in California and I am in Texas. We're setting up a production company and most of the work will occur in California, but long-term we could be doing jobs all over. I think I've got a rough plan in mind and would like to hear what thoughts everyone has before I take this to a lawyer/CPA for official guidance. I'm hoping to walk in with a plan that's 90% complete and just needs tweaking at most.

    LLC Business Model
    An LLC seems like the right approach. It's less paperwork than a C corporation and the only real advantage to incorporating seems to be the ability to bring in outside investors and/or go public one day. We aren't looking to do either. That said, I'm thinking we may want to elect C corp taxation in the near term while we're growing and not taking a lot of money (other than reasonable salary) out of the business and then switch to S-corp taxation down the road if the business gets big enough that we need to worry about double-taxation.

    Form in NV/WY and Register as a Foreign LLC in CA
    I've read lots of articles/blogs on why you should or should not form your company in Nevada/Wyoming. Generally, the "nots" are very focused on the fact that you'll be hit with the same taxes in your home state if you do all your business there and forming in NV/WY only really leads to additional administrative work/fees. This is true, but what if you have the potential to do a significant amount of work in other states? California will give you a tax credit for any taxes you pay in those states, but what if it's lower than the tax in California (or zero even)? In that case, wouldn't it be preferable to be headquartered in a zero income tax state where you don't have to mess with that and be certain to only pay taxes to California for work done in California?

    A few additional questions:
    1. I'll be doing the paperwork/business management work from Texas but the operations of the business will be in California (or wherever we're doing a job). Does our business need to be registered in Texas just because I'm doing administrative work here?
    2. If we formed in Nevada, other than having a registered agent do we have to have a business mailing address there? I've heard people mention this, but haven't found it to be an official requirement.
    3. Any recommendations on a bank? I haven't looked into this much, but we'd like to have a bank with LA branches and I've heard that the business fees at the larger banks are very high.
  2. ArcSine

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    Jun 2, 2010
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    Re electing C-corp taxation for your LLC: Your mention the oft-quoted maxim that a C-corp delivers superior tax results in a growth situation where a significant %-age of the profits are being plowed back into growth. But the reality is that it really turns on a number of situation-specific details (e.g., the nature of the growth assets; gap between effective corporate tax rates and those of the partners; growth and cash flow forecasts; ....). Hence, you might want to save the final decision on this one for after you've painted all the details for the CPA.

    I agree that one of the advantages of an actual C-corp over an LLC structure occurs in multi-equity-layer, outside investor scenarios. As you mention, not applicable in your case, so your choice of setting up shop as an LLC sounds like a good one. I'm just saying the second decision---that of having your LLC treated as a C corp for tax purposes---is probably one you'll want to decide only after input from a tax pro equipped with the specifics.

    Re the switch over to an "S corp" election later, when the growth reinvestment cools off: Could be a good move, but be aware that S corps which were formerly C corps have certain complexities imposed on them by tax law, with which "always S from Day One" types are not burdened. Again, your tax advisor can guide you accordingly, based on your details (and in fact these extra costs or burdens are among the factors you'll consider in deciding whether or not to "go C" for a while).

    You raise an excellent point regarding the entity's state of domicile, and kudos on the homework you've done on it. You're correct that if you domicile in a zero-tax state you've effectively locked in to paying tax solely in those states in which the entity's activities are conducted, without having to worry whether or not the "cross-state reciprocity" credits will totally cancel out any "home state" taxes. But you're also correct that you're injecting another state into the multi-state tax return, hence the additional layer of costs you mention. Have your tax pro run the numbers to quantify the tax benes vs. costs on this one.

    Guess we could call this post the broken-record response....ask your tax advisor, ask your tax advisor....:) Take it as a compliment: you seem to have already done a nice job of blueprinting your plans and doing your preliminary homework, to the point where there ain't much left but to put the details in front of your CPA for more specific guidance. Best of luck with it!
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