During my initial consultations with new customers often ask me about the creation of companies and limited liability companies. Here are some common questions and misconceptions about the formation of a corporation or LLC in a different state than they live in:

Q: I am a New York resident and business owner. I've been told I can save a great deal of taxes every year if I establish my company in a state tax free. Is it really so easy to avoid New York taxes on income from the state?

A: No, not so simple. The way New York handles various tax aspects of the state is allowing a credit against income tax equal to NY the amount of income taxes paid to other states. If you are a full year or in part, reside in NY and if any part of their income was taxed by another State, local government, or the District of Columbia, may claim a credit against the tax State of New York. Therefore, if your income is not taxed by another state, his claim against the NY income tax is zero and you end up paying the total NY income tax.

Q: What advantages over others to establish my business in another state as the anonymity that gives a Nevada Limited Liability Companies (LLC)?

A: While Nevada is listed as a state that offers business owners anonymity, this only applies to the shareholders of a Nevada corporation, not a Nevada LLC. The members and managers of an LLC in Nevada must be disclosed in annual reports that immediately become public information. Also, if you are involved in arms-length transactions with its customers and / or customers, they meet you face to face and they know who you are. Therefore, anonymity is only valuable in certain industries where no face to face contact is common. Moreover, by establishing its New York-based business in Nevada, you will undergo additional filing fees in order to do business and report their business activity in New York.

Q: With all the talks on the establishment of entities outside the state, what is my best course of of the action?

Unless you are operating a large business, most small and medium companies are better place of business in the state that the plan to do business in. This ensures that you do not have to bear the burden of additional reporting requirements, administrative provisions, the filing fees the state, accounting fees and legal fees. Check with your attorney and CPA both before going online to set up a company in a different state.

Michael T. Hanley, CPA is the Managing Partner of the Smithtown, NY CPA Firm, Merl & Hanley, LLP and the author of Effective Tax Planning for the MicroBusiness.
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