If you own a business or have thought about starting a business, chances are you have heard someone or some media channel touting the advantages of registering your business in Delaware. Or Nevada. Or Wyoming. Or any of the other states that offer either no state income tax or corporate friendly rules. In fact, you have probably seen companies offering to set this up for you for a “nominal” fee.
But is it worth it – or even possible – to register your business in a tax friendly state if you don’t live or operate in that state? What if you own an online business that exists only in the virtual world, does that give you more freedom to choose where to register your business? What exactly are the benefits to registering in one state vs. another and what are the rules involved?
Meeting the Physical Presence Test
Regardless of what type of business you are, there are certain rules that determine whether or not you have to register your business in a certain state. Regardless of what the people trying to take your money to set up your corporation in a tax friendly state tell you, you are absolutely required to register in the state you have a physical presence in.
If you are a traditional brick and mortar business, it’s pretty simple to determine whether or not you have a physical presence in a state. If your store is located in the state, you have a presence there and are required to register within that state. But what if your business operates entirely online? Do you have a physical presence in any state, or are you free to register wherever you please? Luckily, there are a set up strict rules that tell us whether or not you have a physical presence in a state even for online business.
If you answer yes to any of the following questions, your business is considered to have a physical presence in that state and you will most likely be required to register there.
- You opened a bank account within the state
- You have employees within the state
- Any of the owners or shareholders live within the state
- You have any type of office or warehouse within the state
If you, as the owner of the business, live in California, you likely have to register your business in California. Open your business bank account in New York? You likely have to register in New York. It doesn’t matter that you don’t actually sell anything to anyone in that state, you are still considered to be operating your business in that state and are most likely going to have to register there.
Is There Still a Benefit to Registering in a Tax Friendly State?
So you now know you probably have to register your business in your home state, but could there still be a benefit to registering in a tax or corporate friendly state like Nevada? Despite what the people wanting your money will tell you, probably not.
Unless your business is a C Corporation, and 99 percent of your should NOT be a C Corp, your business pays zero taxes. Instead, the profits of the business flow through to your personal return and you pay the taxes yourself. This means where your business is registered makes no difference in the taxes you pay. Instead it’s where you as the owner live and pay taxes that counts.
I Registered in the Wrong State, Now What?
OK you have read through this and now know you registered in Delaware and received no benefit. Furthermore, you now realize you have to register in California. What do you do now?
You have a few options here.
- You can keep your business registered in the wrong state, while also registering as a foreign entity in the correct state.
- You can close the registration in the wrong state and register in the correct state.
In my opinion, there is absolutely no reason to choose option one. You will be receiving no benefits for staying registered in the wrong state and will have to pay yearly fee’s to keep your business registered there.
Get it Right From the Start
As with anything else in life, if it sounds to good to be true it probably is. If someone is telling you that you can register in Nevada despite living in California to avoid paying the insane California business fee’s, they are giving you bad information.
Don’t waste your time and money registering where you don’t belong. Get this right from the start and you will avoid a lot of headaches in the long run.