top of page

Entity Structuring – Part II

We will start the second part of this series talking about where to incorporate. Most times businesses are formed in the state in which the business is located. Other times, they are not. There are many reasons why would you would want to incorporate and a state other than the one that you currently running your business in. For instance, you could incorporate in somewhere like Nevada. Incorporating in Nevada gives you privacy, and relief from state income tax. In Nevada, you have to list your officers for a corporation or managers for an LLC. However, in Nevada you can use nominee directors. A nominee director is a person that stands in your place, so that you don’t have to be listed as an officer of your company. Why wouldn’t you want to be listed as an officer of your company? Very simply, if somebody was looking for assets that you owned, the first thing they would do is to an asset search. In the state of Nevada, your name will not come up as an officer of a corporation if you used a nominee director. The nominee director has no control over your company, they are just a stand-in for you to be listed with the state. Further in Nevada, there are no corporate income taxes, so typically you would be responsible for paying any corporate tax.

Delaware, is another popular place to incorporate. In Delaware, they have something called the Court of Chancery. This is where a lot of bigger companies incorporate, because they want to take advantage of this particular court. The Court of Chancery, is a court run by a judicial judge, and does not rely on a jury for deciding cases that are civil in nature. If you incorporate in the State of Delaware, you can take advantage of using this court to settle your disputes. Further, you don’t have to list the officers of the corporation in Delaware, or the members or managers of an LLC.

Once you have decided where you want to incorporate, you need to decide your tax structure. This is when you should talk with an accountant to determine the best way to structure your company tax wise. Basically, if you form a corporation you to be taxed as either a C-Corporation or an S-Corporation. C-Corporations pay tax at the federal, and sometimes state levels. If you take money out of the corporation, your tax again on your personal tax return. This is known as double taxation. S-Corporations don’t pay tax. The profits and losses flow to the shareholder to be claimed on the shareholders personal tax return. The benefit is that you only pay tax on the money one time. The other benefit to that is that you don’t pay self-employment tax. Self-employment tax is 15.3% of whatever your net income is for the year.

Limited Liability Companies are flexible in nature. You can be taxed, any way that you want to be taxed. You can be taxed as a sole proprietorship, if you’re a single-member LLC, partnership if you’re a multimember LLC, a C-Corporation, or an S-Corporation. Combined with the other flexibilities of an LLC, it is more popular to become an LLC over a corporation.

Typically, entities are used interchangeably. For instance, you could form both the C-Corporation in an S-Corporation, and they could work in conjunction with each other. For instance, a shareholder of an S-Corporation pays tax on their personal tax return. However, what if you were in the highest tax bracket of 39.6%? That means you would have to pay tax at 39.6% from the money that you make from your S-Corporation. Instead of that, you could have the S-Corporation, and then form a fiscal year (any year other than a calendar year) ending C-Corporation. The C-Corporation would act as a management company, it would manage the officer from the S-Corporation. Why would you want to use both of these? With the C-Corporation you enjoy certain benefits that you don’t enjoy in an S-Corporation. For instance, you could pay fringe benefits to yourself in the C-Corporation, but not in an S-Corporation fringe benefits would be things like health insurance, medical spending accounts, and other things that you can’t do in an S-Corporation. The highest corporate tax rate is 35%, versus 39.6% for the personal return. Typically, most of C-Corporations pay tax between 15% and 25%.

There are a lot of reasons for using these companies in conjunction with each other. Another reason would be the timing of income. In order for the C-Corporation to manage the officer of the S-Corporation, it would need to pay the C-Corporation a management fee. An S-Corporation has to have their year-end in December. However a C-Corporation, can have their year-end anytime he wants. In December, you could pay a large management fee over to the C-Corporation, and the C-Corporation could sit on this income until such time as they have to pay tax on it. Sometimes it can be for over a year. This is tax avoidance through the timing of income.

As you can see, there’s a lot to entity planning and structuring. Before you start structuring your companies, you would want to talk to an accountant that knows their way around various entities.

bottom of page