Is The Delaware, Florida, Montana, Nevada, Wyoming Corporation/ LLC Entity Setup Really a Scam?
We are living and operating within interesting times. And these interesting times lend themselves to some people and even trusted professionals placing blanket references and labels of the word “scam” when discussing topics that do not neatly and wholly fit within the box to which everything is judged through the lens of perception.
Let’s be 100% crystal clear. Despite the “supposed” reference that the state of Nevada does not share information with the IRS, if your purpose is to hide business activities from the IRS or engage in any type of illegal activity or defraud individuals or entities, then despite any and all claims otherwise, forming an entity in one of these states will eventually leave you standing naked in centerfield with the lights turned out.
And of course experience shows that in the end that a solid and properly constructed operating agreement that is customized to your individual company needs will carry the greatest weight above and beyond all else thus giving your company a lot of the benefits and advantages that it is seeking. With that very important preface made, this post is written for those who wish to take advantage of all legal, moral, and ethical channels to better grow and protect their business and of course themselves.
The Internal Revenue Service:
A very recent Wall Street Journal article in early 2016 shed light on the abuses of off shore corporations. Again, as previously referenced, if your goal is to hide assets and or income from the Federal Government, they do have the means to detect this and even if the State of Nevada says that they do not share information with the IRS, this does not mean that the IRS cannot find out. As well, the IRS is currently investigating abuses of this practice now in the US and as well companies promoting this as a means to hide assets and income from them. That said, in reality as we will outline shortly, provided there is no abuse the IRS does not care which state you are formed in as this makes sense in as much as they will be collecting their revenue either way at the federal level. This means that this is not a valid argument against out of state formation.
Attorneys and Tax Professionals:
We are not aware of an attorney who gets paid more in fees for the state to which you form your company. Attorneys by default are a category of professionals whose purposes in your interactions is to say no. Again, there is no extra compensation for an attorney upon consultation for saying yes and in effect only the invitation of possible liability for saying yes to something that is not mainstream. This of course is not an enviable no-win position to be in by anyone’s measure as the reasoning for the default answer can be easily understood.
The exact same thing can be said for tax professionals only they actually have much to lose in as much as if your business will be formed in a no income tax state they will be losing the revenue for preparing your business income taxes as that income will simply be passed through and added onto your personal state filing if applicable.
Income Tax:
As just previously mentioned, the fact remains that the lion’s share of corporations and even more so llc’s elect to have pass through taxation either by way of deliberate election or by default status as a partnership in the event of a multi-member llc not making an election as dictated by the IRS when an llc files their EIN.
In this case corporate profits are paid at the individual personal income taxation level so this argument really is not supported as for instance if the individual members or stock holders had an actual legal residence within the state of California, they’d pay their business income taxes to the state of California regardless of the state that they formed their entity.
If the business is actually located in the state of California they would still need to register their business in the state of California and at the same time the argument that this indeed is scam is not supported in reality because the state of California will get their taxes either way.
The fact remains that the reduction in paperwork of not having to assemble and file a state return is a distinct advantage in terms of simplification and ease in running a business and a reason why many businesses right now are choosing the llc form of business structure.
Privacy and Asset Protection:
Let’s face it; we live in a highly litigious country wherein a lawsuit could happen at any moment. Even more concerning is the disastrous effect of a frivolous lawsuit on a business and its members.
The only winner is typically the attorneys as everyone knows of someone they know who has wrongfully been dragged through the court system hemorrhaging time and money. This is just a sad reality of being in business. A lot has been made about the asset and liability protections in some states above and beyond others.
Without even going into this, it goes without saying that if a potential plaintiff has limited information about your business, the less the better or in some states complete privacy, then you are better equipped in terms of an eventual lawsuit being brought against you and your company. And naturally, this is just good old fashioned common sense that does not take nor need the advice of a $500 an hour attorney to tell you this.
**Remember each and every Corporation and LLC actually exists and resides within their bylaws or operating agreement which is the heart and soul of a corporation or llc. Without good, solid by-laws or operating agreement, you really do not have a corporation or llc.
***This blog is for educational purposes only and as such you are advised to seek out and consult with your legal and tax advisors prior to engaging in any decision making affecting your business.
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