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If you elect S corporation status, the salary that the corporation pays you would still be subject to New York State income tax, as that is where you performed the services. As for the bottom line income from the S corporation (that flows to the stockholders), that would be taxable in the state in which you reside. In other words, if you actually lived in Nevada and commuted daily to work on Long Island you might escape New York State individual tax on the S corporation income. However, the cost of the daily commute from Nevada to New York and return would, I am sure, far exceed the New York State income tax you would have to pay.
What if you just commuted on weekends and maintained a small residence in New York State and your principal residence was in Nevada? Could you avoid state income tax on dividends and S corporation distributions? This gets into the murky area of determining where your tax home is. Deciphering that is not a do-it-yourself project, as the states vary in their interpretation of the rules and their aggressiveness in attempting to collect all taxes possible. This often boils down to a constitutional question regarding which state has the right to extract tax money from you, so obtaining advice from a competent tax attorney is a must if you are going to try to finesse your way around some state income tax by this maneuver.
INCORPORATE YOUR BUSINESS
Therefore, if your business is location sensitive, that is, you provide services such as painting houses in a specific state, or you operate at a physical location as does a manufacturer, wholesaler, or retailer, there is probably no advantage in incorporating in another state. All you will have accomplished is the necessity to pay fees and file corporation reports in two states instead of one. (There is an exception: when you grow sufficiently to sell your stock to the public. Delaware becomes the state of choice for most publicly held companies for various reasons. The justification for incorporating in that state instead of the state in which you maintain most of your facilities and/or offer services is complex. Your underwriters, lawyers, and accountants can explain at that time.)
When should you incorporate in Nevada? Alice develops software for several customers in different states. She travels around the country in her RV, visiting customers holing up in various RV parks for a month at a time while she creates and revises software. She really has no permanent home, but for state tax purposes she claims Nevada (no state tax) as her residence. Incorporating in Nevada could strengthen her position that Nevada is her tax home. (She also retains a mail forwarding service there that gives her the Nevada address for herself and her corporation.)
If you have a segment of your business that could be chopped off from your main enterprise and incorporated in Nevada, you might be able to avoid some tax in other states. (Check out setting up your own advertising agency to handle your main corporationís advertising in Nevadaóan idea that might work for you.) As your S corporationís taxable income will appear on your personal tax return regardless of where the corporation lives, you would want to operate as an ordinary C corporation in Nevada. Also, you would want the corporation to retain most of its earn-
Planning Your Corporation
ings in its treasury, as any payment to you in the form of salary and/or dividends would be taxable where you live. Remember, also, that if the corporation does business in states other than Nevada, it could be subject to taxes in those states. In other words, do some careful tax planning, with the help of a competent tax advisor, before incorporating in some state other than your state of residence, assuming that your business operates or will operate in the same state where you live.
Choose a Name for Your Corporation
If you are already in business and operating under a business name, such as Bobís Beds, you will probably want to maintain the present goodwill of customers by simply naming your corporation Bobís Beds, Inc. If youíre starting your new business as a corporation from day one, your choice of names is almost unlimited, but you cannot use a name that is similar to the name of a corporation already registered and active in your state. The state agency that controls the issuance of corporate charters will not permit names for corporations that duplicate or nearly duplicate names of existing corporations. For that reason, you should determine the name of your corporation early in the planning process. Usually, for a modest fee, the state agency that registers corporations will let you reserve a particular name for a period of time. That enables you to order signage, letterheads, business cards, and advertising while you are going through the process of obtaining your state charter for the corporation and planning your organization.
Will you operate in several states? Do not push this question aside because you will be a small business in a small area. Small service businesses near state lines, such as those operating in the Washington, D.C.,