Form and file new SaaS LLC - Questions

[Scarter180]

Jurisdiction

Minnesota

I want to form and file a new LLC that is an online-only SaaS business. 1. Would it be legally feasible to file a simple LLC through Delaware, Wyoming, or Nevada instead of Minnesota where I live and operate from my computer? 2. Would it be necessarily more simplified and streamlined to form and file the LLC in Minnesota in a way that outweighs any potential advantages from other states to form and file? 3. When would forming an s corp be advisable - and should this be done immediately or at a certain benchmark ideally? 4. Will a simple Quickbooks type software be able to handle any applicable sales taxes and reaching nexus? 5. Will this nexus trigger a need to file for business licensing in that state or is that needed beforehand or under different circumstances? (Wonder if there is a generalized overall US selling approach available) 6. What FinCEN regulations are worth being warned about in this scenario? 7. Are the complications with being a foreign LLC of this type more troublesome than what it's worth for any tax breaks at this point from other states?

Thanks!
-Sam

 

[zddoodah]

I want to form and file a new LLC that is an online-only SaaS business.

Best not to use acronyms that aren't common knowledge.

Would it be legally feasible to file a simple LLC through Delaware, Wyoming, or Nevada instead of Minnesota where I live and operate from my computer?

Feasible? Sure. A good idea? Impossible to answer without detail.

Would it be necessarily more simplified and streamlined to form and file the LLC in Minnesota in a way that outweighs any potential advantages from other states to form and file?

Huh?

When would forming an s corp be advisable - and should this be done immediately or at a certain benchmark ideally?

Impossible to say in the abstract (same with the rest of your questions). Consult with a local business attorney.

 

[adjusterjack]

SaaS appears to mean Software as a Service.

SaaS business at DuckDuckGo

Would it be necessarily more simplified and streamlined to form and file the LLC in Minnesota in a way that outweighs any potential advantages from other states to form and file?

Probably.

If you form it in another state you'll still have to register it in MN and pay fees and taxes in MN.

I don't know where people get the idea the forming an LLC in a state other than their own makes a difference.

 

[Tax Counsel]

I want to form and file a new LLC that is an online-only SaaS business. 1. Would it be legally feasible to file a simple LLC through Delaware, Wyoming, or Nevada instead of Minnesota where I live and operate from my computer?

You coud do that. The question is whether it would benefit you. Ignore the fact that big companies organize in those states, particularly Delaware, because their reasons for doing that has a lot to with the relationship between the company and its thousands or millions of shareholders and fending off things like hostile takeovers. Those are simply not issues that a one person LLC is going to encounter. So what reason would you have that would benefit you specifically? If you don't have an answer to that, then just organize in your home state. Bear in mind that if you organize it in some other state, Minnesota corporate law will require you to register it in that state anyway as a "foreign LLC", foreign in this case meaning any LLC organized in someplace other than MN. So you'll still be subject to the same MN laws, taxes, and fees regardless of which state you organize in because you operate in MN. In addition to that, you'd now also be paying fees to MN, filing reports with MN, the company would subject to MN business entity law. And on the other side, you are paying fees, filing reports, etc with the state in which the business is organized and you open up the business to being sued in that other state rather than MN, meaning you need to hire an attorney that other state, incur costs trips to that other state, etc. to deal with the lawsuit.

2. Would it be necessarily more simplified and streamlined to form and file the LLC in Minnesota in a way that outweighs any potential advantages from other states to form and file?

The rules for forming a LLC are the same for everyone. In most states, it is not a whole lot harder or all that expensive to organize a LLC in that state. A lot of the rules are somewhat similar from state to state too. But the advantages and disadvantages of what you are asking about vary from one company to the next. For many it doesn't really provide a significant financial benefit to organize in another state. For a few it does. So it's critical to find outwhat advantage, if any, you weill actually get from organizing the business in another state. I will tell you this: I advise most of my clients to just set up their business in this state unless there is something unusual about the business or how it will be structured that might make it advantageous to form it some place else, like Delaware.

3. When would forming an s corp be advisable - and should this be done immediately or at a certain benchmark ideally?

A S-corporation is not an entity that you form with filings at the Secretary of State (or whatever office the particular state uses for registering new business entities. A S-corporation is simply a tax term referring to corporations that have elected to be taxed under Subchapter S of the Internal Revenue Code. That election turns the corporation into something a lot like a partnership. It's advantageous for small corporations because the profits of the company are not taxed twice like the profits of regular corporations (known as C corporations) are. Sub S corporations were more popular before 1997 when the IRS revised the entity regulations. Before that change, there was no easy way for a one owner business to get limited liability protection that corporations provide and get the pass through tax treatment that partnerships provide. Once states started to roll out the new LLC business form, that provided a solution for the IRS. It treats a single member LLC as a sole proprietorship, so there is only one level of tax but under state law it gets limited liability protection similar to that of a corporation. In addition, the IRS decided to let LLCs elect to be treated as corporations rather than a sole proprietorship or partnership. That election then opened the door for LLCs who are treated as corporations to make a S corporation election, if it qualifies for it. And all that is done with filings with the IRS. Under state business law it is still just the same LLC it always was. It is just the tax treatment that changes.

That means you can organize the business to start as a LLC without making the corporation election with the IRS. The profits and losses go directly on your individual tax return. If you immediately made the corporation election and S corporation election then the LLC would be taxed by the IRS a S corporation, but as far as state business is concerned nothing has changed. But the problem is that S corporations are limited in how much of their initial losses they can use right away. Sole proprietorships and partnerships don't have that limitation. That's one of the big reasons that small business that expects losses for the first year or two will start out not making the S corporation election. That election can always be made with the IRS later (though you want to time it right to minimize tax consequences of the change).

What software is good for you depends on what kind of business you are going to do exactly, and how you plan to run it. That's a question for a business advisor.

5. Will this nexus trigger a need to file for business licensing in that state or is that needed beforehand or under different circumstances?

The impact of nexus today is that in any state where you have nexus you'll be liable to pay taxes in that state and, depending on what you do, may need to register as a foreign business entity in that state. Typically online only sales that are conducted from just one state but sell to other states won't be enough to require it to register as a foreign business in that state. But if there is tax nexus you would be liable to pay income tax in those other states. You also have to collect sales taxes in the states that impose them.

6. What FinCEN regulations are worth being warned about in this scenario?

So far there is nothing I see in your post suggesting any reporting to FinCEN would be needed. That'll depend on the details of your business. Ask a tax or corporate lawyer to review your plans and advise you what federal and state obligations you'll have.

7. Are the complications with being a foreign LLC of this type more troublesome than what it's worth for any tax breaks at this point from other states?

Here's the thing: the general public thinks corporations and other business entities organize in places like Delaware to save taxes. But the way business taxes work in the U.S. where you organize doesn't give you any particular tax advantage. You pay tax to (1) the state you are organized in and (2) any state in which you have nexus. So unless you plan to actually conduct business in Delaware, Wyoming, Nevada or Colorado registering in those states is not likely to save you anything, but will add to your costs and administrative burdens. Again, run your business idea past a corporate law and tax law attorney so you understand how this all works and what can actually save you money.

And, I'll ask you once more: what tax breaks do you think you'll get organizing it in another state? If all you've heard from friends or from things you've read that are vague statements that businesses can save a lot of money in tax in other costs then that's misinformed you. For most businesses, there won't be much in tax savings, but it might add to the taxes and fees you pay. You need to indentify specifically what the advantages and disadvantages will be for your particular business in organizing outside your home state versus organizing it in your home state.

It's well worth getting advice from a business and tax lawyer so you get it right. And keep track of those fees: you can add them into your start up expenses that you deduct once the business begins operating.