Establishing a C Corp

[Daniel J]

Jurisdiction

California

Hello,

My Name Is Daniel. I was interested in starting a C Corp. My questions for this subject are two.

One:
What are the proper steps for a start-up to establish a c corp to be a to take full advantage of the fringe?

Two:
To take full advantage of business law and asset protection it.
Is best to incorporate with a registered agent in Nevada. Then, move forward with incorporating in other states?

Thank you for your time,

 

[Tax Counsel]

First, understand that the term "C corporation" is a federal tax term that refers to entities taxed under Subchapter C of the Internal Revenue Code (IRC). You don't form a C corporation with the state. Rather, if you are going to be the only owner of the business, your choices under state law will be to form either a corporation or a limited liability company (LLC). A corporation formed under state law will automatically be taxed as a C corporation unless you elect it to be treated as a S corporation (assuming you are eligible to elect S-corporation status). A LLC formed by a single owner is automatically treated as a sole proprietorship but you may elect for the LLC to be taxed as either a C corporation or S corporation if you wish.

Second, for most new small businesses owned by just one person the better choice for tax purposes is a LLC taxed as a sole proprietorship or S corporation. Taxation as a C corporation usually results in more tax paid. See a tax attorney or other tax professional familiar with taxation of corporations for advice on whether it makes sense for your particular business to be taxed as a C corporation.

Third, note that in most cases you are worse off forming your corporation or LLC in some state other than the state in which the business actually operates. If the business will operate in California and not in Nevada then choosing Nevada as the state in which to organize the business very likely will not be a good choice for you. Discuss this part of the problem with a corporate law/business attorney to understand the benefits and drawbacks of organizing in some state other than one in which the business operates.

 

[zddoodah]

What are the proper steps for a start-up to establish a c corp to be a to take full advantage of the fringe?

I'm confident there are numerous online resources that discuss setting up a corporation, but I have no idea what "take . . . advantage of the fringe" might mean.

To take full advantage of business law and asset protection it.

Huh?

Is best to incorporate with a registered agent in Nevada. Then, move forward with incorporating in other states?

Your post is tagged as relating to California, and you cannot have a Nevada agent for a California corporation. You must designate a California resident agent, even if your primary business address is in another state. If the intent of this question was to solicit opinions about whether you should incorporate in California or Nevada, there is no way for folks who know nothing about you or your business to opine intelligently about that.

I strongly suggest you retain the services of a local business attorney.

 

[flyingron]

A California corporation would have a California registered agent.
A Nevada corporation would have a Nevada registered agent.
If you maintain a presence that can accept service during business hours in each state, you can act as your own. If not, you'll need to hire a registered agent.

If you are a Nevada corporation, you must register (Form S&DC-S/N) in California. As TaxCounsel mentions, you'll probably lose whatever benefit you think you're getting by registering in Nevada if you're solely doing business in California. You still owe the franchise tax.

See here: https://www.ftb.ca.gov/file/business/types/corporations/index.html

 

[zddoodah]

A California corporation would have a California registered agent.
A Nevada corporation would have a Nevada registered agent.

AND...if you have a Nevada corporation that is qualified to do business in California, you'll need registered agents in both states.

 

[Daniel J]

Right. Thank you all for your comments/replies. I appreciate them all.
Looking back, I realize their were errors and the context of the questions not written right. (its late Sorry) a bit scattered. Making it hard to understand.

when mentioning fringe. I meant fringe benefits as far as, If a C Corp instead of a S corp you can write into your bylaws many benefits that you could not otherwise as a S Corp.

As for double taxation. There are tax avoidance methods a company can create and write into its bylaws to help benefit from in the from of write-offs / expenses. I'm know their are limitations, but I also know their are proper procedures and methods to doing so to help ease that burden.

Also, for Context. The Start-up will be with 2 to 4 people, Employed in the state of California. planning to start a corporation in Nevada with a pass-through entity in California.

Another few questions in the same range of category.

1. If I did start a corporation in Nevada. Would that automatically require that I get payroll, workers comp., including other employee tax., Ext? Or can the corporation run as a entity without employees in Nevada(or any state for that matter)?
2. Furthermore, if I was planning on using this Nevada entity to start an LLC or C Corp in California, can I use a pass through method tax method from the LLC (OR C Corp) in California to the Corporation in Nevada?
3. This is a follow up question for one and two, Would this method require me to pay employee taxes in both states?
4. If I had a Nevada Corp setup with registered agent in Nevada. Could I be my own registered agent in California?


Thank you for you time,

 

[Tax Counsel]

Right. Thank you all for your comments/replies. I appreciate them all.
Looking back, I realize their were errors and the context of the questions were a bit scattered. Making it hard to understand.

Another few questions in the same range of category.

1. If I did start a corporation in Nevada. Would that automatically require that I get payroll, workers comp., including other employee tax., Ext? Or can the corporation run as a entity without employees in Nevada(or any state for that matter)?

A corporation cannot do anything for itself. It will need at least one officer (i.e. a CEO) to run the corporation, and that officer generally would be paid for the work done for the corporation, though federal minimum wage laws would not require that the CEO be paid. Most state minimum wage laws would not require that either, but you'd need to check the law in the state where the work is to be performed. State law would also determine whether unemployment comp insurance, worker's comp insurance, etc., would be required for that CEO. Of course, to the extent the corporation does pay employees it must comply with the various federal and state employment tax laws, like doing income tax and FICA tax withholding and paying matching employer FICA tax.

Even though paying the CEO is generally not required, it is generally a good idea to do that for income tax purposes. If it is a C corporation, the salary paid (so long as it is not excessive) may be deducted from the corporation's gross income, reducing the corporate income tax and thus reducing the amount of income that is subject to double taxation. Pay that is excessive cannot be deducted.

If it is a S corporation then federal tax law will characterize all payments/distributions from the S corporation to a shareholder as compensation for services the shareholder has provided to the corporation. For example, suppose that Alan is the sole shareholder and CEO of Alan's Superstore, Inc. Alan has not taken any pay for the work he's done for the corporation but had he been paid reasonable compensation for that work he'd have gotten $50,000. The corporation pays him a distribution of $75,000. Under federal tax law, the first $50,000 of that distribution is treated as wages paid to Alan and thus subject to all the various withholding and employment tax rules. The remaining $25,000 paid to Alan would be treated as a corporate distribution with respect to his stock.

In short, a corporation is likely to end up having at least one employee and that employee generally should be paid even if minimum wage laws would not require it. Paying those wages triggers a variety of other obligations for the corporation.

2. Furthermore, if I was planning on using this Nevada entity to start an LLC or C Corp in California, can I use a pass through method tax method from the LLC (OR C Corp) in California to the Corporation in Nevada?

If Alan has his corporation in Nevada and then the Nevada corporation forms a single member LLC (let's call it Alan's Pacific Stores, LLC) to sell stuff in California, then Alan's Pacific Stores, LLC would be disregarded as a separate entity for federal tax law and in any state that uses the federal entity classification scheme. The result would be that Alan's Pacific Stores would be treated as just a branch of Alan's Superstore and all the income of the LLC would simply be reported on Alan's Superstore corporation return.That's true whether Alan's Superstore is a C or a S corporation for tax purposes.

However, if Alan's Superstore Inc forms instead Alan's Pacific Stores Inc, a California corporation (or forms the LLC and elects for it to be taxed as a corporation) then it matters whether Alan's Superstore Inc is a S or a C corporation.

If it is a S corporation then it may elect for Alan's Pacific Stores to be a qualified S corporation subsidiary (QSUB), which then would result in the QSUB being ignored and all its income simply being reported on the 1120S return filed by Alan's Superstore. Without that QSUB election, Alan's Pacific Stores must file its own separate Form 1120 and pay its tax separately from Alan's Superstores Inc.

If Alan's Superstore is a C corporation then it is not possible to make a QSUB election. The only way then that the two corporations could combine their incomes and file together on a single return would be to elect to be a consolidated group and file a consolidated group return. Warning: the consolidated return rules are extremely complicated and most return preparers will not be familiar with them. Having these returns done can be very expensive. Typically only rather large corporate groups elect into this regime.

3. This is a follow up question for one and two, Would this method require me to pay employee taxes in both states?

If all the work is done in just one state then employment taxes will only be due to one state. More than one state might end up taxing the employee on the income, however, if the employee lives in one state and works in another.

4. If I had a Nevada Corp setup with registered agent in Nevada. Could I be my own registered agent in California?

The Nevada corporation needs a registered agent in Nevada. In addition, if the corporation does business in California (which includes being managed from California) then it must register in California as a foreign corporation and would need a registered agent in California. You could be the registered agent in California if that's where you are located.

I'll say it again: for most small businesses it does not make sense to organize the business entity in some state other than a state in which it conducts business. You end up with additional costs and burdens for little additional benefit. And in general for most new small businesses organizing as a C corporation is not tax advantageous. You can start out as a LLC or S corporation first and easily convert to a C corporation later should the C corporation be a better choice later when the company gets bigger.