“Come to Tax-Free Nevada and incorporate your business! Never pay income tax!” Nice try, but it’s a fantasy so factually incorrect it’s hard to know where to begin.
It’s a permanent point of contention for me, being in the formation and structuring world, to see Nevada STILL being touted as a tax-free state. Here are the facts:
FICTION: Forming a Nevada entity means you don’t owe taxes.
FACT: Every business formed in the United States and deriving revenue from United States sources is liable for federal income tax. A Nevada company won’t save you from that. What you may save is state income tax, but with new nexus laws coming into place on what feels like a daily basis, don’t count on that either. If you form your company in Nevada, but do all of the income producing work (or sales) from your location in Washington, California, Texas, etc., you have a legal obligation to register your business into that state. Once you complete the registration, your business is subject to state income taxes, just as if you’d formed it there in the first place.
Plus, as the owner of the company, nexus is often traced back to you and your physical location. If you pull a paycheck from your company and you live in Michigan, you have created Michigan nexus for company taxes. That’s the same for all states. Even if you don’t pull a paycheck and are a passive owner you can still create nexus. That’s certainly how California and some other states feel.
As I see it, you’re usually better off forming in your home jurisdiction unless there’s a strong legal and financial argument for a two-state registration. Sometimes it works, but many other times it’s a way for you to pay more without getting more.
FICTION: You can create a Nevada business presence through a virtual office, with mail forwarding, a local Nevada telephone number, and a Nevada bank account. Once the business presence is established, you don’t owe taxes.
FACT: Again, there’s no such thing as tax-free, so the first part of the above statement is busted. Second, these steps still don’t create true nexus. To create nexus in Nevada, you’d have to come here and do business within the state on a regular basis. If your bank account happens to be in Nevada, but all of your deposits and checks are processed through a branch in Nebraska, all of your business expenses are incurred in the Omaha area, your mail is forwarded to Nebraska, unopened and unhandled, and all of your phone messages are returned from a Nebraska-area phone, where are you really doing business?
It would be great if simply setting up shop in Nevada allowed you to escape Nebraska taxes – but if that really were true, why would anyone form a company in any other state?
DOES NEVADA EVER WORK? Yes. There are times when a Nevada company can work for you. But that answer is going to be different for everyone. Before you sign the check or send out your credit card information, make sure you work through your individual situation. Make an informed decision using facts, rather than fiction, and you’ll already be ahead of the game.
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