Forming Entity in Different State

Forming Entity in Different State

For a NY or NJ person what do you think about forming entities in either Delaware or Nevada as opposed to the home state of NY or NJ?


We cannot give out state specific advice, so we'll give you some general advice that will give you some insight. Lets assume the business owner lives in State A and wants to form an entity in State B for a better tax result. If the business is conducted in State A, then the State B business will have to be licensed or authorized to do business in State A anyhow. From a legal cost perspective, you've just added paperwork and costs. If State A knows that a State B entity is licensed to do business, and is in fact doing business, inside its border, then it will tax that entity. So, from a tax perspective there may be no benefit. Theoretically, it could be worse in that the entity may be taxed in both states. There are no income tax treaties between states as with various countries, so double taxation is possible. Now, if the person has no business or real estate in State A, forming an entity in State B might avoid any taxes in State A and the need to get the State B entity licensed in State A. Now that could be a winner. For example, a client in a high tax state forms an LLC in a no/low tax state as part of an overall estate plan that includes a trust formed in the no/low tax state. The LLC will only own passive investments (e.g., partnership intersts) or marketable securities. As part of the overall plan nexus (legal connection) is adequately established with the no/low tax state. That could be quite advantageous. However, its not always a simple matter. What is the basis of the new LLC having nexus to the new state (saying it saves you tax dollars won't cut the mustard, yet alone the taxes). Does the LLC have real deposits in that state? Does the LLC file a tax return in that state? Does the LLC have an agent in that state? You will need to look at the laws of the various states involved, as well as the tax rules. It can be a winner, but a bit of care and planning is in order. And it won't work for everyone every time.

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