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R. Klein, EA
R. Klein, EA , Accountant
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I am considering creating a Corporation in DE. But all my

Resolved Question:

I am considering creating a Corporation in DE.
But all my clients are NY/NJ. I currently have NJ LLC co. that I would like to dissolve.
Would I pay DE or NJ taxes?
Submitted: 3 years ago.
Category: Finance
Expert:  R. Klein, EA replied 3 years ago.

fastfile :

Hello and thanks for asking about your state tax liability.

fastfile :

While you could start a DE corporation, it really does nothing for you.

fastfile :

Remember that an entity basically has two purposes: Tax protection and Lgal Protection.

fastfile :

As for legal protection, you would be required to use DE courts to defend your corporation or to sue if you were a DE corporation. In order to use the NJ court system, you would need to register there as a foreign entity. Bsaically, you would end up paying NJ registration fees.

fastfile :

As for income tax protection, well, just because y ou are a DE corporation does not free you from NJ either. If you have nexus to NJ and your office is in New Jersey and all your customers are in NJ, you get to pay corporate tax or any income tax on icnome sourced from NJ. So, probably no savings there unless you have a DE physical office and meet clients there.

fastfile :

So, other than for the prestige of having a DE corporation, I can't think of one good reason to do so unless you are a large national or multinational entity.

Customer:

This is the part I don't understand: "unless you have a DE physical office and meet clients there"...
there seems to be always a catch.
I would have an office in Wilmington, DE.
My clients are in NJ thought.
Meeting in the office in DE is kind of tought because I am travelling to clients' site or working from my office (in this case you can consider that office being in DE even though physically I'd be sitting home)...
Would that still be considered to file NJ taxes in NJ?

Customer:

The current office in NJ can stay or not. if beneficial.

fastfile :

By doing that, now you are liable for DE taxes on the income sourced from DE.

fastfile :

So now, you can prepare two corporate state returns instead of one. Not sure if that will save you any money due to a difference in tax rate, but it certainly will increase the tax preparation complexity.

Customer:

I'd have to verify the tax benefit (the law/courtsystem benefits should be there as is).
but generally if I have an office in DE then I could file taxes in DE even when clients are in NJ?
would it be affected by having a second office in NJ? or employees in NY?

because there are always keywords... in this case you mentioned "income sourced from DE". meaning what exactly?

fastfile :

The legal term is Nexus. Nexus refers to the state you have the strongest ties to.

fastfile :

In mist cases, it's where you office. So if you office full time in DE, even if the customers are in NJ and you serve them by phone, you will have income tax liability back to DE.

fastfile :

If yo have an office in both places, generally, the office closest to the customer will have nexus, but it is not that simple.

Customer:

I'm sorry, I know these are probably very uneducated questions... and I am now considering this business change to Corp so I am considering it in broader terms as well now...

so I will ask a straight question if I may - why is DE refered to as a "tax paradise"? or what does co. need to do to make it a "tax paradise" for themselves...

fastfile :

I don't know that it is a "tax paradise". It has corporate tax. It does offer corporation friendly courts, which is usually why big corporations set up shop there.

fastfile :

If you don't have operations in DE, there is no tax. THERE. But there is at home in NJ.

Customer:

hmmm

Customer:

thank you for your time.

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