Have a Tax Question? Ask a Tax Expert
Welcome to Just Answer. I am here to help you resolve your tax and finance concerns. Please feel free to ask anytime you need extra help.
First, I need to make you aware of a few items:
No matter that you call the money received from individuals/sponsors donations, if they receive any item in exchange they have made a purchase and you have made a sale which will be reported as income by your entity.
If you reside in California and work in California the state will consider this a taxable entity in California regardless where it is organized since it will have nexus in the state. The minimum franchise tax in California is $800 per year. To avoid duplicate taxation as well as the registered agent fees in Delaware ($200 + per year - one of the things not always mentioned) I would form the LLC in California.
Taxation of the entity will be fairly simple. Reporting form decisions will need to be made - either taxed as a C Corporation or a partnership. The partnership will provide you tax losses during development but your associates may not be able to take advantage of them.Therefore, I would elect to have the entity taxed as a C Corporation. The following link will take you to an IRS page about LLC's and there are other useful items referenced on that page which I suggest be read by you and your associates:
Your income would be taxed in California. If you finally determine to form the LLC in Delaware you will be taxed by Delaware as a non resident and will be able to claim an offset on your California return. It would , however, require two returns be prepared for you.
Your title does not matter if questioned by the IRS. The reality of the situation is what will dictate. Based on what you have stated, you will be an owner and, if C Corporation tax reporting is elected will be able to receive a salary. If taxed as a partnership you will not get a salary but will be taxed on your entire share of the profit/loss whether or not you remove it from the business.
Is there any additional assistance or clarification you need at this time? If yes, please feel free to ask. Otherwise, This is a significant decision and merits clarity of thought and an understanding of the tax authority rules. Thank you for the opportunity to assist you.
Thank you for reply.
What's the best way to form this company:
1. Me establishing partnership of the existing firm in Europe and opening a sister company in US,
2. I form the company and let my non-resident partners buy it (can they do that and how?),
3. or forming new partnership in US with my non-resident partners?
Just to clarify - if my partners are not residents, they don't have to pay federal tax on income as individuals? Could they have bank account in US and transfer their profits in and out of country? Would this depend on how this company is being formed?
Does this mean that I as US citizen have to file income tax on entire company profits since my partners don't have to pay taxes, or just my share of profit? Is it same with deductibles?
Since I would just live in California, and all work is done online, and I would only have the home office there, would that be exception from paying double franchise tax (DE and CA)?
If your "partners" have US business interests they will be required to file US tax returns and, if a tax is due, pay that tax. The saving grace for them will be that, if there is a tax treaty between their nations and the uS they will be entitled to a tax credit for the tax paid to the US on the nations taxes. The tax treaties can be researched at the following web site:
Following that logic, I would establish the business in the state of your residence by forming an LLC and filing as a partnership.