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CGCPA
CGCPA, CPA
Category: Tax
Satisfied Customers: 3740
Experience:  over 40 years experience in tax matters
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I am US citizen and live in California...

Customer Question

I am US citizen and live in California. I am planning to open the production and publishing software company in Delaware together with my partners from Croatia, structured as LLC. This company would be receiving donations from public to support the software development, in exchange donors will receive various software packages depending on donation amounts (some being downloaded from Internet and some packaged and mailed to them). After completion, the software would be sold solely via internet.
- How would be this company taxed during development and afterwards while selling software online?
- What would this mean for me - would I be taxed on income in Delaware and/or California?
- What would be the best tax situation for me: operate as salaried director of the company, some percentage co-owner, or as the legal representative of the owners that are not residents of United States (Croatia nationals)?
Submitted: 10 months ago.
Category: Tax
Expert:  CGCPA replied 10 months ago.

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:

 

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Limited-Liability-Company-(LLC)

 

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.

 

Expert:  CGCPA replied 10 months ago.

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.

Customer: replied 10 months ago.
Thank you for your answer.
May I please ask you what did you mean by "The partnership will provide you tax losses during development but your associates may not be able to take advantage of them."?
Thank you in advance.
Expert:  CGCPA replied 10 months ago.
The tax losses will likely result from R&D costs and overhead and you will be able, if filing as a partnership, to deduct those losses from your other sources of income on your US tax filings. The tax benefits may not be as great for your partners since they do not, per your earlier statement, reside in the US. However, if they do reside here and/or need to file uS returns they will be able to claim the same taxable income reductions as you can. Thus, they may not receive the same benefit as you on a dollar for dollar basis. I do not know Croatian tax laws and cannot comment on any benefit that may accrue to them in that nation.
CGCPA, CPA
Category: Tax
Satisfied Customers: 3740
Experience: over 40 years experience in tax matters
CGCPA and 2 other Tax Specialists are ready to help you
Customer: replied 10 months ago.

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)?


 

Expert:  CGCPA replied 10 months ago.

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:

 

http://www.irs.gov/Businesses/International-Businesses/United-States-Income-Tax-Treaties---A-to-Z

 

Following that logic, I would establish the business in the state of your residence by forming an LLC and filing as a partnership.

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