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Which state would be best suited to file an S CORP for an…

Which state would be...

Which state would be best suited to file an S CORP for an entertainment company with a traveling show, Nevada or Delaware? There will be three owners all living in different states, but none in Nevada or Delaware.

Lawyer's Assistant: Since business law varies from place to place, can you tell me what state the corporation is registered in?

We have not registered the corporation and are looking for guidance on which state to register.

Lawyer's Assistant: Has anything been officially filed? If so, what?

No

Lawyer's Assistant: Anything else you want the lawyer to know before I connect you?

What are the pros and cons of filing in either state, and would an LLC still be a viable choice if we wish to pursue investors.

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Answered in 34 minutes by:
3/11/2018
Attorney Wendy
Attorney Wendy, Attorney
Category: Business Law
Satisfied Customers: 1,167
Experience: Member at Keefer & Keefer LLC
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Hello. My name is ***** ***** I am an attorney. I am currently working on a response to your question and will have that to you shortly.

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Customer reply replied 4 months ago
Thank you Wendy for your confirmation. To elaborate on my question of best suited, we are looking at this from the perspective of business structure, taxation, and running this type of business with the most benefits and efficiency.
Customer reply replied 4 months ago
I prefer text so I can share the results with my partners.

You have already done the hard work - narrowing down your options to the two most business friendly legal systems for business formation - Nevada and Delaware. An S-Corporation is not a state formed entity; rather the S-Election that creates the S-Corp is a federal tax status election that will be made using IRS Form 2553. What the S election does is create a pass through entity - meaning the company itself pays no taxes on its profits, but rather those taxes are passed through and claimed as income on the individual owners/shareholders tax returns. This is similar to a limited liability company. Both S-Corporation status and LLCs are often utilized for smaller or family businesses. With just three owners either of these structures likely works well. The key difference between corporate entities and LLCs relates to what regular filing requirements the state of formation requires (e.g., LLCs have very limited if any documents that must be filed with the state at regular entities after their formation; corporations often have more required formalities to ensure they remain in good status but can provide slightly better protections from liability). Based on what you have indicated, either structure likely works for you, though investment can often be a little cleaner with a corporation as the investor can become a shareholder while still ensuring you issue enough shares that you and your partners remain in control of day-to-day operations and can operate via a Board of Directors. But investment in LLCs can be handled relatively easily as well.

Now the question is Delaware or Nevada. Though Nevada has made several legal changes to try to compete to attract the business formation that Delaware has long been known for; I still believe Delaware to be the better option for the following reasons: lower filing fees for formation documents, better reputation among the business community (e.g., Chamber of Commerce - and a good aspect for attracting investors), no required list of managers at time of formation of an LLC (which is required in Nevada). With corporations Nevada may have a slight edge of greater protection for members of the Board of Directors but Delaware has better shareholder protection; so its pretty balanced. Delaware is well practiced at being the home to businesses that operate in other locations and has a very easy filing process. I apologize I just saw your message regarding text; this may be too long for text but hopefully you can access text on your computer or phone such that you may be able to cut and paste this to send to your partners.

If you need any further help, please reply to this email. If I answered your question and provided excellent service, I would greatly appreciate your 5 star rating at this time.

Please note: This information is for educational purposes only and is not legal advice. No course of action is being proposed and no attorney-client relationship or privilege has been formed as a result of this conversation.

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Customer reply replied 4 months ago
Hello Wendy, sorry for the delayed response as I needed to have your response reviewed by my partners. We would also like to know if we plan to do business and have our shows in Vegas would this make a difference in still choosing Delaware that we do not plan to have shows? Also I heard another difference is Nevada is that it does not have Franchise Tax and Delaware does. Is this true? Are there any other significant differences between these two states we should know about? Also I would like to know if I can use my current Entertainment Company which is an S CORP to work for the new Company or do I need to keep this separate? For instance I have services that can benefit the new company such as contacts and clients that can potentially bring business but my partners feel I should keep this separate and not involve my established company.

The following link provides one of the simplest lists I've found of the benefits of various states of incorporation/formation (WY, NV, and DE): http://mywyomingllc.com/wyoming-vs-nevada-vs-delaware/

Most states - since the rise of the Delaware corporations - have made moves to be more corporate formation friendly. So, you likely won't make a horrible decision whatever you do on that front. On the franchise tax, for an LLC, the Delaware franchise tax is a flat fee - I believe the current rate is $300. Either state will work for your business, which you choose likely depends on whether you are more concerned with inner corporate protections (e.g., indemnity, no franchise fee) or attracting investors (e.g., the unlimited stock and par value of DE corporations)

As for using your existing company to do business with this new one. There is nothing inherently wrong with that as long as everyone involved signs off on it and also that you do not vote on any decisions that impact giving business to your other business, payment of your business etc. Your involvement in those decisions that could directly benefit your other enterprise would be a conflict of interest. If you simply sat out those votes, there would not be a legal problem. That said, if your other partners do not agree to do business with your existing entity, that ends the inquiry. If you do wish to pursue this, it might be beneficial to prepare a proposal, just as if you were a complete outsider, and ask them to consider it without your input to see if they can realize the benefit that might bring to the new venture.

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Customer reply replied 4 months ago
on a annual renewal of the S CORP, Nevada would be less in fees as Delaware charges a $300 Franchise Tax per year? Also once we begin doing shows in Nevada, we would not pay state tax on personal or business, but would have to pay in Delaware if we were to incorporate there? I see we do not need a business license in Delaware but once we begin doing business in Nevada would we then need to get a business license? We would like to know more on the costs to run the business after we choose either state and which one would be more cost effective. All of this research is making me re-evaluate if I should consider moving my S CORP from CA to either of these states and the benefits of doing so. Please let me know your advise on this as well.
Customer reply replied 4 months ago
Also I see there is no Personal or Corp State Tax in Nevada so how will this affect the fees associated with choosing Delaware? Unlimited stock is allowed & of any par value in Delaware but not in Nevada, please explain.

I will get you some information to respond on these issue tomorrow if that is okay?

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Customer reply replied 4 months ago
Wendy. Thank you for your quick response, it is much appreciated.

You are correct on the comparison of annual fees - NV $0; Delaware $300. For the true tax consequences, since you are all not in the same place, each of you should consult your/an accountant. Do keep in mind that if the IRS accepts your S-Election, there will be no taxes on the corporation in either state, as the entire purpose of the S-Election is to create a pass through entity. Delaware recognizes the federal S election and does not require Delaware S corporations to pay income tax. However, it does require these businesses to the state’s franchise tax. In addition, an individual S corporation shareholder will owe tax to the state in which he earns the revenue or in which he resides on his or her share of the company’s income - thus, the pass through. In most places, other than Delaware, you will need to register to do business in the state as a foreign company (if it is not the state in which you were formed) and you will likely need to check all city and county regulations as you may be required to get a business (or special event) license or permit in order to do business there. These requirements, although having common elements, vary widely from place to place. The real determining factors on the cost to do business in one place over the other is hard to evaluate without knowing exactly where and what kinds of shows and how often you will plan to do in any place. The huge benefit of an S-Corporation is that it is a pass-through entity in almost all 50-states; thus, your tax costs are not based on the company or where it is located but on your own tax situation and where you are earning income and paying taxes, if that makes sense.

In terms of moving your existing S-Corporation, I'm not sure there would be any great benefit. If you do business in CA and you live there, your tax costs are basically going to be the same since the income of the business is passed through to you.

You really can't go wrong in most states forming a company there - you would likely be pretty similar if you were in any of your states of residence, Nevada, Delaware or another state, as long as that state recognizes the S-election (and nearly all, f not all, do).

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Customer reply replied 4 months ago
Thank you Wendy, we are trying to finalize which state would be best to file for our specific needs and future plans. We are still considering Nevada as we see our company doing shows regularly there as Vegas offers the show rooms that will accommodate our production. We are also looking at potential investors in Nevada and wondering if they would prefer our company be incorporated there since they are residence. Once we have established ourselves we are imagining that we would need to go from an S CORP to a C CORP so how would this play into things and the final choice we make? Regarding moving my current company, I am considering changing the name of my company and re-branding which is why I wanted to see how changing where the new company is incorporated would be beneficial. I no longer reside in CA so this is another reason of looking into the change. However I still do most of my business in CA so I would like to know the best options to setup the new corporation and make the name change.

When considering both this new company and your existing, it is now sounding a lot like Nevada may be a good choice, especially if you are going to convert to a C-Corp at some point with the new company. Having both your companies in the same state would also simplify compliance with all state laws and regulations since they would be the same. I am sorry I cannot provide a definitive answer to the question as you and your partners will have to consider the information I provided and your own business needs. Let me know if you think of anything else.

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Customer reply replied 4 months ago
They are asking about what is required in regard to setting up the S CORP and positions that need to be filled. Is it required to choose who will be the President, Treasure and Secretary? There are three of us in this partnership and we are wanted to setup the Bylaws and know the proper structure that needs to be in place regarding the positions each of us will take. We understand that there are the Shareholders, Directors, and Officers. We want to know how we fairly and legally need set up these positions. For instance do we need to have one of us assigned to take the Secretary position to be compliant? None of us feel we are a fit for this position.

The link attached provides the form for the S-Election: https://www.irs.gov/pub/irs-pdf/f2553.pdf

First you will file Articles of Incorporation in your selected State, at which time you will want to draft and have the shareholders approve Bylaws. The Bylaws will identify what officers will manage the company and how they will be elected (often by a Board of Directors), how many directors there will be and how they will be selected and for what length terms (elected by the shareholders). The attached link provides the packet and instructions for formation of the corporation in Nevada: https://nvsos.gov/sos/home/showdocument?id=668 You will take these steps, then internally draft and approve the Bylaws as set forth above. In terms of officers, to ensure compliance with state and federal laws and to have someone to oversee compliance issues, as well as day-to-day business operations, you should have a President, Treasurer and Secretary. The Treasurer handles funds and tax issues typically and the Secretary is critical for ensuring minutes are taken at meetings of the Board, Officers and Shareholders, and for maintaining records on stock ownership. One of the incorporators - founders of the company - can fill one or more of these, though some states prohibit holding two offices, or you can hire someone to perform these functions. Bylaws will have some uniform considerations and some provisions that are unique to your business.

Attorney Wendy
Attorney Wendy, Attorney
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Satisfied Customers: 1,167
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Customer reply replied 4 months ago
They want to know if more than one of us can take the title of President or is it required to split the three of us into the three primary positions, President, Treasure and Secretary? If none of us choose to be the Secretary and take on the job of maintaining the record keeping, will we need to hire someone to assign them this position? Are there positions/titles/roles we are required to use and setup for the Board of Directors? Also want to confirm that as shareholders we have agreed to split the company 37-33-30 and we want to know how this affects how we operate as a corporation and the rules we need to set in the bylaws?
Customer reply replied 4 months ago
We also want to know about the deadline for filing we heard about being March 15th and how this will affect us if we do not file in time?

Since your business is not formed yet, the way to calculate when you have to make the S-Election is a little tricky. You generally must make the election within 2 months and 15 days of the start of your company's tax year. For for a company that existed before or on Jan. 1 that deadline would be this month, but for a new business that is going to operate on a calendar tax year (the most common way to count a year), your first year of business will be a short year and does not start until the earliest of the following dates: the date the corporation first had shareholders; the date it first had assets, or the date it began doing business. So, if you start doing business on April 1 of this year, your S-Election would be due June 15. I am not sure it is prohibited but it is not wise to have more than one person occupy a single officer position. If you want some people to have equal authority, then you could have a President with limited authority and then 2 vice presidents who have more daily operations power. You do need to have a secretary. The Board of Directors is simply a board or group who will be elected by the shareholders and who will then, usually, have authority to elect directors (you decide how many directors you want). The board of directors and officers make most business decisions, but your bylaws or a particular state's laws will have some decisions that require shareholder approval. On the split, you need to decide is that how the shares will be split for profit/loss/dividends purposes and control of operations or just profit/loss/dividends. A lot of these specifics will depend on what state you choose, but most of the decisions about how the company operates will be something you three as the original shareholders and ultimately perhaps the original directors, which is common, will have to decide.

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