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CPA question regarding corporations

Hello, I am starting an...
Hello, I am starting an internet company which will sell subscriptions to members who will gain access to video tutorials online. One service, one monthly subscription, everything is done online and over the phone and no physical goods are sold or used to deliver the product such as cd's or or flash drives. My headquarters could be located in Southern California with 22 employees to begin but I am willing to relocate to another state or jump over hoops and loops if its worth it. I've already read an e-book that reviews the basics of each type of corporation and made some research on-line as well so you don't have to give me all the general information. At this point I'm looking for smart, simple, strategic advice that will make the most since once I'm making $250k per year. And to make it easier for you I've divided the question in to 3 parts, thanks in advance :)

1) I need to know all of the differences between S-Corporations and LLC's that choose to be taxed as S-Corps and why would anyone choose either.

2) Then I need to know in which state is it most favorable for me to file the corporation. Some say stay here in California others say Delaware, Nevada, Wyoming, or Florida. I'm lost.

3)Lastly, will I have to charge sales tax given the description of my service? I understand that online subscriptions are not taxable due to the fact that there is no physical product being manufactured or used to deliver it, but I've also read contradicting information online.


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Answered in 17 hours by:
11/18/2011
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,132
Experience: Taxes, Immigration, Labor Relations
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Hi and welcome to Just Answer!
1) I need to know all of the differences between S-Corporations and LLC's that choose to be taxed as S-Corps and why would anyone choose either.

A Limited Liability Company (LLC) is a business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.

Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit "single member" LLCs, those having only one owner.

The federal government does not recognize an LLC as a classification for federal tax purposes. An LLC business entity must file a corporation, partnership or sole proprietorship tax return.

An LLC that is not automatically classified as a corporation can file Form 8832 to elect their business entity classification. A business with at least 2 members can choose to be classified as an association taxable as a corporation or a partnership, and a business entity with a single member can choose to be classified as either an association taxable as a corporation or disregarded as an entity separate from its owner, a "disregarded entity."

Instead of LLC - you may register a corporation. For tax purposes it will be taxed as C-corporation. But shareholders generally may choose the corporation to be taxed as S-corporation.

So LLC and corporation are legal entities, while C-corporation, S-corporation, partnership or sole proprietorship are taxing structures.

2) Then I need to know in which state is it most favorable for me to file the corporation. Some say stay here in California others say Delaware, Nevada, Wyoming, or Florida. I'm lost.
The easiest way to have a business entity in the state in which you run business operations. Most states require to register foreign entities (entities that are registered outside the state) before they may legally perform business activities within the state.
If you may choose any state - you may based your decision on the State Business Tax Climate Index (SBTCI) - see this publication - http://www.taxfoundation.org/files/bp60.pdf
The ten best states in the Tax Foundation's 2011
State Business Tax Climate Index are as follows:
1. South Dakota 6. Montana
2. Alaska 7. New Hampshire
3. Wyoming 8. Delaware
4. Nevada 9. Utah
5. Florida 10. Indiana
3)Lastly, will I have to charge sales tax given the description of my service? I understand that online subscriptions are not taxable due to the fact that there is no physical product being manufactured or used to deliver it, but I've also read contradicting information online.
When you provide online services - there are two factors - your physical location and location of your customers. Based on these factors you determine under which jurisdiction the sale transaction is regulated. Then - you need to verify if your services are subject of sales tax or not. In most states online services are not subject of sales tax - but to be précised - regulations for specific states should be examined.

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Customer reply replied 6 years ago
Hello,
Thank you for trying to answer my question. You provided me with a lot of knowledge and helpful information but it’s not addressing the concern. I’m an entrepreneur trying to make a decision with three questions on my way.

1) Differences between S-Corporations and LLC's THAT CHOOSE TO BE TAXED AS S-Corps and why would anyone choose either.
In my question I mention “that choose to be taxed as s-corps” and then I ask “why would anyone choose either.” I’m looking for advise here it's all a game with a strategy I'm looking for the strategy not for technicalities without the advice.

2) I need to know in which state is it most favorable for ME to file the corporation.
Notice I ask which one is most favorable for ME. I am going to be doing business nationally and internationally. I am not looking for the easiest way I am looking for the most favorable. In accounting I have a feeling favorable means profitable.

3) Will I have to charge sales tax given the description of my service?
Simple questions have simple answers, yes or no. Maybe arriving at the answer is hard but nevertheless the answer is simple. If you need more information about my company or what just ask.

More info: Gross sales estimated to be 250k per year. Product a SUBSCRIPTION that gives customers access to video tutorials delivered via the internet.

Thanks for trying
Jax Tax
Jax Tax, Tax Attorney
Category: Tax
Satisfied Customers: 1,408
Experience: JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
Verified
1. The difference in an Llc and a corp both making a s election involve allowable fringe benefits and may ultimately effect the sale if any. The differences are all small but there are many. It could take an entire.college course to cover. Just trust me and go with the corp and file.form 2553 to male the sub s election. If you are in a high risk profession outside this business and the business will own significant assets, an Llc may be better due to what is called a charging order but otherwise go with the corp.
2. The whole favorable.state.issue has been diluted in the last decade. Just set up in the state you are located. Historical differences involved shareholder and partner disputes mostly and you are just one guy so it really does not matter at all. If the above.issue with the charging order is applicable and you choose an Llc, you may want to consider Florida or Nevada but otherwise, your state is fine.
3. As for sales tax, I cannot provide an answer. It depends on what state.you are in. If your state.charges.sales tax on this service then you must withhold.sales tax from customers in your state. In no case will sales tax be charged to customers outside the state(s) you have a presence. So it depends on what services your state charges sales tax. Each state.is different.
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If you additional help, please let me know.
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Customer reply replied 5 years ago
Helo Jax Tax,

Your advice is good and I really appreciate it.

As far as part one, okay I'll go with the s-corp.

As far as part two, I don't want to just do what's easy I want to do what's going to give me more options in the future, more escalability, and protect me most. But, I am not going to sell, get partners, or loans. I want to maintain as closely held of a corporation as as possible. If you where going to make 500k net a year with a company that was 100% internet (selling monthly memberships to customers who would gain access to online video tutorials) and you lived in southern California would you register your S-Corporation here in California? I'm a strategy type of guy. I like to go by the book but I also appreciate a good strategy with vision. Help me out.

As far as part three, can you please ask me whatever you need to know to tell me if I will have to pay sales taxes in California for selling online memberships. Nothing will be physically manufactured, nothing will be physically shipped, everything is 100% online streaming.

Thanks for you help.
1. Set up a corporation with the state. There is no s.corp set up. You set up an Llc or a corporation then make the sub s tax election with the Irs . I suggest the Corporation with the sub s election.. It gives you more options during the life of the business and upon sale. As soon as you set up the corp with the state, go to Irs.gov and get your Ein . Takes 5 minutes online. Then file form 2553 to make the sub s tax election. All Irs filings are free.
You will then need to get your unemployment insurance, sales tax Id, and payroll account with the state. All of this is free as well. The only cost is with the original corporate set up with the state.
2. Which state? California. There is.no reason to do other anywhere else of you live in Cali and will be doing the work in cali . There is no income.tax on the corp any way.and as a resident of cali all income is taxed there.personally any way because the income passes to you personally as a w2 employee and on the k1 as investment income.
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3. Sales tax. Yes, you mist charge.sales.tax to customers who live in cali. Any were else, no. You will charge.the.customer.the tax and.submit it to the state. You don't come.out of pocket, you just have to handle it.

4. Other- yes, you do have to pay yourself as a w2.employee. The amount should be reasonable and.reflect what you would expect to pay someone else to do your job within the company. I strongly suggest you pay a payroll company to handle all aspects of payroll including filing and payment of payroll taxes. We are talking about up to weekly filing requirements. Very worth the small fee to make sure it is done right. Additional profit is yours as dividend income not subject to social security and Medicare tax. Currently 13.3%.
Jax Tax
Jax Tax, Tax Attorney
Category: Tax
Satisfied Customers: 1,408
Experience: JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
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Customer reply replied 5 years ago
I was going over the info you provided a couple of weeks ago and decided to send you a tip.
Thank you very much.
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