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My wife and I live in California, and we are co-trustees of

our family trust. Each of...
My wife and I live in California, and we are co-trustees of our family trust. Each of us are launching different businesses - Hers is a personal care product to be sold online. I am an unincorporated real estate broker about to undertake an ambitious global online auction platform for which I plan to raise money. We are considering having our family trust form a single-member LLC (Wyoming?) for my wife's project, and having the family trust form a C-Corp (Delaware?) for my project. Does this make sense, or is there a better approach?
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Answered in 25 minutes by:
1/13/2013
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,160
Experience: Taxes, Immigration, Labor Relations
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LEV :

Hi and welcome to Just Answer!
There is nothing wrong with your business structure as long as it serve the purpose.
The primary purpose of having a family trust to preserve your assets and pass then to your beneficiaries after you die. In additional assets in the family trust - assuming that is an irrevocable trust - are protected from in case you are sued.
However - if that is a revocable grantor trust - it is ignored for income tax purposes - and generally do not file a separate tax return.
A single member LLC owned by the trust is disregarded entity for income tax purposes. The LLC might be liable for other taxes - for instance sales tax, property tax, etc - but not income taxes. Instead all tax liability is passed to the member.
I do not see the reason to register the LLC in Wyoming. As long as it will be run by your spouse out of California -it will be a foreign entity - and according to California tax law - it should be registered in California anyway and will be subject of franchise tax in California.
For income tax purposes - taxable income will be passed to the trust and most likely - to your spouse personally.

LEV :

C-corporation is a separate legal and taxing entity. It will file its own tax return and will pay corporate income tax. The same issue with the place of registration - I do not see any reason to register it in Delaware as long as it will be operated in California. As a foreign entity - C-corporation register in California before conducting any business activities ay and will be subject of franchise tax in California.
It might be easy to hide business activities from FTB - especially if that are online activities - but that woudl be a violation of CA tax laws - and we need to be clear on that.

LEV :

C-corporation would be a good choice as a business structure if you plan to raise money and sell shares to investor. However when income is distributed - it will be taxed twice - on corporate level and for shareholders. Just you need to be aware of that.

LEV :

From tax prospective - I see that you will have relatively complicated business structure and there will be some additional overhead for accounting and tax reporting. As long as that serve your other purposes - that would be OK to absorb extra cost.

Customer:

LEV, thanks. The idea behind having the family trust as owner here on the ground floor is that my wife and I are both in our early 60s and we are estate planning. My wife's motivation for the LLC was to protect herself in case of a lawsuit, to legitimize her company to customers, and to protect herself from high California taxes. If filing the LLC in another state will not matter and she will still be obligated to pay California taxes, even though her company is internet based, should she look into an S Corp?

LEV : As I already mensioned - if the business activities will be run out of California - a foreign entity which is Registered in another state - is required to be registered in California and income will be subject of California taxes. That is acccording to California laws. Having out of state registration might only help to hide business activities from FTB but we need to be clear - t,hat might be classified as tax avoidinence scheme... By. The way -the trust may not be a shaholder of S corporation - with few exemptions.
LEV :

That is a good idea to have a family trust for estate planning. Generally you might want to protest your assets in the trust in case of a lawsuit - and having a separate entity - such as the LLC - to separate business operations from trust's assets is also a good idea. So there is a purpose for such business structure - and that purpose will be a reason you agree for additional expenses.

LEV :

While the business might be internet based - it may not be nowhere - it is still run out of a physical location - which happens to be in California - that determines a nexus in California.

LEV :

See for reference - http://www.sos.ca.gov/business/be/faqs.htm#form-question7


Before transacting intrastate business in California the business must first qualify/register with the California Secretary of State. (California Corporations Code section 2105, 15909.02, 16959 or 17451.) California Corporations Code sections 191, 15901.02(ai) and 17001(ap) define "transacting intrastate business" as entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce.

Customer:

Hi Lev, My wife read that there may be an advantage to an LLC with an S Corp election. What do you know about this arrangement?

Lev
Lev, Tax Advisor
Category: Tax
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Experience: Taxes, Immigration, Labor Relations
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First pf all having S-corporation as a business structure will not affect California tax liability. In additional - generally the trust may not be a shareholder of S-corporation.
Then - S-corporation is not a legal entity - but rather the tax status. Generally - you register an LLC or a corporation - and then choose it to be treated as S-corporation.

A Limited Liability Company (LLC) is a business structure allowed by state statute.

Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC's owner's tax return (a "disregarded entity"). Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation. And an LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it files Form 8832 and affirmatively elects to be treated as a corporation.
In case of S-corporation - you are both - an employee and a shareholder. As an employee - you receive wages - which are generally deductible for S-corporation and taxable income for you. As a shareholder - you are responsible for taxable income of your S-corporation.
While S-corporation files its own tax return - it doesn't pay any taxes - but all taxable income is passed to shareholders who report it on their individual tax returns. That is why S-corporation classified as a pass through entity. Shareholders are responsible for S-corporation's income REGARDLESS if that income is distributed or not.

Possible tax benefits would be based on your specific circumstances.
For instance - if you have substantial net business income - you may choose to treat your LLC as S-corporation. In this case you will be an employee of S-corporation and will receive wages, which will be deducted by the S-corporation. The S-corporation would file an income tax return - but will not pay any income taxes - instead - the tax liability is passed to shareholders - and that income is not subject of neither of self-employment taxes nor employment taxes - so there would be potential saving..
However - there will be additional overhead for filing employment and income tax returns for the S-corporation.Thus to overcome these additional costs - your net business income should be substantial - generally - at least $40-$50K.

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Customer reply replied 4 years ago

Hi LEV, re: the Deleware C-Corp - what is your opinion on number of shares to register when launching? Should the number be small or large? If at the beginning 100% of the shares are owned by our family trust, what's the cost difference between 1,000 shares and 10 million shares? Is there a cost disadvantage to having fewer now and issuing more shares later? Thx.

Hi and welcome to Just Answer!
Generally - the number of shares would not affect your taxes or business operation as long as you will not start selling shares. For instance - when you sell shares to investors in order to raise capital to expand your business - you might want to have larger number of shares - for instance 1000 shares. I do not think that you need 10,000,000 shares unless your corporation will going public and shares will be sold to a very large number of investors.
Aside from that - the number of shares really would not matter - but the only matter a proportion of the ownership reflected by the number of shares.

Just for illustration - if you have $100 - it might be one bill or 100 $1 bills - you might have extra duty to count them - but might be easy to operate when you do financial transaction. You might also have 10,000 coins 1 cent each - that will result additional storage issues, counting issues, but as long as you are not making 1 cent payments - such small denomination seems as unnecessary.
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Lev
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