Choosing State to form LLC

**jond2062** · 11-11-2008 02:20 PM

I just came across this forum today while doing some research on forming an LLC. Any thoughts or prior experience you may have would be helpful and greatly appreciated.

I have recently been in talks with a start-up company in the beverage industry about providing some financial and business consulting services to them. I am currently employed full-time and would be doing this on the side. One of the founders of this start-up is a family friend and I am confident that this could provide me with some additional income, as well as put me on ground level with a very exciting young company. That being said, the only way I would consider entering a relationship would be as an official employee or if I formed my own legal entity and offered my services an a per-hour consulting basis. The risk of doing this informally just seems to high (unless any of you can suggest otherwise).

This brings me to the issue I have been researching: The company I would be providing services to operates out of Washington state and they would likely be my only client for the foreseeable future. However, I live in California. So in considering forming an LLC, the problem I am faced with is the $800 franchise tax in California. Since I am doing this work on the side, I wouldn't expect my revenue to be very significant, so $800 represents a large amount on a percentage basis. Additionally, since I am employed full-time, all of the income from the LLC would be taxed at my marginal rate, meaning taxes/fees would be eating up a significant amount of this venture.

As a result, I have been trying to decide if it makes any sense to form the LLC in Washington state. Now I know that California basically does anything it can to prove that I am doing business in their state, but is it possible to argue otherwise and have firm ground to stand on? If so, what would be required? Assuming I kept this company as my only client and they operate out of Washington, would the fact that I am physically located California be the overriding factor? I would be more than willing to open the bank account in Washington and I have physical address that could be used up there as well. I'm just not sure if this is enough.

I'm not trying to do anything illegal, I am just trying to structure things so that starting this business is realistic. Any help would be greatly appreciated.

**StealYourDreams** · 11-11-2008 04:26 PM

If you are a resident of California you will have to pay CA taxes regardless of where the work is performed.

You can form your company anywhere you want, but doing it in another state to avoid the $800, is not a good idea.

If you're only going to have one client for the foreseeable future you may want to get paid personally via 1099 to both make sure you have a gig and to save your money so that $800 is not an issue.

**buynick** · 11-11-2008 04:28 PM

My feeling is that you should support the state you live in by forming your corporation in your own state. The fees you pay help that state, so it only makes sense to help your own state in order to reap those benefits yourself.

**jond2062** · 11-11-2008 05:32 PM

Thank you for your responses. I expected that the general sentiment would be that there wasn't much support for forming an LLC outside of my home state of California, but I was hoping someone might have a creative solution.

StealYourDreams: Working as an independent contractor is fine and I have done it several times before, on a smaller scale. However in this case, I am concerned about any legal ramifications and the exposure of my personal assets. If I don't organize any type of formal business entity, what protections do I have as an independent contractor? Or more importantly, what is the level of risk exposure? Can a well written agreement between the company and myself mitigate any major concerns?

buynick: I couldn't agree with you more. But in my opinion, the $800 franchise tax is an unnecessary burden for a new business. The majority of other states impose no such fee/tax and they are in better financial shape than California is. The question you have to ask is would the state be better off collecting approx. 35% of $10,000 (assuming I start a business but don't have to fork over $800) or 35% of nothing (if the $800 stops me from going into business). The problem I have is not in having to pay taxes, its that the $800 fee is in place regardless of whether I do $1,000 in revenue or $45,000 in revenue.

**StealYourDreams** · 11-11-2008 06:58 PM

Originally Posted by jond2062

StealYourDreams: Working as an independent contractor is fine and I have done it several times before, on a smaller scale. However in this case, I am concerned about any legal ramifications and the exposure of my personal assets. If I don't organize any type of formal business entity, what protections do I have as an independent contractor? Or more importantly, what is the level of risk exposure? Can a well written agreement between the company and myself mitigate any major concerns?

Honestly, if you're that concerned about the legal ramifications you may want to reconsider working with the company in question.

Yes, in theory as an individual you have unlimited liability. Reality is most individuals dont get sued or do anything that would put them in a situation warranting the added protection of a seperate legal business entity.

Should you do it? Yes. Will it hurt you if you work with the company in question under a DBA for X months while forming a seperate entity? That's the risk you take and sometimes you have to take calculated risks to succeed.

**kimbeckers** · 11-11-2008 10:58 PM

As has been stated, I too would form the business entity in the state that you live in. The costs for forming the entity far out way the protection and tax breaks it will bear. If you are that considered about the personal protection I think that you have more protection forming a corporation over an LLC. You can elect to form as S corp instead of a C corp, receive the same protection as the C but avoid the double taxation. When filing your taxes as an S corp the profits or loss of the corporation get carried over to your personal tax return as opposed to the C corp which pays its own taxes.

You should always consult with an attorney or CPA before making a final decision, they can file the papers for you or you can do it yourself if you like.

**Justice44** · 11-12-2008 12:24 PM

Originally Posted by jond2062

Thank you for your responses. I expected that the general sentiment would be that there wasn't much support for forming an LLC outside of my home state of California, but I was hoping someone might have a creative solution.

StealYourDreams: Working as an independent contractor is fine and I have done it several times before, on a smaller scale. However in this case, I am concerned about any legal ramifications and the exposure of my personal assets. If I don't organize any type of formal business entity, what protections do I have as an independent contractor? Or more importantly, what is the level of risk exposure? Can a well written agreement between the company and myself mitigate any major concerns?

buynick: I couldn't agree with you more. But in my opinion, the $800 franchise tax is an unnecessary burden for a new business. The majority of other states impose no such fee/tax and they are in better financial shape than California is. The question you have to ask is would the state be better off collecting approx. 35% of $10,000 (assuming I start a business but don't have to fork over $800) or 35% of nothing (if the $800 stops me from going into business). The problem I have is not in having to pay taxes, its that the $800 fee is in place regardless of whether I do $1,000 in revenue or $45,000 in revenue.

Hi Jond, what is an LLC? I asked that at the end of my introductory PM to you. Perhaps you were to busy to answer it.

**kimbeckers** · 11-12-2008 12:26 PM

A Limited Liability Company (LLC) is a relatively new 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.

A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.