We have prepared a few Corporate FAQ that we hear most frequently from clients and prospective clients. If your questions isn’t listed please feel free to contact us.
Question: I have a DE corporation with offices in NJ and NY. Most of our business is conducted in NJ, but we are headquartered in NY. Do we need to file taxes in all three states?
Answer: The short answer is yes. Probably.
A corporation is taxed in every state it does business and in the state it is incorporated.
Income is apportioned between the three states. Each state has a different regime to apportion those taxes.
New Jersey Corporation Business Tax Act imposes a franchise tax on a domestic corporation for the privilege of existing as a corporation under New Jersey law, and on a foreign corporation for the privilege of having or exercising its corporate charter in this State or doing business, employing or owning capital or property, maintaining an office, deriving receipts, or engaging in contracts in New Jersey. A taxpayer has a regular place of business outside New Jersey, its tax liability is measured by net income allocated to New Jersey, according to a three-fraction formula based on an average of property, payroll, and sales, which is counted twice. The factor is computed by adding the percentage of the property and payroll fractions, and a fraction representing two times the sales receipts, and dividing the total by four.
New Jersey is a gross income state and doesn’t give a full credit for taxes paid to another jurisdiction.
New York has a corporation franchise tax, which applies to both traditional (C-type) corporations and to S corporations. For traditional corporations, the amount of corporation franchise tax due is the highest of the following four amounts the corporation’s entire net income (ENI), the corporation’s business and investment capital, the corporation’s minimum taxable income (MTI); or a fixed dollar minimum (FDM) tax. Most corporation used, ENI. ENI is based on federal taxable income with certain New York-specific modifications. New York apportions based on sales.
New York gives a full credit for taxes paid to another jurisdiction if New York is the principal taxing jurisdiction.
Delaware taxes every domestic or foreign corporation doing business in Delaware, not specifically exempt, is required to file a corporate income tax return and pay a tax on its federal taxable income allocated and apportioned to Delaware. This tax is based on an equally weighted three-factor method of apportionment. The factors are property, wages and sales in Delaware as a ratio of property, wages and sales everywhere.
New Jersey would probably tax 100% of the income giving credits to other jurisdictions. New York would tax its portion of sales. Delaware would charge a minimum tax.
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Question: I am interested in forming a non-profit corporation in NY; can I be the sole shareholder and director?
Answer: You can be the sole director – but you may not be the sole shareholder.
Not for profit corporations are different than other forms of corporation. Nonprofit organizations have to pass the organizational and operational tests to be recognized as tax-exempt by the Internal Revenue Service and New York State. Due to the requirements of the organizational test, most nonprofit organizations are formed as non-stock nonprofit corporations. This is because boards of directors of corporations with stock are required to maximize shareholder return instead of focusing on the exempt purposes of the organization. In addition, allowing board members to have shareholder interest could result in private inurement.
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Question: What are tax pros and cons of treating workers as employees v independent contractors for the business and the individual?
Answer: Treating a person working for you as an employee or an independent contractor is not so much a choice, but an obligation to be fulfilled by the employer in accordance with the labor laws of the United States and the state in which the employee works.
Generally, per the Internal Revenue Service, an individual is an independent contractor if the worker has the right to control or direct only the result of the work and not what will be done and how it will be done. You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.
If the worker is an independent contractor, the employer need not withhold taxes and reports the contractor’s work on a form 1099. The independent contractor need not receive benefits and the employer does not pay employer-side employment taxes.
If the worker is an employee, the employer must withhold taxes and reports the contractor’s work on a form W-3. The employee must receive benefits per the company’s policies and the employer must pay employer-side employment taxes. Depending on the state laws, the employee gets vacation and sick day benefits.
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Question: How do you merge an Limited Liability Company and a corporation?
Answer: There are three different ways to accomplish the same objective.
- Contribution by LLC of its assets to a corporation in exchange for stock
Assuming that the contribution of the LLC’s assets to the corporation in exchange for stock meets the requirements of Section 351, it is tax free to the LLC. The LLC takes a basis in the stock of the corporation equal to the basis of the assets contributed to it, decreased by liabilities assumed by the corporation and increased by the gain it recognizes on the exchange.
The transaction is not taxable to the corporation. The corporation takes a basis in the LLC’s assets equal to the basis of the assets in the hands of the LLC. The distribution of the stock to the members terminates the LLC and the members take a basis in the stock equal to the basis in their LLC interests.
- Distribution by LLC of assets followed by the members’ contribution of assets to a corporation
Assuming that the contribution of the LLC’s assets to the corporation in exchange for stock meets the requirements of Section 351, it is tax free to the LLC members. The Limited Liability Company members do not recognize gain on the distribution unless the amount of money distributed. The basis of the assets to the members equals their basis in their LLC interests less the amount of money distributed. The consequences of the deemed contribution to the corporation in exchange for stock are similar to the contribution by LLC of its assets to a corporation in exchange for stock.
- Exchange by members of LLC interests for stock of a corporation
The exchange of LLC interests for stock is tax free to the members and the corporation. The LLC members basis of the stock to the members equals their basis in their LLC interests. The corporation’s basis in the LLC interests equals the members’ basis in their LLC interests. The basis of the assets in the corporation’s hands equals its basis in the LLC interests.
Each of the three methods involves transferring property to a new corporation in exchange for stock. In order for the incorporation to be tax-free the transferors of the property must be in control of the corporation immediately after the exchange.
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Question: For corporations, which jurisdiction has the lowest state taxes?
Answer: The jurisdiction with the lowest taxes is the jurisdiction in which the corporation does business.
Taxes rates vary from state to state, but lowest tax rate is not how you should be sizing up this problem. A corporation must pay tax in the state in which it is incorporated and every state in which it does business. The state of incorporation will tax 100% of income. Income will be apportioned among the states in which the client does business. The incorporating state may grant a credit, but it may not. It will seriously complicate state taxes.
The business also needs to pay fees to every state in which it does business as well as the state of incorporation.
If you are starting out, and not public, the best place to incorporate is the state in which you will do business. Incorporating in the state in which you will do business will minimize taxes overall, even if the specific rate will be higher as an optic.
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