“You have been selected for an IRS audit” are dreaded words. Those words instill shivers in every spine. How would you like to save legal hassles and lower the probability of an IRS audit? Incorporation is the key. Let’s make the process as painless as possible; which state has the lowest fees and highest asset protection?
Why Incorporate?
Audit Probability – Did you know the IRS is far more likely to audit a proprietorship or partnership than an LLC or C Corporation? The IRS knows the temptation of the small business owner to slip a personal lunch into business expenses. “What’s the harm of paying a credit card bill or two out of the business?” The odds of personal to business expense crossover are less likely with a corporation. The average taxpayer has about a one percent likelihood of being audited; small business faces a 2.5 percent chance of an audit. Expense crossovers and mistakes trigger IRS audits.
Taxes – If you want to save taxes, and who doesn’t, filing IRS form 2553 may allow your LLC to be taxed as an S-corporation rather than at the higher corporate tax rate.
Asset protection – Being sued is not on my list of top five favorite things. Losing everything we’ve worked hard to accumulate isn’t on our list either. One major advantage of incorporating as a limited liability corporation or a C corporation is creating a barrier protecting personal assets from any potential business liability exposure. “Piercing the corporate veil” is poking a hole in the protective barrier of incorporation.
Which state is best for your corporation?
When Shawn Petersen started PrintPlace.com, he intended to stay small. High quality products and service propelled PrintPlace.com to #54 on Inc.’s 2010 list of fastest growing privately held companies.
If there is a possibility of doing business in multiple states, internationally or ever moving your business to another state, consider which state is best for your corporation?
Why choose a different state in which to incorporate?
Incorporating in your home state may be easier, more expensive and higher risk. We tell our kids “easier is not always better.” Choose the state where you receive the optimum protection for personal and business assets.
The three leading contenders for asset protection and freedom to do business are: Delaware, Nevada and Wyoming.
Delaware
Delaware led the field and declared their corporate law as “equivalent to American corporation law.” Nevada rose to prominence several years later and Wyoming is the newest kid on the incorporation block.
Delaware hosts over 900,000 corporations including half of the United States corporations and 63% of Fortune 500 corporations. Delaware’s ”Court of Chancery” is legendary pro-business; Delaware’s legal history and “flexible corporation statutes” include a price tag.
Caution – Delaware requires 8.7 percent state corporate tax, reporting stock number and value, and director and officer contact information. Nevada and Wyoming do not.
Delaware make it easier for the IRS to retrieve information than Nevada or Wyoming.
Nevada
Read the fine print; the difference is in the details. Nevada has several positives and one negative.
Positive – Nevada surpassed Delaware in protecting small business rights. Nevada protects corporate officers from monetary penalties; Delaware does not. Nevada provides protection against undisclosed personal benefits to officers or directors and acts or omissions prior to statue adoption; Delaware does not.
Negative – Nevada does require a company tax payer ID number and a personal guarantee on the state’s business license.
Wyoming
“Wyoming challenges Delaware’s most pro-business claim by professing a four year ranking of “the most business-friendly tax system.”
Lowest fees – Wyoming state fees are 70% lower the first year and 84% lower going forward. Nevada requires a $125 officer filing fee and a $200 state business license fee. Wyoming requires a $100 business license fee and a $50 renewal fee.
Wyoming does not require US citizenship in order to incorporate.
Wyoming professes simplified filing, closed LLCs and limited asset disclosure, i.e. less paperwork. (Simple and “non-disclosure” of assets is inversely related to asset protection.)
Summary:
| Delaware | Nevada | Wyoming |
|---|---|---|
| 8.7 % state corporate tax | no state tax | no state tax |
| Officer list and fee | Officer list and fee | no officer list |
| Stock number and value | no stock list | no stock list |
| US citizen registered agent | US citizen registered agent | not US citizen |
| Business license | Business license | Business license |
The deal is in the details. If your goal is protecting your assets, avoiding an IRS audit, saving yourself money and headaches, seriously consider incorporating. With legal matters, “do it yourself” may not be best; consult a professional to incorporate.