Q:

Subject: Setting up corporation

Which state is most favorable for establishing a corporation?  I will be operating out of Virginia.

At current, I operate a small business out of Georgia under Sole-proprietary structure.

A:

That is not something that can answered quickly.  There are pros and cons to each state. 

Where you actually charter the corporation isn’t as important as where your corporation actually conducts business.  One of the most common mistakes I see people make is assuming that just by incorporating in a tax free state, they are automatically exempt from state income tax.  It becomes a very expensive lesson for those people when they learn that any state in which your corp operates will require that you file corp tax returns and pay its state income and franchise taxes, regardless of where the corp is chartered.

There are ways to source and shift income into tax free states that will depend on what kind of business you will be running.  You will need to work with a tax pro who is familiar with state taxes and strategies for shifting and sourcing income into the lowest tax states.

Good luck.

Kerry Kerstetter

 

There is still no shortage of confusion over the differences between C and S corporations, as I’ve been trying to explain for so many years now.  Some typical examples:

Q:

Kerry,

 I saw your article on C Corp vs. S Corp on your website. I am a CPA with a handful of small business clients. I have a real estate broker client wanting to incorporate. My gut reaction was to recommend S Corp due to double taxation but after reading your article, I am second guessing myself.

I’m tempted to recommend C Corp so that she can deduct her health insurance and other out of pocket medical expenses thru corp. I assume we could take care of the double taxation issue at year end by bringing the profit down by either additional wages or retirement plan contributions. Any advice would be appreciated.

A:

We have dozens of Realtor clients who are saving huge amounts of taxes for all of the reasons that I spell out in that piece contrasting C & S corps, not just the health insurance.

Kerry Kerstetter

 

Q:

Hi Kerry,       

        I’m in North Carolina my CPA advised me to start an S-Corp and I did

so.   I’m a recruiter and have little overhead and have billed around $36K

my first qtr.  What are your thoughts on this?  Should I have started a

C-Corp instead?

A:

I really don’t have enough information to be second guessing your CPA.

However, I do frequently find people jumping into S corps without properly thinking things through.  If your CPA didn’t take into consideration the various points I covered on my web page comparing S & C corps, he may have steered you wrong.

More often than not, a profitable business can save huge amounts of taxes by using a C corp instead of an S.

Good luck.

Kerry Kerstetter

Tax Software vs. Tax Preparer – Is There a Clear Winner? – As I’ve said many times, there is no better example of GIGO (garbage in, garbage out) than with tax software.

File Your Taxes: There Are NO Good Excuses! – Gail Buckner looks at the idiotic arguments used by tax protestors.