As a business owner, how do you feel when you see a competitor making misleading or flat-out wrong representations about how your industry works?
In the field of business formations and maintenance, the idea of the “Nevada virtual office” as a tax-saving solution for people living outside of this state has been around for as long as I can remember. The problem is that claim is largely … untrue (I’m not allowed to use the first word that came to mind). Fortunately, one of the things I love about having my own business is that I get to stand up and shout the truth as long and loudly as possible!
Here are four things to know about the whole Nevada virtual office game:
- It only works if you live here. How are you going to prove to the IRS that your business is operated in Nevada if you live in Kentucky and do all the work in your office there? Forming a Nevada structure to hold property or a business that isn’t physically operated or located in Nevada will not save you any money in taxes. It will actually cost you money as you will have all the Nevada maintenance PLUS the costs to register that business in your home state.
- A virtual office in Nevada is a FANTASTIC idea — for the promoter selling it to you. There is nothing about this set-up that creates a Nevada nexus under the IRS rules, so you won’t escape state taxes. Letterhead, a mailing address, someone who anwers the phone and takes messages for you … none of those things are enough. Legally it’s not always clear. Yes, you created the entity in Nevada, but realistically, where is the work done? Where is the money earned? If someone doesn’t pay you, where do you sue them? The answers to those questions are more relevant to the legal nexus of your business structure. On the other hand, you WILL get to pay your promoter lots of money each year to keep that virtual office in good working order!
- If you set up a Nevada business structure, a Nevada bank account won’t prove nexus – especially if your records indicate that all your deposits are made to a bank branch in another state. It’s also getting harder to do, as many banks in Nevada are looking for proof that you and your business both live here.
- A mail forwarding service doesn’t work to prove nexus any more than the virtual office set-up or bank account does. But it will add to your operating costs.
The worst example I saw of this was about 5 years ago, when an LA restauranteur called me up looking for some advice. He’d been sold an entire Nevada office package by a promoter, and was trying to figure out how to upstream his income out of California so he could start getting all of these tax savings. But every time he called, he’d get passed around, and then get a bill for “additional services.” I had to explain to him that there really wasn’t a way to “upstream” his income out of California. He operated a physical restaurant in California – what was he going to upstream? The dirty dishes? He’d been taken for upwards of $2500.
To me it’s unethical and flat out wrong to sell someone an expensive “solution” to their tax and asset protection concerns that does nothing more than line the seller’s own pockets.
Having said all of the above, there are times when setting up a structure in Nevada is a great idea. Maybe privacy is a really big issue for you – you’re a celebrity, or are starting a new life, and you want to keep yourself off the record. A Nevada entity can work to your advantage here, because Nevada allows for nominees (people you name as figurehead officers and directors, while you still provide the day to day direction). Will you have some extra costs? Yes, but for you, those extra costs are far outweighed by the benefits you receive.
Another time Nevada is a good choice is if you move frequently and want a single operating entity you can take with you. If you start a business in Nevada while living in State A, the typical set-up would be a Nevada entity that’s also registered in your home state. When you move to State B, you would unregister from State A and register into State B. You don’t have to open and close businesses, get new Tax ID numbers, upset your vendor relationships, etc., or worse yet, cause an unanticipated tax consequence when closing one is considered a taxable event. You are just changing addresses as though you were moving across town. For you, spending the few hundred extra dollars per year to maintain your business in more than one state is offset by the ease of moving things around.
Where real estate is concerned, using a Nevada entity can sometimes help, but it really depends on your unique circumstances. If you buy a house in Ohio through a Nevada LLC, for example, you’ll probably still have to register the LLC in Ohio to have proper legal standing there. If your tenant doesn’t pay, you have to bring eviction/collection proceedings in Ohio, because that’s where the debt arose. If the porch collapses around your tenant causing injury, a lawsuit will also be brought in Ohio, because that’s where the damage occurred.
So could you argue that as the property is owned by a Nevada company the lawsuit should be brought in Nevada? Sure, but your chances of winning aren’t great. Then again, lawsuits cost money, and the more money the other side has to spend, the more likely a negotiated settlement becomes.
And finally, what about upstreaming income? You need a few things here. First, you need a C Corporation – because you can’t upstream income in a flow-through entity. Second, you need a real reason to set up a business in Nevada and have services performed there. “I don’t want to pay California taxes” may be the truth, but it’s not enough for the CA Franchise Tax Board to let you off the hook. One example we’ve used in the past is an accounts receivable factoring business. In this case you’d have a business in one state that made the sales, then sold the accounts to the factoring business to collect. But you’d have to have real people on the ground in Nevada doing the work. And the factoring company would need to have more than just your business as a client, otherwise it’s hard to prove to the tax authorities why that part of your business needed to be outsourced to Nevada.
I hope this helps. As you can tell, this is a bit of a sore subject with me … 🙂