LLC's and S-corps with alien status
jo...@tulip.dt.net
Hi there,
Casus:
My partner and myself formed a normal C corporation in
Delaware. We are doing business from Oakland,
California.
My partner is a US Citizen, I am a Dutch citizen (hey,
it ain't much if it ain't Dutch) but I have also my
American Corporation, based in Carson City, Nevada. We
both own 50% of the company.
I want to give my partner the tax-advantages of a S
Corporation, but obviously we cannot change our C corp
to a S corp, because of my alien status. I pay my taxes
in Holland (and willing to do so in the future).
What are the options?
1. Let my own American (C) Corporation own 50% of the
stock instead of me. Then transform the C Corp as
discussed to a S Corp? Is this legal?
2. Change our C corp to a LLC ? What are the main
advantages and disadvantages of a LLC ? Does a LLC have
stock? Is the company itself easy to sell when it's a
LLC ?
You can email me at jo...@dt.net
Thanks for your time, we appriciate it, we are confused !
Joost Zuurbier
THealy CPA
> 1. Let my own American (C) Corporation own 50% of the
> stock instead of me. Then transform the C Corp as
> discussed to a S Corp? Is this legal?
An S corporation cannot have a C corporation as a
shareholder, so you're out of luck.
> 2. Change our C corp to a LLC ? What are the main
> advantages and disadvantages of a LLC ? Does a LLC
> have stock? Is the company itself easy to sell when
> it's a LLC ?
You would need to liquidate the C corp. and then re-form
it as an LLC. Depending on the amount of assets and
gains in the C corp. this could get very expensive in
terms of taxes on liquidation. Assuming the liquidation
isn't a problem, forming an LLC would work very well.
You could invest either through your American
corporation or personally, depending on what works to
your advantage. As to selling the company if someone
wants what you have, it'll work just as well as a
corporation.
Tom
Solving your tax and business problems with
Professional Service...Personal Attention
"I care about you and your business!"
My favorite phrase: "It depends!"
Tom Healy @ Thomas E. Healy, CPA, PC
Gene Prescott (NC, CPA)
jo...@tulip.dt.net wrote:
> My partner and myself formed a normal C corporation in
> Delaware. We are doing business from Oakland,
> California.
>
> My partner is a US Citizen, I am a Dutch citizen (hey,
> it ain't much if it ain't Dutch) but I have also my
> American Corporation, based in Carson City, Nevada. We
> both own 50% of the company.
Are saying you have two C corps? And that you own 50% of
one, but 100% of the other?
> I want to give my partner the tax-advantages of a S
> Corporation, but obviously we cannot change our C corp
> to a S corp, because of my alien status. I pay my taxes
> in Holland (and willing to do so in the future).
I am remembering the rule as "nonresident alien" being
ineligible for S shareholder. Haven't actually had to deal
with that one.
> What are the options?
>
> 1. Let my own American (C) Corporation own 50% of the
> stock instead of me. Then transform the C Corp as
> discussed to a S Corp? Is this legal?
As I recall, shareholders of a S Corp must be an
individual, estate, trust, 501(c)(3) organization
(charity), 401(a) (qualified plan trust), partnership
(as a nominee). That would leave C corp out.
> 2. Change our C corp to a LLC ? What are the main
> advantages and disadvantages of a LLC ? Does a LLC have
> stock? Is the company itself easy to sell when it's a
> LLC ?
That may be doable, but may also need to consider creating
LLC from scratch that acquires the business activity of the
C. LLC (the C stands for Company NOT Corporation) are very
flexible entities that provide some protection to personal
exposure to business liabilities. There are advantages and
disadvantages but exactly which element is which can depend
on your circumstances. You actually need to obtain
professional tax planning help (meaning a fee based
relationship).
> You can email me at jo...@dt.net
Post it here, read it here. :-)
> Thanks for your time, we appriciate it, we are confused !
Actually I'm not sure there is not a obvious reason for
having a Delaware Corporation for a CA based business.
There can be some long-term down side to a C corp (it
actually is an "it depends"). You really should obtain
professional help.
Bruce Steiner
"Gene Prescott (NC, CPA)" <Pres...@TaxTechCPA.com> wrote:
> Actually I'm not sure there is not a obvious reason for
> having a Delaware Corporation for a CA based business.
In the case of corporations doing business in only one
state, I used to set them up in the state where they do
business. But my corporate people tell me it's easier
to set up and deal with corporations in Delaware. The
extra cost is about $250 per year.
Bruce Steiner, attorney
bste...@worldnet.att.net
(212) 986-6000 (NY office)
(201) 862-1080 (NJ office)
also admitted in FL
Edward Zollars
Bruce Steiner <bste...@worldnet.att.net> wrote:
> In the case of corporations doing business in only one
> state, I used to set them up in the state where they do
> business. But my corporate people tell me it's easier
> to set up and deal with corporations in Delaware. The
> extra cost is about $250 per year.
It would seem the decision tree would come down to
whether the advantages were worth $250 per year. As I
recall, the primary advantages seemed to arise *if*
certain litigation arises concerning the corporation,
and for some reason minority shareholder interests seems
to be one of those issues. But those are obviously
issues of law which I tend to leave to the attorneys
<grin>.
---
Ed Zollars, CPA Phoenix, AZ
ezo...@primenet.com
http://www.getnet.com/~hmtzcpas
Gene Prescott (NC, CPA)
Bruce Steiner wrote:
>> Actually I'm not sure there is not a obvious reason for
>> having a Delaware Corporation for a CA based business.
> In the case of corporations doing business in only one
> state, I used to set them up in the state where they do
> business. But my corporate people tell me it's easier
> to set up and deal with corporations in Delaware. The
> extra cost is about $250 per year.
Wonder if someone can give practical example. We are starting
with an assumption that the creation cost "could" be less (if
Delaware is in fact easier) but the ongoing filing costs will
be more (at least two state returns). I suppose some states
could have "stifling" requirements compared to Delaware. If
you are operating in one of those states, does the Delaware
incorporation escape those requirements?
Katie Jaques
"Gene Prescott (NC, CPA) wrote:
snip
> Actually I'm not sure there is not a obvious reason for
> having a Delaware Corporation for a CA based business.
> There can be some long-term down side to a C corp (it
> actually is an "it depends"). You really should obtain
> professional help.
Corporations get organized in DE a lot because it's easy
for the attorneys. From a CA tax standpoint, DE
incorporation means NOTHING, as long as the corporation
does business in CA. It still has to file a CA return
and pay the $800 minimum franchise tax.
Incorporation in DE can have advantages for a publicly
held corporation, or one that you may want to take public
in the future. I am not aware of any particular
advantage of DE incorporation for a closely held
business. On the downside, incorporation in DE requires
you to file an annual franchise tax return. You can keep
the DE franchise tax to the minimum of $30/year by not
authorizing more than 3,000 shares of stock, but why jump
through the compliance hoops? If it's going to do
business in CA, just organize it in CA and forget DE. If
it's going to move outside CA later, do an F reorg and
reincorporate in the state where it will be doing
business.
Katie in San Diego
The foregoing is intended for educational purposes only
and does not constitute legal or professional advice.
The views expressed herein are those of the writer and
are not expressed on behalf of her employer.
Bruce Steiner
ezo...@primenet.com (Edward Zollars) wrote:
> Bruce Steiner <bste...@worldnet.att.net> wrote:
>> In the case of corporations doing business in only one
>> state, I used to set them up in the state where they do
>> business. But my corporate people tell me it's easier
>> to set up and deal with corporations in Delaware. The
>> extra cost is about $250 per year.
> It would seem the decision tree would come down to
> whether the advantages were worth $250 per year. As I
> recall, the primary advantages seemed to arise *if*
> certain litigation arises concerning the corporation,
> and for some reason minority shareholder interests seems
> to be one of those issues. But those are obviously
> issues of law which I tend to leave to the attorneys
Ed (and Gene Prescott and Katie Jaques, who also asked
about this):
If a corporation is doing business in a state, it has to
file returns in that state, and pay tax in that state.
So, traditionally, if a corporation is only doing
business in one state, we incorporated it in that state.
Thus, for example, if the corporation only does business
in, say, NY, and it is incorporated in Delaware, it
still must file in NY and pay tax in NY. There is no NY
tax savings to incorporating in Delaware. Indeed, there
are additional costs of having to hire a registered
agent in Delaware and having to do annual filings in
Delaware. It will cost about $250 per year extra to
deal with Delaware, in addition to the costs of dealing
with NY (or whatever state you are actually doing
business in), which costs you won't avoid simply by
incorporating in Delaware.
So why would you incorporate in Delaware?
First of all, the initial filing is easier. You can
check corporate name availability and reserve corporate
names easily in Delaware. You can file the certificate
of incorporation easily (even by fax!) in Delaware. If
you want to dissolve or merge, you can do it easily in
Delaware. In a recent thread, Rich Carriero described a
situation where it took quite a while to get tax
clearance in Rhode Island to dissolve. The same can
happen in NY or NJ. This can be avoided by
incorporating in Delaware.
I am also advised that the Delaware corporate law is
generally very flexible from a corporate management
standpoint.
I suppose there is also some benefit to having all of
one's corporations in the same state.
Notwithstanding the above, when a corporation was only
going to do business in one state, I have always set it
up in the state where it was going to do business. But
recently a client wanted to set up a corporation to do
business in NY (it will be 2/3 owned by foreign
corporations, so we chose a corporation rather than an
LLC to avoid the branch profits tax), and my colleague
in our corporate department who is working with me on
this matter said that he is now using Delaware for all
of his incorporations.
I would be interested to hear whether others are doing
the same.
Edward Zollars
Bruce Steiner <bste...@worldnet.att.net> wrote:
> Notwithstanding the above, when a corporation was only
> going to do business in one state, I have always set it
> up in the state where it was going to do business. But
> recently a client wanted to set up a corporation to do
> business in NY (it will be 2/3 owned by foreign
> corporations, so we chose a corporation rather than an
> LLC to avoid the branch profits tax), and my colleague
> in our corporate department who is working with me on
> this matter said that he is now using Delaware for all
> of his incorporations.
If there is a valid reason to do so that's worth the
$250 per year (and I suspect in the case above that will
be true), then I'd not object to a Delaware
incorporation. However, I've seen laypeople who decided
they needed a Delaware corporation even though they had
no idea *why* they needed it <grin>. If you are only
going to operate in a single state, I would say you
always need to be able to clearly explain why you want
to incorporate outside that state.
Gene Prescott (NC, CPA)
Me too :-)
Katie Jaques
Bruce Steiner <bste...@worldnet.att.net> wrote:
> If a corporation is doing business in a state, it has to
> file returns in that state, and pay tax in that state.
Also, as a rule, if a corporation organized elsewhere is
doing business in a state, it must file qualification
papers (or obtain a certificate of authority, which is
the same thing) in in the state(s) where it operates. A
qualified foreign corporation generally has to file some
kind of annual report with the Secretary of State, just
as a domestic corporation does. That's another layer of
compliance; not complex or difficult, but an additional
annual cost.
snip
.. In a recent thread, Rich Carriero described a
> situation where it took quite a while to get tax
> clearance in Rhode Island to dissolve. The same can
> happen in NY or NJ. This can be avoided by
> incorporating in Delaware.
In California, in order for a foreign corporation to
withdraw its qualification to do business in the state,
it must obtain a tax clearance just like a domestic
corporation. Until it does so, the corporation is
subject to the annual $800 minimum franchise tax and
other reporting requirements. This is true even if the
corporation is legally dissolved and really doesn't
exist under the laws of the state where it was
organized. So there is nothing to be saved there by
incorporating in Delaware or anywhere else.