Go Legal Yourself!, 2nd Edition

CHAPTER 1What Legal Entity Should I Be?

As a practicing business attorney for 18 years, I have heard it all when it comes to incorporating a business. Many think that incorporating their business will help them cut the federal tax bill or avoid paying state income taxes completely. First-time entrepreneurs often have misconceptions about incorporation, usually resulting from an optimistic desire for lower taxes or third-hand advice from a friend or a friend's accountant. When small business owners fall prey to some of these myths, the consequences can range from higher taxes to misunderstanding their personal liability. To gain a better understanding of these myths, it's important that you understand some of these misconceptions surrounding incorporation.

• Incorporating can help with avoiding state taxes:

  Those starting a business in California might be jealous of neighbors in Nevada who don't have to pay state income taxes. Many entrepreneurs believe that they can incorporate in a low tax or no tax state and their business is not required to pay any income taxes. It sounds like a great strategy but it does not work. When it comes to state taxes, it does not matter where the business is incorporated. What generally matters is where the owner operates the enterprise. Those living and running a business in California still need to pay state taxes on the income earned in California even if the company is incorporated in Nevada. Moreover, Nevada requires an annual filing of the ...