Entity Formations and Considerations Podcast

In our first podcast, boringly referred to as Podcast 1, we discuss entity formations and considerations. You wake up with a great idea, and you ask yourself, “What’s next? How do I materialize thoughts into substance?” We don’t want to unnecessarily complicate the heck out of things, but there are some considerations when forming a business.

Entity Location

One of the first concepts is location… where should you form your new entity? Delaware and Nevada have marketed themselves, quite literally, as a business-friendly state. While we are not here to argue the efficacy (or lack of) of their marketing and statements, some of the hype is just that. In our small business podcast we discuss physical nexus and economic nexus. Generally speaking, physical nexus is your butt… where do you do the work? Economic nexus can be summed up a bit differently; while you do not physically occupy space in another jurisdiction, such as a state, you have substantial presence (quasi-physical) because of revenue or sales, property and / or payroll.

So often people want to form their business in Nevada although they do all the work in California (as an example). This is fine. You can easily form your entity in Nevada, but you will also have to file as a foreign entity in California. So, what did you accomplish? Who knows. However, you might be relying on legal advice (good, sound and proper legal advice) and Nevada is necessary. Or… you are obtaining some venture capital and they insist on a Delaware corporation. Remember the golden rule; he or she who has the gold makes the rules.

LLC versus Corporation

In our small business podcast we also discuss the differences between a limited liability company and a corporation, and why you might need to choose one over the other. Some professions in certain states, such as a physician, accountant or attorney in California, are required to be professional corporations (P.C.). In continuing to pick on California, they have a nasty tax called state disability insurance (SDI). Corporate officers can opt-out of SDI, but LLC members cannot. If the ultimate goal is to file an S Corp election on the underlying entity, then the tax effect is the same between LLC and a corporation… but the corporate form in California allows you to opt-out of state disability insurance.

We also discuss the differences between LLCs and corporations in terms of paperwork and terminology (articles of formation versus articles of incorporation). Exciting!

Other Owners

Do you want to add your spouse to the ownership? Perhaps. Do you want to add your mother to the ownership as a silent investor? While she might be anything but silent, she might need some cash to cover living expenses and it might make sense for her to pull money out of the business at a lower marginal tax rate than you. Children? Oh boy… that sounds like trouble.