Corporate Transparency Act Disclosure of Beneficial Ownership Information Impact on Non-U.S. Residents

The Corporate Transparency Act (CTA) is a new federal law requiring most domestic and foreign business entities formed or registered to do business in the United States to disclose information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN).

Update April 19: You can now officially use your registered agent’s or virtual address as your company’s address on the BOI report. Ensure you get permission first from your registered agent or use their virtual address for FinCEN. Check out the updated FAQ F.12 on FinCEN’s website at this link. 

Update March 7: Here is a win for NSBA members; they won a lawsuit against the CTA, and now their members do not need to file a BOI report! See details here: https://www.nsba.biz/post/press-judge-rules-in-favor-of-nsba-in-lawsuit-over-corporate-transparency-act. Will this ruling last? Not likely. Once the case enters the appeal process, it will likely be escalated to the Supreme Court, where the lower court’s decision may be reversed. Therefore, this may only serve as a temporary setback to filing a BOI report unless, by some chance, the Supreme Court deems the CTA unconstitutional.

Update March 1: A new challenge for non-residents with a U.S. company is how to fill out the BOI report for the U.S. business address. For most U.S. entities formed by non-residents, the single-member LLC disregarded is the most popular; either use a registered agent address on the filed articles and with the IRS or a virtual address for both. Unfortunately, on the BOI report, they will not accept either address. The BOI report says the reporting company address: the reporting address, which is the address where the company does “business,” should be a physical US address; registered agent, virtual office, and PO box are not accepted. This has changed in April. See the updated FAQ at this link. 

See more details about the business address here:  As noted in the proposed rule, the requirement to report a business’s street address is not satisfied by reporting a P.O. box or the address of a company formation agent or other third party.” You’ll find it in this article: https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-information-reporting-requirements. Section B. COMPANY ADDRESS.

The street address should be the principal place of business. Otherwise, it should be the primary location in the United States or U.S. Territory where the reporting company conducts business. See items 11-15 at https://boiefiling.fincen.gov/resources/BOIR_Filing_Instructions.pdf. 

In summary, the rule says to report the address of the principal place of business in the United States or, if the reporting company’s principal place of business is not in the United States, the primary location in the United States where the company conducts business.

Remember, the BOI report information is shared with the IRS, so plan and consult with a professional to determine which U.S. address you will use as your principal place of conducting business in the U.S. 

Update: The BOI report is open and available to complete for all entities filed before 2024 and for new filings in 2024 (Jan. 2024). Go to this link to file. For new entities filed in 2024, you will need the company applicant’s FinCEN identifier. 

Update: Alert: FinCEN has been notified of recent fraudulent attempts to solicit information from individuals and entities who may be subject to reporting requirements under the Corporate Transparency Act (Nov. 2023). The fraudulent correspondence may be titled “Important Compliance Notice” and asks the recipient to click on a URL or to scan a QR code. Those e-mails or letters are fraudulent. FinCEN does not send unsolicited requests. Please do not respond to these fraudulent messages, click on any links, or scan any QR codes within them.

You may receive notifications from companies or firms that will provide a service to file your beneficial owner’s information (BOI) report on your behalf for a fee. That is acceptable and very different from a company that uses marketing to appear as a government-type agency, even though they may have a disclaimer in fine print at the bottom.

These companies are not affiliated with the government and may charge excessive service fees. If you decide to use a third-party service to file your BOI report, it is important to be aware of these differences and choose a reputable company.

It’s important to note that while the initial filing of beneficial ownership information with FinCEN under the Corporate Transparency Act is a one-time requirement in 2024, the real significance lies in the obligation to update this information whenever changes occur. Failing to update this information could lead to fines.

Think about how often you’ve moved or established new businesses. If you have any role in managing or controlling these entities and haven’t kept track of these changes, you could be subject to compliance penalties. It’s essential to thoroughly understand these regulations and ensure that all entities under your control comply with 2024 onwards.

Here is what you need to know.

The CTA is now in effect as of January 1, 2024. The guidelines for filling out your beneficial owner’s statement are now available online at this link. 

How will this impact U.S. and non-U.S. resident e-commerce sellers and other agencies selling through a U.S. LLC?

Before we get to that, let’s address what happened with disclosing ownership before this change:

Before the Corporate Transparency Act (CTA), U.S. residents were not required to disclose their ownership of 25% or more of a U.S. entity to any government agency. However, several other laws and regulations may require U.S. residents to disclose their ownership of U.S. entities, such as:

What is a beneficial owner?

A beneficial owner is an individual who exercises substantial control over an entity, either directly or indirectly, or who owns or controls 25% or more of the entity’s equity interests.

According to FinCEN’s BOI Small Compliance Guide – see at this link, your company can identify beneficial owners by taking the following steps:

Step 1: Identify individuals who exercise substantial control over the company.
Examples are provided below to help you identify those individuals.

Step 2: Identify the types of ownership interests in your company and the individuals that hold
those ownership interests. Examples are provided below to help with identification.

Step 3: Calculate the percentage of ownership interests held directly or indirectly by individuals
to identify individuals who own or control, directly or indirectly, at least 25 percent of the
ownership interests of the company.

How do you determine who has substantial control over a company? Here are the questions to ask provided by FinCEN’s BOI Small Compliance Guide (see page 26).

1. Does your company have a president, chief financial officer, general counsel, chief executive officer, or chief operating officer?

2. Does your company have any other officers that perform functions similar to those of a President, chief financial officer, general counsel, chief executive officer, or chief operating officer?
Note: One individual may perform one or more functions for a company, or a company may not have an individual who performs any of these functions. These are senior officers in your company.

3. Does your company have a board of directors or similar body, AND does any individual have the ability to appoint or remove a majority of that board or body?

4. Does any individual have the ability to appoint or remove a senior officer of your company?  Questions 3 and 4 are individuals with appointment or removal authority over your company.

5. Does any individual direct, determine, or have substantial influence over important decisions made by your company, including decisions regarding your company’s business, finances,
or structure? These are important decision-makers in your company.

Note: Certain employees who might fit this description are exempt from the beneficial owner definition. See section 2.4 of the guide for more information.

6. Are there other individuals who have substantial control over your company in ways other than those identified in 1-5 above? These are individuals to whom the catch-all would apply.

What entities are covered by the Corporate Transparency Act? Which are Exempt? 

The CTA covers most domestic and foreign business entities formed or registered to do business in the United States, including corporations, limited liability companies (LLCs), partnerships, and trusts. Exemptions are provided for certain entities, such as publicly traded companies, banks, and investment funds. “Large operating companies” are also exempt, which are entities that (i) have more than 20 full-time U.S. employees (not counting employees of affiliated entities), (ii) reported more than $5 million of revenue from U.S. sources on a consolidated basis to the IRS for the previous year and (iii) have an operating presence at a physical location in the United States. 

Overall, there are 23 exempt categories, and your first step is to determine if you have a reporting requirement. 

The big category is #23, called “Inactive entity.” What does that mean?

Here is what FinCEN says about an inactive entity qualification: 

An entity qualifies for the inactive entity exemption if all six of the following criteria apply:

FinCEN’s Small Entity Compliance Guide includes checklists for this exemption (see exemption #23) and for the additional exemptions to the reporting requirements (see Chapter 1.2, “Is my company exempt from the reporting requirements?”).

Is the reporting requirement applicable to foreign companies registered for business operations in the U.S.?

It is important to note that the Corporate Transparency Act applies to domestic and foreign companies registered to do business in a U.S. state. While foreign registration was previously required in some states to obtain a sales tax permit, this requirement has been eliminated in most cases.

However, the Corporate Transparency Act now requires all companies registered to do business in a U.S. state to disclose their beneficial ownership information, regardless of their origin.

Additionally, in the past, some states, such as Florida, required foreign entities to register with the secretary of state before opening a U.S. bank account.

What information must be disclosed?

Entities covered by the CTA must disclose the following information about their beneficial owners to FinCEN:

• Full name
• Date of birth
• Address
• Social Security number or taxpayer identification number

If you don’t want to give your SSN as the owner, don’t be the owner. What if another entity is the owner?

Does that mean you provide the EIN? Probably, but what about the second entity, who is the owner? What if you own that entity? Doesn’t that mean you would provide your SSN (assuming you have one) for the second entity? Yes.

Does that help at all? It might depend upon the nature of the company, and keep in mind the 23 exemptions, of which one is whether you have 20 or more employees or report over $5 million in revenues.

What about non-residents who do not have an SSN or a TIN (taxpayer identification number)?

The ITIN is the most common for non-residents. What does that trigger regarding your U.S. filing responsibilities, and how do you even obtain an ITIN if you don’t have a U.S. filing requirement?

At NCP, our CEO, Scott Letourneau, is a certified tax advisor, consults often on these and other subjects, and works with a mastermind group of tax attorneys and other legal professionals for support. Learn more at this link.

How will the CTA impact new entity formations?

The CTA will add a new step to the new entity formation process. Entities formed or registered to do business in the United States on or after January 1, 2024, must file a report with FinCEN disclosing information about their beneficial owners within 30 days of formation or registration. If you have active entities with the secretary of state but are not active for any business or holding assets, it would be best to clean them up and dissolve them before January 1st, 2024.

But on Sept. 28, 2023, FinCEN proposed extending this deadline to 90 days for entities formed in 2024.

After the initial report, there is no annual or quarterly filing requirement. However, reporting companies must file an amendment within 30 days after any change to their reported information.

Entities already formed or registered to do business in the United States on January 1, 2024, will have until January 1, 2025, to file a report with FinCEN disclosing information about their beneficial owners.

New Entity Strategy: If you are starting a new business entity in January 2024, it is best to file the entity formation documents before January 1st, and when applying for the EIN (Employer Identification Number) through Form SS-4, use a start date of January 1st, 2024. This will give you the full 12 months to file your beneficial owner form instead of only 90 days in 2024.

What are the consequences of failing to comply with the CTA?

Entities that fail to comply with the CTA’s reporting requirements may be subject to civil penalties of up to $500 per day. Individuals who knowingly and willfully fail to comply with the CTA’s reporting requirements may be subject to criminal penalties of up to five years in prison and a fine of up to $250,000.

What should businesses do to prepare for the CTA?

Businesses should start preparing for the CTA by identifying their beneficial owners and gathering the required information about them. Businesses should also develop a plan for complying with the CTA’s reporting requirements.

The public will not have direct access to the beneficial ownership information reported due to the Corporate Transparency Act (CTA).

The CTA requires FinCEN to maintain the information in a secure, nonpublic database. However, FinCEN may disclose the information to law enforcement and other government agencies for authorized purposes.

FinCEN has not yet announced any plans to make beneficial ownership information available publicly. However, some experts believe that it is likely that FinCEN will eventually make the information publicly available, at least in a limited way. Even if no information is public, it goes to the IRS. We foresee where FinCEN will scrape the list of all entities that apply who are registered with the secretary of state and compare that to the list of companies that file with FinCEN by the end of 2024, and cross-reference with the IRS to go after companies in 2025, that are not in compliance. Your address will be important because it may have changed since you formed the LLC and obtained the EIN. So, you may never see the fine mailed directly to you due to an address change.

Non-residents need to be aware of a complete U.S. LLC formation strategy and the best address service that is detailed and reliable so they can stay in compliance with FinCEN. Remember, if you make any changes to your ownership of your LLC, the manager, the responsible party, or the owner’s home address…, you must update your account with FinCEN or face a potential civil penalty of up to $500 for each day that the violation continues, or criminal penalties, including imprisonment for up to two years and/or a fine of up to $10,000.

Will your Amazon brand competitors finally discover the “true owner” of the Amazon account? 

Remember, on your Amazon account, your “brand name,” which is the same as your “display name,” will rarely have your LLC name. Your “sold by name,” also known as your “storefront name,” is separate. In the big picture, if your LLC name is not your “brand name,” it will be only the legal entity on your account and not show up on your Amazon page with your products.

Anyone can search the USPTO database to determine who owns a trademark. This includes trademarks owned by Amazon businesses, but the CTA is not expected to make beneficial ownership information public now.

Your privacy from other competitors should be safe. At the end of the day, most competitors don’t need to know who the owner is to compete; they need to know their competition. In litigation, privacy and asset discovery are much more important when looking for leverage to fast-track a case.

What about the IRS as a non-resident individual or company owning a U.S. LLC operating a U.S. business on Amazon? 

That could be a real issue for many sellers who have taken a strong stance that they are not engaged in a U.S. trade or business and do not have any effectively connected income with that U.S. trade or business. Determining whether a seller is engaged in a U.S. trade or business is a complex process that requires carefully analyzing all relevant facts and circumstances.

Did you or your foreign company file a protective return? If not, perhaps now is the time before the IRS has all the ownership information. 

Tax Form 5472 requires reporting corporations to disclose information about their 25% or more foreign shareholders to the IRS, and now the Corporate Transparency Act (CTA) will also require reporting companies to disclose information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). FinCEN may then share this information with the IRS and other law enforcement agencies. The key for non-residents becomes what U.S. tax returns the owners file, if any. Remember, you may not have had any responsibility to file a return by the owner.

What sellers can do

Non-resident sellers who form a U.S. single-member LLC as a non-resident individual or a foreign corporation may want to consider filing a protective U.S. tax return.

There are a few benefits for U.S. LLCs owned by foreign companies to file a protective US tax return:

• Preserve the right to deduct expenses. If a U.S. LLC owned by a foreign company does not file a tax return, it will lose the right to deduct any expenses incurred, even if those expenses are related to business activities that generate income in the United States. Filing a protective tax return preserves the right to deduct these expenses, even if no income is reported.
• Establish a tax filing history. Filing a protective tax return for a U.S. LLC owned by a foreign company can help establish a tax filing history for the entity. This can be beneficial if the company later starts reporting income in the United States. A good tax filing history can make obtaining a U.S. tax identification number easier and opening bank accounts and other financial accounts in the United States.
• Avoid penalties and interest. If a U.S. LLC owned by a foreign company fails to file a tax return, even if it has no income to report, it may be subject to penalties and interest. Filing a protective tax return can help to avoid these penalties and interest.

It is important to note that filing a protective tax return does not mean the U.S. LLC owned by a foreign company must pay taxes in the United States. The company will only be required to pay taxes if it has income effectively connected with a U.S. trade or business.

Here are some specific examples of how filing a protective tax return can benefit a U.S. LLC owned by a foreign company:

• A U.S. LLC owned by a foreign company is engaged in limited business activities in the United States, such as maintaining a bank account and attending trade shows. The company does not earn income from these activities. However, it wants to preserve the right to deduct any expenses incurred with these activities. To do so, the company can file a protective tax return.
• A U.S. LLC owned by a foreign company is starting a new business there. The company does not expect any income in the first year of operation. However, it wants to establish a tax filing history and avoid penalties and interest. To achieve these goals, the company can file a protective tax return.
• A U.S. LLC owned by a foreign company has been inactive for several years. The company now wants to start reporting income in the United States. The company can file a protective tax return to re-establish its tax filing history and avoid penalties and interest.

If you are considering filing a protective tax return for a U.S. LLC owned by a foreign company, you should consult a tax advisor to ensure you comply with all US tax laws.

Are all the owners disclosed? 

The Corporate Transparency Act (CTA) requires reporting companies to identify all beneficial owners, regardless of ownership percentage. A beneficial owner is an individual who exercises substantial control over an entity, either directly or indirectly, or who owns or controls 25% or more of the entity’s equity interests.

This means that reporting companies must identify all individuals who meet any of the following criteria:

• They are a senior officer of the entity.
• They have authority over the entity’s management or finances.
• They have the ability to make important decisions about the entity’s business.
• They have a significant financial interest in the entity.

Reporting companies must also identify any individual who controls one or more intermediary entities that control the reporting company.

The CTA does not provide a specific definition of “substantial control.” However, FinCEN has issued guidance that provides some examples of activities that may constitute substantial control. These activities include:

• Appointing or removing senior officers of the entity.
• Approving major transactions or investments.
• Setting the entity’s budget or financial goals.
• Approving the entity’s strategic plan.
• Having the ability to veto important decisions made by the entity.

Reporting companies must file a report with FinCEN identifying their beneficial owners within 30 days of formation or registration (but 90 days for those entities formed in 2024). The report must include the following information for each beneficial owner:

• Full name
• Date of birth
• Address
• Social Security number or taxpayer identification number (TIN). Don’t want to disclose your SSN as a U.S. resident? What about a non-resident entity registered to do business in the U.S.? Here is what FinCEN advises: If a foreign reporting company has not been issued a TIN, report a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction.

If the beneficial owner is a foreign individual, the reporting company must also provide the beneficial owner’s passport number and country of citizenship.

The CTA is a significant new law requiring reporting companies to disclose more information about their beneficial owners. FinCEN and other law enforcement agencies will use this information to investigate and prevent financial crimes.

Are there other areas where U.S. residents must disclose their ownership in a U.S. entity formation?

Schedule G of Form 1120 requires corporations to disclose ownership details of any individual or entity that owns, directly or indirectly, 20% or more of the corporation’s voting stock. The IRS uses this information to identify and track large shareholders of corporations.

Schedule G requires corporations to report the following information about their large shareholders:

• Name
• Taxpayer identification number (TIN)
• Country of citizenship
• Percentage of voting stock owned

Corporations must also report any changes in ownership of 20% or more of their voting stock to the IRS within 30 days of the change.

The ownership disclosure requirements on Schedule G are different from the CTA’s reporting requirements in a few key ways:

• Schedule G only applies to large shareholders who own 20% or more of a corporation’s voting stock, while the CTA applies to all beneficial owners of domestic reporting companies.
• Schedule G only applies to U.S. corporations, while the CTA applies to both U.S. and foreign reporting companies.
• Schedule G is filed with the IRS, while the CTA report is filed with FinCEN.

Despite these differences, Schedule G and the CTA are important tools for the IRS and FinCEN to combat money laundering, terrorist financing, and other financial crimes.

If you file Form 2553 to make the S election, you must disclose each shareholder’s ownership percentage. This information is reported in Part I of Form 2553.

In addition to disclosing each shareholder’s ownership percentage, you must also obtain the consent of all shareholders who own stock on the date the election is filed. This consent is obtained by having each shareholder sign the Shareholder’s Consent Statement in Part I of Form 2553.

The ownership disclosure requirements on Form 2553 are similar to those on Schedule G of Form 1120. However, there are a few key differences:

• Form 2553 requires disclosure of the ownership percentage of all shareholders, regardless of whether they own 20% or more of the corporation’s stock.
• Form 2553 requires the consent of all shareholders who own stock on the date the election is filed.
• Form 2553 is filed with the IRS while you file your corporation’s federal income tax return.

The ownership disclosure requirements on Form 2553 are important for the IRS to administer the S corporation election. The IRS uses this information to ensure that all shareholders know and consent to the election.

Conclusion

The Corporate Transparency Act is a significant new law that will significantly impact new entity formations for U.S. and non-U.S. residents. Businesses should start preparing for the CTA by identifying their beneficial owners and gathering the required information about them. Businesses should also develop a plan for complying with the CTA’s reporting requirements.

Remember, existing entities required to report have until the end of 2024 to submit their filings. It’s important to note that any updates or clarifications to the instructions or guidelines will likely occur within the first 30-60 days of the new year. Therefore, delaying your report submissions for a few months can be strategic.

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Shopify Payments U.S. for Non-Resident Sellers: A Step-by-Step Guide

As an existing non-resident Shopify seller, you likely started your Shopify store with Shopify payments linked to your region. 

However, if you’d like to set up a Shopify Payments account for a region different from your location, such as the U.S., you can submit your case to the Shopify Support Team and follow the steps below. 

Not Everyone Will Qualify for Shopify Payments  (Even If You Meet All the Steps)

However, having the requested documents does not guarantee that you’ll be approved for Shopify Payments. Shopify’s internal specialist teams will ultimately make the call regarding supportability.

What is Required to Qualify for Shopify Payments?

A business must have physical operations on US soil to use Shopify Payments US. A USD checking account is also needed, opened with a US banking institution and located on US soil. Virtual banks and currency services will not work for this, as it has to be an actual US bank.

Items you will need to be ELIGIBLE for Shopify Payments U.S.

• US Tax ID: To get a Shopify Payments US account, you’ll need a US tax identification number (TIN). If you’re a business like an LLC or Corporation, you need an Employer Identification Number (EIN). You’ll need a Social Security Number (SSN) if you’re a Sole Proprietor.
• Physical Operations in the US: A US tax ID isn’t enough. Your business needs to have a physical presence in the United States. This means having a real operation there. A lease agreement is required (which we do provide) as part of our virtual address service with our U.S. entities.

  Specifically, here is what Shopify says about this part to qualify for Shopify Payments: In order to be eligible for Shopify payments in a particular region, you must EITHER (a) be PHYSICALLY present within that region (not 99% of you as non-residents), OR (b), have an OPERATIONAL presence with that region.

  To establish PHYSICAL PRESENCE, they will require a document in your name (personal name) such as a utility bill (e.g., water, electricity, or gas bill from the past three months (not cell phone), PERSONAL LEASE AGREEMENT (dated) OR property insurance (dated).

  By the way, this is the same evaluation in 2024 for local banks in the U.S. for a personal bank account (which has changed in the last two years); they want you to lease an apartment in your own name and have one major utility bill in your own name with that address.

  If you are NOT physically present within the region selected, we would INSTEAD need to establish an OPERATIONAL PRESENCE. This can be done, for example, by showing you have RENTED or OWNED warehouse space or retail space in the U.S. For example, see warehouse space for sale in Las Vegas at this link. Here is warehouse space for rent in Las Vegas at this link.

  Please note (from Shopify) that registering a company within a region is NOT sufficient to establish an operational presence. Translation: a cheap online LLC with an EIN and address will not qualify you for Shopify payments in the U.S.

• Government-Issued Photo ID: You’ll need a government-issued ID with your photo on it (like a driver’s license or passport) for verification. Sometimes, they might accept non-US IDs, but it’s best to check with Shopify.
• Business Registration Document: Ensure your business is officially registered in the US. This proves that your business is legitimate. The key is, are you creating a U.S. person? And you need to be clear on the U.S. tax responsibilities that it creates. 
• Proof of US Operation: You must show evidence that your business operates from the US. A bank statement or forwarding service won’t work as proof. It would be best if you had something more reliable. A utility bill and lease agreement is recommended. 
• USD Checking Account: You’ll need a real US bank account in US dollars to handle transactions. Virtual banks or currency services won’t be accepted.

SSN or ITIN Verification 

U.S. merchants enjoy the convenience of Shopify Payments, but there are specific requirements they must meet to use the U.S. version of this payment gateway. Let’s explore the obligations of U.S. merchants:

U.S. merchants setting up a Shopify Payments US account must provide all nine digits of their Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) for verification purposes. This is a mandatory step, even if the merchant already has an Employer Identification Number (EIN) for their business.

This rule still applies even if you have an EIN for your business. Shopify needs to bypass this step on sign-up.  To learn more about this, refer to the US Shopify Payment Terms of Service: Section B-3.

Meeting this requirement helps Shopify ensure the merchant is a legitimate entity operating in the U.S. and adheres to relevant regulations and tax laws.

Processing Time for ITIN

In situations where obtaining an ITIN is necessary, it’s important to consider the potential impact on your LLC’s setup in the short and long term. Processing an ITIN application can take time, typically extending to 3-4 months. Therefore, planning accordingly and anticipating delays during this process is essential.

Possible Exemptions for ITIN

In some cases, Shopify may waive the requirement for an ITIN based on the account holder’s unique circumstances. Each case is reviewed individually, and exemptions are considered on a case-by-case basis. If Shopify determines that the account holder’s circumstances warrant an exemption, they may proceed without an ITIN.

Considerations for Setting up the LLC

When setting up your LLC, it’s essential to consider the potential need for an ITIN, especially if you plan to use Shopify Payments as your payment gateway. This consideration becomes even more critical if you use your LLC as the legal entity for insurance purposes on platforms like Amazon.

An LLC in the U.S. can be taxed in four different ways, and only three apply to most non-residents: an LLC disregarded for tax purposes, an LLC taxed as a corporation, or an LLC taxed as a partnership. The only option to obtain an ITIN with the LLC is an LLC that is disregarded for tax purposes, and an ITIN is usually only available when personal U.S. taxes are due on a 1040NR tax return. When you form an LLC, how it is managed and a complete formation with formalities to protect your U.S. business is key. Completing a W-9 means you are creating a U.S. person for tax purposes. 

Another key is understanding your full U.S. tax responsibilities when you form a single-member LLC that is disregarded to determine if the LLC or owner is engaged in a U.S. trade or business and has effectively connected income. 

Separately, it is the responsibility of sales tax compliance. Only turn on sales tax settings in all states by knowing the tax rules and being licensed in each state where you have crossed nexus thresholds or have physical nexus. 

How to Update Your Shopify Store to Qualify for Shopify Payments U.S.

You can change your address to a US location. Access your dashboard and click the “Settings” option to get started. If you go to “Payments, “you will see the option to activate the Shopify payment gateway.

Step 1

1. Form an LLC US Company (Consult with NCP first). 
2. Apply For an EIN Number
3. Get a US Phone Number
4. Get a US Address
5. Get a US Bank Account
6. Obtain an ITIN

Step 2

Once you’ve successfully established your US company, whether a US citizen or a non-US citizen, the next step is to activate your Shopify payment gateway using the information obtained during your LLC formation.

Before activating, update your store address to the US address in your LLC documents. This US address can be utilized for your business or online applications.

During the Shopify payments activation process, you may encounter a field requesting your SSN’s last four (4) digits. In this case, you can replace it with the last four (4) digits of your ITIN.

Complete the remaining personal details as required, submit the information, and the Shopify review team soon notify you to determine if your application has been approved or if additional information is required. 

———————–

Shopify’s verification takes place by activating the Shopify Payments account.

The instruction says to change or update the store address to a US address but doesn’t ask for any verification.

The next step is to activate Shopify Payments. You would only need to provide entity documents to activate Shopify Payments.

If applicable, you can enter your Business Number or Tax Identification Number depending on which country your business is located in.
They will ask the following:

• Business Type
• • Individual/Sole Proprietorship – need SSN/ITIN or SIN – Social Insurance Number (for Canada)
  • Corporation
  • Nonprofit
  • Partnership
• Business Number/TIN
• Business Address
• Personal Details
• First and Last Name
• DOB
• Product Details
• Customer Billing Statement
• Banking Information

If your store is in Europe, you must provide a VAT number or indicate that you don’t have one.

If you set up your Shopify Payments account as a Corporation or LLC, you will still need to provide the name and date of birth of someone associated with the business. This is a requirement for verification purposes.

All businesses must submit a tax ID and are responsible for collecting and remitting tax on their sales.

You may also need to submit details about you and your business. This information is used to help identify merchants using Shopify Payments and is a requirement to comply with the terms of service.

What is required may differ from country to country. Typically, this includes:

• documentation about the business associated with the Shopify Payments account
• owner of the business
• or an individual with signing authority for the business.

If Shopify is unable to verify your identity using the information above, you may be asked to submit additional documentation that could include the following:

• Proof of identity
• Proof of home address
• or, Proof of business verification

If your business can’t be verified using the information you provided at the time of Shopify Payments sign-up, additional documentation might be requested. Just so you know, the documents that you provide must include the business name, business address, and company registration number or VAT number.

For business verification, upload your official federal business registration document, including your federal tax registration number, if available.

Business documents require the following:

• Documents must be clear and large enough to read.
• Documents must be valid and representative of up-to-date registration.
• Complete documents must be uploaded. A complete document contains the following:
• The full business name, business address, and either VAT number OR company registration number are clearly stated and legible.
• All pages of a multiple-page document. Upload a PDF containing all the relevant pages.
• Documents can be uploaded in .png, .jpg, or .pdf format.

To help the verification process, when providing documents as evidence, ensure that your documentation:

• is clear and large enough to read
• is correct, valid, and up-to-date
• is complete with all details visible
• is free of any errors or typos
• matches the information provided

Your identity, home address, and proof of entity documents must be reviewed and matched successfully to the information on your Shopify Payments account before your business can be fully verified.

Reviews of your Shopify Payments account can take up to 3 business days to complete.

Important: You must complete your Shopify Payments account setup, including all your business details and banking information, within 21 days of your first sale. If your account isn’t set up within 21 days, then payments might be automatically refunded to the customer.

For merchants in the European Union and Hong Kong, you need to complete the setup of your Shopify Payments account before you can accept payments from customers.

The first step is to schedule a strategy call to determine the U.S. LLC structure, ownership, and U.S. taxation for your situation. Learn more at this link. 

Understanding Amazon’s Tax Interview: Key Mistakes Non-Residents Should Avoid with LLCs

Navigating Amazon’s tax interview for non-residents with U.S. LLC can be complicated, particularly regarding tax compliance. Many non-residents choose to operate as individuals or entities from their home country and will complete the W-8BEN or W-8BEN-E form during the Amazon tax interview.

Forming a U.S. single-member LLC often becomes necessary, especially in dropshipping scenarios where U.S. suppliers require dealing with U.S. companies (tip: don’t form your LLC in Wyoming when dropshipping). It might also be essential for securing U.S. insurance coverage when options are scarce in the non-resident’s country since many insurers do not provide services for non-residents in most countries. The necessity for insurance compliance increased after September 2021, particularly for sellers recording over $10,000 a month in sales.

It’s crucial to understand that U.S. suppliers may be indifferent about your Amazon sales, the proper completion of your Amazon tax interview, or even whether you’ve mistakenly committed tax fraud. However, insurance underwriters need to be more indifferent regarding claim filing.

Imagine this: Your insurance adjuster denies your claim because your U.S. LLC wasn’t genuinely managing your Amazon business or due to an ‘inadvertent trick’ played on the Amazon tax interview. Depending on the size of your claim, the repercussions can range from mildly inconvenient to severe. A $5K claim on a $1M policy might not raise eyebrows, but a claim worth $800K is likely to trigger intensive scrutiny from insurance company attorneys.

Suppose you’re an Amazon seller ticking the insurance box to get verified and are not concerned about coverage because you’re selling low-risk items like rubber kitchen spatulas. In that case, the above doesn’t apply. However, the looming risk of an Amazon suspension should pique your interest, so please keep reading.

Establishing a compliant U.S. LLC and meticulously navigating the Amazon tax interview are not just administrative formalities. An Amazon account will often not be verified, and you will be asked to provide additional verification in the form of a business utility bill linked to your U.S. address. That makes your verification process 10X more difficult. It is best to work with NCP and utilize our Amazon New Account 32-page Guide, or if you have already formed an LLC, book a consult with our CEO, Scott Letourneau, to review what you need to amend on your filing and changes to your Amazon account to help get your account verified.

Amazon Tax Interview Questions

Amazon’s Reverification Under the INFORM Consumer Act

Wyoming LLC Requirements for a U.S. Dropshipping Business

Are you looking to form a Wyoming LLC to establish a dropshipping business in the U.S.?

If so, there are many factors to consider, including the legal structure of your business. One popular option for entrepreneurs is forming a limited liability company (LLC) in Wyoming. In this post, we’ll explore the benefits of a Wyoming LLC for your dropshipping business and guide you through the steps to establish a U.S. bank account and obtain a resale certificate.

Benefits of a Wyoming LLC for Your Dropshipping Business

Asset Protection

As a dropshipper, you’re responsible for delivering products to your customers without physically handling inventory. However, you’re still vulnerable to legal issues and liabilities arising from customer complaints, copyright infringements, etc. Forming a Wyoming LLC can provide asset protection by separating your personal assets from those of the business.

When it comes to forming a Wyoming LLC, it’s crucial to remember that more than simply filing articles of organization is needed to provide legal protection for your business. A shocking 90% of LLCs formed in Wyoming have zero protection because the owners needed to complete formalities beyond the operating agreement.

Just to remind you, an LLC only has protection on the day it’s formed. Afterward, you must operate it as a separate legal entity and avoid commingling funds to ensure continued protection. Adequate capitalization is also critical to maintaining legal protection for your business.

If you don’t take these steps seriously, you could have a personal judgment against you in the U.S., creating severe problems for your business. Even if you can form a new entity, working with suppliers and using A.I. tools for search can still be challenging if your business has a tainted history.

As legal issues arise, proper LLC protection and maintenance is crucial for drop shippers. To help you avoid getting sued, we recommend checking out this informative article from Dodropshipping.com. It covers valuable tips on minimizing the risk of legal issues when dropshipping, including avoiding trademark infringement, using high-quality product images, and providing accurate product descriptions. By following these tips and establishing a solid legal and financial foundation for your dropshipping business, you can reduce your legal risk and focus on confidently growing your business.

2. Tax Advantages

Wyoming is one of the most business-friendly states in the U.S., with no state income tax, franchise tax, or personal property tax.

While Wyoming may have a sales tax, obtaining a resale certificate can help you save money when working with most U.S. suppliers.

One of the significant benefits of forming a Wyoming LLC is that you’ll only need to file the 5472 and proforma 1120 tax forms, assuming that it’s a single-member LLC disregarded. However, additional or different tax forms may be required if a single-member LLC is taxed as a corporation or a multiple-member LLC is taxed as a partnership.

U.S. taxation can be a complex issue, and it’s essential to understand the requirements to ensure compliance. At this link, you will see the factors involved to evaluate to determine your U.S. tax responsibilities and help you understand your obligations as a business owner. For more information on U.S. taxation requirements, please visit the link on our website.

Forming a single-member LLC in Wyoming is a cost-effective option for non-residents. If they formed a Wyoming LLC, U.S. residents would need to foreign qualify into their home state.

3. Privacy

Wyoming LLCs offer privacy protection by not requiring owners to disclose their names on public records. Your personal information, including your name and address, will be confidential. The critical question to ask, if privacy is important, is when do I lose my privacy after my LLC formation?

Steps to Establish a U.S. Bank Account and Obtain a Resale CertificateChoose a Business Name and Register Your Wyoming LLC

The first step to establishing your dropshipping business is to choose a business name and register your Wyoming LLC.

If you’re considering forming a Wyoming LLC, you should start with a comprehensive strategy. Don’t make the mistake of simply filing your articles without considering the management structure of your LLC, foreign ownership, and your U.S. tax responsibilities at both the state and federal levels.

To ensure that your business is set up for success, we recommend you conduct a federal trademark search, at a minimum, using the trademark office database. However, for the best results, a comprehensive search is highly recommended. This step can help you avoid costly legal issues and protect your business’s intellectual property.

2. Apply for an EIN

An EIN (Employer Identification Number) is a unique identifier your business will use when filing taxes and opening a bank account. The key is to complete the SS4 property, which will let the IRS know which U.S. tax returns you plan to file. The SS4 can NOT be amended, so complete it carefully. The SS4 must be faxed to the IRS for non-residents, which may take up to 30 business days. The time frame is also essential for U.S. banking, as they will need the IRS letter with the EIN.

3. Open a U.S. Bank Account

Once you have your EIN, you can open a U.S. bank account for your Wyoming LLC. You’ll need to provide your EIN, articles of organization, and other identifying information to the bank.

Choosing the right bank is critical when establishing a U.S. bank account for your non-U.S. dropshipping business. Finding a bank familiar with working with non-U.S. residents is essential to ensure a smooth and efficient process.

However, be prepared to provide a personal utility bill in your name that matches your personal address. Most banks typically require this documentation, even if you plan to travel to the U.S. after the pandemic.
Unfortunately, establishing a U.S. bank account for a legal entity (not the individual) can be nearly impossible for non-residents.

Many banks require a personal utility bill in the U.S. linked to your personal address, separate from the documentation required for the LLC formation. If you plan to travel to the U.S., you will likely need help establishing a U.S. bank account.

Be sure to choose a bank familiar with working with non-US residents. Most banks will also want a utility bill in your personal name that matches the same address as your personal address. Even if you plan to travel to the U.S. after the pandemic, establishing a U.S. bank account for a legal entity (not the individual) is almost impossible for non-residents.

Why?

The banks request a personal utility bill in the U.S. linked to your personal address, separate from what they require for the LLC formed.

4. Obtain a Resale Certificate

A resale certificate lets your business purchase products from suppliers without paying sales tax. To obtain a resale certificate, you must register with your state’s tax authority and provide your EIN and other business information.

A Wyoming resale certificate will suffice in many cases, allowing you to avoid paying sales tax on your purchases. However, it’s important to note that suppliers may require a resale certificate from that specific state in some states, such as nine.

In addition to registering your Wyoming LLC, obtaining a U.S. bank account, and obtaining a resale certificate, there are a few other steps to establish a solid legal and financial foundation for your dropshipping business.

• Set Up a U.S. Business Address and Phone Number 

You must establish a U.S. business address and phone number to build trust with your suppliers and customers. Without this, you may struggle to communicate effectively and establish credibility in the marketplace.
You can work with a reliable mail forwarding service or virtual office provider to obtain a virtual business address and phone number.

However, it’s essential to ensure that your virtual address is fully compliant and that you have a lease agreement to avoid legal issues.

Also, you should be able to partner with a team that understands the critical items that will be mailed to your virtual address, including verification codes, bank requirements, sales tax permits, and IRS notices.

• Set Up a Payment Gateway Account

You must set up a payment gateway account, such as Stripe or PayPal, to accept customer payments. A VPN is a consideration for non-residents regarding these accounts. These gateways allow you to securely process credit card transactions and manage your customers’ payment information. Please choose a payment gateway compatible with your dropshipping platform that offers competitive rates. The key is knowing the entire process, including what happens when an SSN is unavailable.

• BE-13 Government Filing

According to a Form BE-13 filing (Survey of New Foreign Direct Investment in the United States), foreign investors in certain U.S. businesses must report their investments. U.S. companies with more than 10% foreign ownership must file a Form BE-13 with the U.S. Bureau of Economic Analysis (BEA), a U.S. Department of Commerce division.

The BE-13 is a complex form due within 45 days of filing your entity.
Failure to comply may result in fines of up to $25K, and the BEA may seek injunctive relief. Furthermore, willful violations may result in criminal penalties of up to $10K and imprisonment of up to one year.

Please note that the BE-13 is NOT the same as the 5472 and Proforma 1120, which are federal tax returns related to an SM LLC DE.

For your convenience, we’ve included a link to the BE-13 FAQ page: https://www.bea.gov/help/faq (note that there are 40 tabs of FAQs).

Schedule Your Discovery Call Today

At Nvinc.com, we understand the importance of proper LLC formalities and can help guide you through the process to ensure your business is fully protected. Schedule a discovery call with us today to learn how we can help you establish a solid legal and financial foundation for your dropshipping business. Don’t leave your business vulnerable to legal issues – take action now to protect your future success.

Forming a Wyoming LLC can be an intelligent choice for your dropshipping business, providing asset protection, tax advantages, and privacy. If you’re ready to get started, our team can help guide you through the process.

Schedule your discovery call today at our calendar at this link to learn more about how we can help you launch your U.S. dropshipping business.

Silicon Valley Bank Alternative for Non-U.S. Residents

You will need this Silicon Valley & First Republic Bank alternative as a non-resident business owner. We have important news if you’ve formed a Delaware corporation or U.S. company with Silicon Valley Bank as your only banking partner.

Due to recent regulatory actions by California authorities, Silicon Valley Bank has been closed. On March 10th, Silicon Valley Bank’s assets were seized by FDIC in the most significant bank failure since 2008. Just before noon on the East Coast, the Federal Deposit Insurance Corporation said it was closing the bank. On May 1st, JP Morgan Chase takes over First Republic Bank. 

In business, the number one can be your worst enemy. Depending on a single joint venture partner, relying on a solitary source for leads, or working with only one supplier or vendor can leave you vulnerable to a single point of failure.
But perhaps the most crucial area where you should avoid being a “one” is banking. Having just ONE BANK ACCOUNT can be a recipe for disaster.

If that account is closed, frozen, or otherwise inaccessible, your business could be brought to its knees. That’s why it’s crucial to diversify your banking relationships and work with multiple partners. Doing so will ensure your funds are protected, and your business can continue operating even if one bank account is compromised. So, if you rely on just one bank account, it’s time to diversify. Don’t let the worst number in business bring you down – instead, take control of your financial future by working with multiple banking partners.

You must find an alternative U.S. bank account to continue operating your business. Fortunately, our team is here to help. We specialize in assisting non-resident business owners like you to set up an alternative banking solution quickly and efficiently.

If you still need a U.S. company formation, first gain clarity on your best U.S. banking options BEFORE forming a U.S. entity. You want to avoid what so many do: to find a low-priced option only to form the LLC and realize either during the process or after opening a U.S. bank account (even without travel) is impossible.

At NCP, our experience since 1997, with thousands of companies formed and working with dozens of banks, brokerage accounts, and online banking platforms.

We have the experience to help you fit all the puzzle pieces in the correct sequence to help you accomplish this task. As we can’t control the banks and their policy changes, we can control how best to form your U.S. company to lead to your best option to establish the bank account. This may involve how the LLC is formed and managed, to a lease agreement without an expensive lease, to match documents and state records to streamline the experience.

Most important is our relationships with our bankers and that we do things right and attract successful entrepreneurs that the banks prefer to work with over time. Let us share our current U.S. banking options and recommendations for 2023.

If you or someone you know needs support, we can help set up your U.S. entity correctly and have all the resources from sales tax to tax returns.

Here is our link to our U.S. LLC formation packages, with details and what’s included.

Before we get to the banking details, you must know this ONLY works on a U.S. entity, not a foreign entity.

As you know, we do a lot of work in the e-commerce space, and there are “banking” accounts, such as Payoneer and others.

The challenge is that moving money from one currency to another is great, but they must be fully functioning bank accounts. They do not allow for an ACH pull, which is required to automate the payment of sales taxes.

NCP’s U.S. Banking Checklist

We have a  relationship with a trustworthy company with a banking platform that works with a bank (not in California) that will work for non-U.S. residents, and you do NOT need to go to the bank in person.

Do you have these questions on your mind?  

Is there a monthly bank fee?

We’ve been getting some questions about our banking partner and wanted to clarify some things. First, we want to assure you that our partner does not charge a fee for setting up your account. While we have a fee for the process and introduction, it’s not an extra fee you’ll be charged – it’s simply our fee for facilitating the process.

It’s also important to note that no requirements above and beyond the norm would make it impossible to open an account.

However, some U.S. banks have specific requirements that can cause issues for non-residents. For example, some banks may require a personal utility bill from a U.S. residential address, not a P.O. box, even if you visit the bank in person. Other banks may want to do an official site inspection and see your employees working.

But don’t worry – we’ve got you covered! We’ve compiled a complete checklist for our banking relationship that includes all the information you need to know to ensure a smooth account opening process. You can find it at the bottom of this page.

What is required to open this NEW U.S. Bank Account without Travel:

• It is required to have a U.S. entity with an EIN.
• You must have a letter from the IRS with your EIN. Our U.S. entity packages include our virtual address service so that the IRS mail will come to our office, and we will scan your IRS letter to your secure folder and your other documents to establish your U.S. bank account. Caution: Avoid banking alternatives that avoid this important compliance step. More compliance is coming, don’t impact your business with shortcuts. 
• Verify your phone number (from your home country if foreign clients)
• ID and selfie verification- a link will be sent to the signer’s phone number to access a page to upload ID and take a selfie verification.
• I am setting up multi-factor authentication for logging in to the account.

Required documents below per entity type:

LLC Documents

• EIN Verification Letter
• Articles of Organization
• Operating Agreement
• Government-issued photo I.D. (Passport in color)
• U.S. address (our virtual address, which is included in our U.S. packages, qualifies)
• Ownership structure

Corporation

• EIN Verification Letter
• Articles of Incorporation/Certificate of Formation/Certificate of Incorporation
• Company By-Laws
• Government-issued photo I.D. (Passport in color)
• U.S. address (our virtual address, which is included in our U.S. packages, qualifies)
• Ownership structure

Are you a company owner with a stake in a U.S. entity? If that entity is owned by a company with over 25% ownership, we’ll need the personal information and passports of the beneficial owners who have 25% or more ownership in that company. It’s essential to provide this information to ensure a smooth process.

Don’t stress; we’ve got you covered. We’ve created a comprehensive Silicon Valley Bank alternative checklist to answer all your questions and provide an alternative to Silicon Valley Bank. Our checklist ensures you cover all the bases and get the best service possible. So why wait? Get your hands on our checklist now at this link.

5472 and Proforma 1120 for a U.S. Single-Member LLC Disregarded Owned by a Non-Resident

As a non-U.S. resident with a U.S. single-member LLC, staying compliant with tax laws is crucial. Whether for Amazon Insurance, Shopify payments, or bulk purchases from a U.S. manufacturer, IRS forms 5472 and proforma 1120 for your U.S. single-member LLC disregarded likely must be filed annually. 

LLC may require filing Form 5472 and proforma 1120 annually. These forms will come into play the following year after you form your U.S. single-member LLC and obtain an EIN through the IRS. It is important to note how your SS4 was completed, especially for line 9a. 

Form 5472 is an information return of a 25% foreign-owned U.S. corporation or a foreign corporation engaged in a U.S. trade or business under sections 6038A and 6038C of the internal revenue code.

It’s important to note that the taxation of a U.S. LLC can vary based on its structure, with single-member LLCs taxed as C corporations requiring both Forms 5472 and 1120. On the other hand, non-resident members of an LLC taxed as a partnership must file IRS Forms 1065, 8804, and 8805.

A failure to timely file a Form 5472 is subject to a $25,000 penalty per information return, plus an additional $25,000 for each month the failure continues, beginning 90 days after the IRS notifies the taxpayer of the failure, with no maximum penalty.

What is new on the instructions for 5472 in 2023?

Part VII lines 41a through 41d. On Form 5472, these lines have been reworded to reflect the final regulations under section 250 (T.D. 9901, 85 FR 43042, July 15, 2020, as amended by 85 FR 68249, Oct. 28, 2020; T.D. 9956, 86 FR 52971, Sept. 24, 2021).

Part VIII lines 48b and 48c. These instructions require a new attachment for Part VIII, lines 48b and 48c. Specifically, if the taxpayer made the election described in Regulations section 1.482-7(d)(3)(iii)(B) or Notice 2005-99, the taxpayer is required to attach the statement described in the instructions for Part VIII, lines 48b and 48c, later.

You would use form 5472 when reportable transactions occur during the tax year of a reporting corporation with a foreign or domestic related party.

What is a Reporting Corporation? A reporting corporation is either:

• A 25% foreign-owned U.S. corporation (including a foreign-owned U.S. disregarded entity (DE), or
• A foreign corporation engaged in a trade or business within the United States. 

Reportable transaction. A reportable transaction includes:

• Any transaction listed in Part IV (for example, sales, rents, etc.) for which monetary consideration (including U.S. and foreign currency) was the sole consideration paid or received during the reporting corporation’s tax year;
• Any transaction listed in Part V; or
• Any transaction or group of transactions listed in Part VI.

However, transactions with a U.S.-related party are not required to be identified explicitly in Parts IV, V, and VI.

Exceptions from filing. A reporting corporation must not file Form 5472 if any of the following apply.

1. It had no reportable transactions of the types listed in Parts IV and VI of the form and, in the case of a reporting corporation that is a foreign-owned U.S. DE, also had no reportable transactions of the type listed in Part V of the form.
2. A U.S. person that controls the foreign-related corporation files Form 5471 for the tax year to report information under section 6038. To qualify for this exception, the U.S. person must complete Schedule M (Form 5471) showing all reportable transactions between the reporting corporation and the related party for the tax year. This exception does not apply to foreign-owned U.S. D.E.s.
3. The related corporation qualifies as a foreign sales corporation for the tax year and files Form 1120-FSC. This exception does not apply to foreign-owned U.S. DEs.
4. It is a foreign corporation that does not have a permanent establishment in the United States under an applicable income tax treaty and timely files Form 8833.
5. It is a foreign corporation whose gross income is exempt from taxation under section 883, and it timely and fully complies with the reporting requirements of sections 883 and 887.
6. Both the reporting corporation and the related party are not U.S. persons, as defined in section 7701(a)(30), and the transactions will not generate in any tax year*:

• Gross income from sources within the United States or income effectively connected, or treated as effectively connected, with the conduct of a trade or business within the United States; or
• Any expense, loss, or other deduction that is allocable or apportionable to such income.

Note. *Exception 6 does not apply to foreign-owned U.S. DEs.

Foreign-owned U.S. DEs. While a foreign-owned U.S. DE has no income tax return filing requirement, as a result of final regulations under section 6038A, it will now be required to file a pro forma Form 1120 with Form 5472 attached by the due date (including extensions) of that Form 1120.

The foreign-owned U.S. DE has the same tax year used by its owner for U.S. tax filing requirements.  If a foreign corporation owns the U.S. LLC DE, that structure triggers different tax returns.

They have a dedicated mailing address. Foreign-owned U.S. DEs are required to use the following dedicated mailing address. These filers do not use the mailing address provided in the Instructions for Form 1120.

Extension of time to file.  A foreign-owned U.S. DE required to file Form 5472 can request an extension of time to file by filing Form 7004. The DE must file Form 7004 by the regular due date of the return because of Form 5472 of a DE. Must be attached to a pro forma Form 1120; the code for Form 1120 should be entered on Form 7004, Part I, line 1. “Foreign-owned U.S. DE” should be written across the top of Form 7004.

The DE must fax or mail Form 7004 to the fax number or mailing address identified earlier by the return’s due date (excluding extensions). For these entities, do not use the regular filing address listed in the Instructions for Form 7004.

Depending upon multiple factors, you may have additional U.S. tax forms, including whether your LLC is engaged in a U.S. trade or business and has effectively connected income. If so, filing forms 1040NR and W-7 may be required. 

Essential additional tax forms and terms that may impact your U.S. tax responsibilities. 

• 1040NR and W-7 (ITIN): If you are deemed engaged in a U.S. trade or business, filing the protective returns, 1040NR, W-7, 8833 (assuming from a treaty country). You could lose deductions if you don’t file the protective returns and are audited.
• Conduct of a U.S. trade or business (USTB): If you are engaged in U.S. trade or business, you need to file a U.S. return. But if NO US-sourced income= title is transferred outside the U.S.  If, outside the U.S., there is no US-sourced income and no effectively connective return. BUT no tax due, foreign source income if Title transfers outside the U.S. What determines if it is US-sourced income? Where Title has transferred. See IRS PDF for more details on USTB.
• Effectively Connected Income (ECI): Effectively connected income is income that is effectively connected with the conduct of a U.S. trade or business. When determining whether income constitutes effectively connected income, the IRS employs two tests: (i) the asset-use test; and (ii) the business-activities test. The asset-use test looks to whether the income or gain is derived from assets used in, or held for use in, the conduct of the trade or business in the United States. The business-activities test looks to whether the activities of the trade or business were conducted in the United States and were a material factor in realizing the income or gain at issue.
• Fixed, Determinable, Annual, Periodic Income (FDAP): Tax at a 30% (or lower treaty) rate applies to FDAP income or gains from U.S. sources, but only if they are not effectively connected with your U.S. trade or business.
• Foreign Bank Account Annual Report (FBAR): The FBAR (Foreign Bank Account Report) is important if you’re a U.S. citizen with $10,000 or more non-U.S. accounts. Does this apply to non-residents? 

If a person is a non-resident (non-U.S. citizen and non-legal permanent resident), then they are considered a non-resident and would generally not be required to file the FBAR. Here is a link to FBAR mistakes to avoid.

• Form 1042-S – Every US person, business, or institution providing income to non-citizen individuals must file a Form 1042-S, even if ultimately the payments they made were exempt from taxation because of a treaty or taxation exception. 

The form applies to all payments made to non-resident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts subject to tax withholding. 

• Hybrid Entities – From a U.S. tax perspective, a hybrid entity is an entity that is “fiscally transparent” for U.S. tax purposes but not fiscally transparent for foreign tax purposes. Learn more about hybrid entities at this link; a sharp U.S. tax attorney with great U.S. tax charts for your review.
• Branch Profits Tax – U.S. tax law imposes a 30% branch profits tax on a foreign corporation’s U.S. branch earnings and profits for the year that are effectively connected with a U.S. business to the extent that they are not reinvested in branch assets. 

Branch Profits tax ONLY comes into play with a foreign corporation with a permanent establishment (PE) in the U.S. A U.S. corporation owned by a foreign corporation is not subject to branch profits but a dividend withholding tax, which the treaty can reduce. 

• State Sales Tax: If you sell on a non-marketplace such as Shopify and crossed economic nexus thresholds, you must register for sales tax and collect and remit if your product is subject to sales tax. 

Remember that some products, such as supplements, digital products, software, and food items, are not taxable in every state. These sales tax rules apply to non-U.S.-based entities doing business in the U.S. 

This content is an overview of several complex tax subjects, and we recommend you work with a qualified tax professional of which we work with several that we can recommend. 

Why a Simple LLC Provides ZERO Protection

If you form a “simple” LLC online with an EIN and a basic operating agreement. With the first legal issue, you may be “financially paralyzed” even if you win the lawsuit! You will not be able to get any loans or financing, which is paramount in today’s economy.

What is a “simple” LLC? That is an LLC filed through the Secretary of State with a registered agent, an EIN obtained through the IRS, and nothing else. It is the “starter” low-end package sold online with most incorporating companies. There is no operating agreement, membership certificates, or formalities.

The big issue is if your business operating through the LLC or LLC holding the assets gets sued. You might think I have never been sued, nor am I the “type” to create issues. The current economic conditions are a perfect storm for more lawsuits in the future (and opportunity).

If you lose the lawsuit, it gets worse.

Most attorneys warn against the $99 online LLC packages. Why? Because they will slice through those in 15 minutes in court and go after the individual every time. That piece of paper provides NO protection (even with insurance). 

What do they mean by “slicing through those in 15 minutes”? That is called piercing the corporate veil, where the owner is PERSONALLY liable. Once you are personally liable, you cannot obtain any personal funding because every financial application wants to know if you are currently in a lawsuit. When you answer yes, you will not be funded. You would not even be able to get a HELOC (home equity line of credit) from your residence. 

This is what we mean by being “financially paralyzed,” so you should not operate a business as a sole proprietorship.

The better approach is to form a COMPLETE LLC with the correct operating agreement and formalities to protect you and your assets, whether you are building your brand or looking to protect your safe assets.

NCP will help you before, during, and after formation to protect your entity veil, properly update any marketplace accounts to avoid suspension, and properly transfer your assets to the new entity so they are protected. Finally, you provide support and structure to protect your entity veil and personal assets.

How To Obtain a Sales Tax Exemption Certificate

Suppliers often require an exemption certificate when they ship products from the US. In addition, some B2B marketplaces have created Sales Tax Exemption Programs, such as Amazon (ATEP) and Alibaba (ASTEP), that can quickly help buyers identify as eligible tax-exempt for US sales tax purposes. You may enroll in their program to acknowledge and ensure that you are qualified for sales tax-free towards purchases on Amazon or Alibaba Business.

Enrolling in the program will require completing the form or uploading the certificate. You’ll need to make all information you have entered correctly, and the details must match the business information. You must complete the information required by the program to be accepted.

What is a Sales Tax Exemption Certificate?

A sales tax exemption certificate is a tax form you can present to your supplier or dropshipper to make sales tax-free. It is an official or proper document that prohibits someone from paying sales tax on your goods or services.

When do you need a sales tax exemption certificate?

1. If one of your supplier or drop shippers wants you to provide a resale certificate. 
2. Suppose you have nexus with a state resulting from physical presence or a remote sales tax law. In that case, you must collect an exemption certificate whenever you don’t charge a customer sales tax on a taxable transaction. No exceptions.

You need a sales tax exemption certificate to avoid getting an EIN. What are your options?

It depends on the state you are getting an exemption certificate. You may be limited if the supplier requires an exemption certificate from the home state. In all situations except for the ten states listed below, you can get an exemption certificate from any regular state. You have more flexibility to be in a position, if it is not one of these ten states listed, to obtain an exemption certificate without an EIN US number. It is beneficial for the non-resident seller because if you get an EIN in many cases, you may want to file a protective return even if you have a tax treaty with your country. If you are a U.S. resident, you already have a Tax ID and an entity most likely for your business, so in many cases, you might get an exemption certificate from your home state. 

Do you know if sales tax returns are due?

For the states requiring sales tax registration, you must file a tax return based on your sales tax filing frequency (monthly, quarterly, annual). If you are not required to register for sales tax but have EIN for the business, you must file income tax returns with the IRS for the EIN.  For VAT ID, you must file tax returns in your home country.

Note: You have no US tax return obligations if a state accepts your VAT number for the exemption since you will not be registering for FEIN or a sales tax license in a state.

SST (Streamlined Sales Tax), the MTC (MultiState Tax Commission), or go directly to the state? Which is best? 

MTC and SST forms are important alternative documents, and most states will accept them. There are states not covered by these two forms, e.g., Washington D.C. and Louisiana. Well, you have to visit their website and get the form.

*SST has 24 state members and has created the Streamlined Sales Tax Exemption Certificate, which anyone can use for all their member states. If one of your suppliers or dropshipper wants you to provide an exemption certificate to one of these 24 states, you can give them this SST form. You don’t need to be registered in these states to use this form. This form will accept your FEIN, driver’s license, and state-issued business ID number. For foreigners, it will accept your VAT issued by your country. If you don’t have a VAT number, you need to get a FEIN.

*MTC has 37 state members and has created the Uniform Sales & Use Tax Exemption Certificate, which can use for some of their member states.  Please consult the link for a complete list of the states that accept the Uniform Sales & Use Tax Exemption Certificate, subject to notes on pages 2-4 of that document. If one of your suppliers or dropshipper wants you to provide an exemption certificate, you can give them this MTC form. Remember that some states still require a reseller to be registered to collect sales tax in the state where the reseller makes the purchase. 

MTC form is very similar to the SST form but has a lot of restrictions, and you must read the footnotes for seven pages. Also, please remember that some of the MTC member states are also members of SST. However, the form requirement will still be based on the program’s requirements (SST, MTC, or a state exemption form). 

We suggest you check first the state who will accept the SST form before you get into the MTC form because the SST form is easy and has not required much hesitation. If you don’t have a sales tax ID in the state, you only need to provide the other tax ID number mentioned above.

SST Member States:
Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, North Carolina, North Dakota, Nebraska, New Jersey, Nevada, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin, and Wyoming.

MTC Member States:
Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Washington, and Wisconsin.

Who is responsible for getting a sales tax exemption certificate?

Reseller or purchaser. Whoever brings the responsibility should know enough about when to get an exemption certificate. Whoever needs an exemption certificate must know what forms and types of exemptions use.

Why is a sales tax exemption certificate necessary?

The auditor will require you to submit all exemption certificate documents for sales-tax-free claims on your filing returns. If the supplier or reseller missed some certificates, it could be a massive evaluation, including penalties and interest. This is also one of the common causes of sales tax audit problems.

Do you need to register for a sales tax account to obtain a sales tax exemption certificate?

Not all states must register for sales tax account numbers, but more than ten states require sales tax registration before getting an exemption certificate.

Will those ten states requiring sales tax registration accept sales tax exemption certificates from other states?

No, they do not accept out-of-state resale certificates. These states are very stringent in terms of accepting exemption certificates.

Does the sales tax exemption certificate expire?

It depends on the state because some exemptions certificate needs to renew specifically if not used within twelve months.

What are my options to obtain a sales tax exemption certificate?

1. A Basic state requirement for non-resident sellers is VAT ID or other country-issued tax ID. If a VAT ID should suffice the basic requirement for a state exemption, the non-resident seller will not need to register for FEIN or a state tax ID number and will only complete the exemption certificate directly.
2. Options are based on the state requirements. If a state does not accept VAT ID, the non-resident seller should apply among the following:
3. EIN only (specify the states)
4. EIN + state-issued tax ID number (specify the states)
5. State-issued tax ID number only. No FEIN is required.

How to Handle an Amazon Suspension for Insurance Non-Compliance

Keeping your Amazon Seller Central account active is vital to your seller ranking and overall Amazon business. Ignoring repeated Amazon notices to comply with insurance is not a good idea. Amazon will force compliance and take action for non-compliant people, but the unknown is when.

If you have received several emails from Amazon about compliance with their updated insurance policy, the clock is ticking for compliance.

Amazon sends reminder notices every few weeks for you to get into compliance after you cross the $10K in monthly sales threshold. It is rumored that by September 2023, Amazon will suspend sellers who need to be compliant. This is the second anniversary of the program’s start, and many sellers who comply are unhappy with those who are not. Plus, there is pressure from insurance companies for Amazon to stand behind their compliance requirements. 

We know the supply chain issues need to be fixed, don’t suspend your seller central account or access to your funds by not complying.

What happens if your Amazon Seller Central account is suspended?

You will need to take the proper steps to get out of suspension. First, it involves complying with the insurance policies and uploading your certificate of insurance to Amazon to get it approved.

Ideally, this will solve your suspension issue, but how fast it is still being determined.

If you continue to have issues, we have a recommended resource with Chris McCabe, an expert helping Amazon sellers with suspended accounts or ACINs. See our video at this link from the previous Prosper Show, where Chris shares valuable tips on responding to Amazon appropriately when handling an Amazon suspension issue. 

Why risk paying high fees to a company to help you get out of suspension and risk-taking your selling ranking in the meantime?

First, check with Marsh.com to see if they can offer you insurance in your home country.

If they cannot help, schedule a call with our team at this link, and we will explain your options with U.S. insurance and a U.S. company to protect your account, business, and income for you and your family.

Crypto Taxation

Determining your crypto taxation starts with knowing if your crypto transactions are taxable or not. Below are the most common crypto activities that you do need to report on your tax form:

• Selling your crypto for cash or converting to a stable coin.
• Trading one cryptocurrency for another digital currency (such as Ethereum).
• Using cryptocurrency at a merchant as payment, including paying with a crypto debit card.

You may also receive income from crypto. Here are some examples:

• Receiving airdropped tokens resulting from a hard fork. An airdrop is a transfer of free cryptocurrency from a crypto project into users’ wallets.
• Staking or mining cryptocurrency
• Getting paid in crypto
• Interest income from lending

Most crypto investors have only bought and sold crypto on a crypto exchange or wallet, creating short and long-term capital gains or losses.

You will create ordinary income if you have earned crypto from a job, mining, staking, or earning interest.

If you earn ordinary income in your names by default, you are operating as a sole proprietorship which will show up on schedule C, subject to state and federal income taxes.

Like any ordinary income you have earned, if high enough, you may want to structure an S corporation or LLC taxed as an S corporation to save on self-employment taxes which is 15.3%.  Plus, an LLC taxed as an S corporation will keep the income off schedule C, which is much more likely to be audited by the IRS.

Five steps to file your cryptocurrency taxes:

1. Calculate your crypto gains and losses. We recommend you use crypto tax software. There are many crypto tax software on the market. If you are outside the U.S., you will use Cointracking.info to organize your transactions to determine a gain or loss so you can file a return with a tax professional in your own country. Another alternative tax software for U.S. residents is Taxbit.com. Their software at the free level works well with traders and investors.
2. Complete IRS Form 8949
3. Include your totals from 8949 on Form Schedule D
4. Include any crypto income on Schedule 1 (or Schedule C if you are engaging in crypto taxes as self-employed-a mining operation is an example). For example, if you earn staking reward income that goes on other income on Schedule 1, line 8z, added to your personal 1040 tax return.
5. Complete the rest of your personal tax return. If you set up your exchange in the name of a business entity, and that entity has a return, such as an LLC taxed as an S corporation, that return would also be filed. A single-member LLC disregarded for tax purposes where the owner is the individual does not file a U.S. return for the LLC unless it is owned by a non-resident and would file form 5472 and pro forma 1120.

NCP can help you with your digital LLC for U.S. and non-U.S. residents. We work with a U.S. exchange’s VIP team that will help speed up the time to set up your U.S. crypto account (minimum capitalization is $10K). Go here to learn more about our digital LLCs.

See the video below from the recent Miami Bitcoin event with Scott Letourneau and our sister brand, cryptowealthprotection.com, and how Taxbit.com can help you simplify your crypto taxation.

In most cases, crypto income should be reported in personal income or self-employment income. Any time you are filing a Schedule C, you may be entitled to business expenses, and any loss on your Schedule C may be used to offset earned income. The key is to make sure you operate a mining business, not a hobby. If you are deemed to be operating a hobby, you may only offset your losses that equal your income.

If you earned staking income or interest rewards from lending out your crypto, this income is generally reported on Schedule B.

The key with crypto tax software is to fix any missing or duplicate transactions after using the API feature or CSV to import your data from your exchanges and wallets. Cleaning up your missing and duplicate transactions will lead to filing a more accurate 8949 form with your personal tax return.

Single-Member LLC vs. Multi-Member LLC Charging Order

LLCs are more popular than corporations for a few reasons, including flexibility in the management structure, taxation options, and the bonus of the “charging” order protection in most states.

When you operate a business, you must consider what happens if your business is sued directly. Will your business liability insurance policy protect your business assets, will the plaintiff attempt to pierce the LLC veil and go after your personal assets? Most don’t consider the big question: What happens when you are sued personally for something non-related to your operating business? Will you lose control of your personal assets, including the ownership in your LLC?

The LLC has this built-in “charging order” protection, making it more challenging to take over the LLC’s ownership and control its assets.

What is a “charging order,” and why is it important?

A charging order is an order which places a lien on your membership interest in the LLC. It is a request to the manager of the LLC to pay the creditor all of the profits and income that would have otherwise gone to you. It is usually limited to the dollar amount of the judgment and is similar to a garnishment of wages or income.

In about two-thirds of the states, the charging order is the exclusive (only) legal remedy personal creditors of LLC members have. However, in most states, creditors with a charging order only obtain the owner-debtor’s financial rights and cannot participate in the management of the LLC. Thus, the creditor cannot order the LLC to make a distribution subject to its charging order.

The design of the charging order is to protect the non-debtor members against this forced and involuntary partnership with a creditor.

The significant issues come from the history of the charging order, which comes from partnership law, and some states do not recognize the benefit of the charging order with a single-member LLC.

The first case was in Colorado in April of 2003, and another one in Florida in 2010.

The result is that some believe you should always have a two-member LLC to have full advantage of the charging order.

What happens when you don’t have a partner? Some will suggest finding someone to be a 1% or 2% partner to solve this issue. But it is not that simple.

What do the courts look at when you add a partner, and what will the courts look to decide if the “charging order” should hold up for LLCs? There is a difference between a passive investment partner to make a two-member LLC vs. a partner who has a say in management. If you add a partner that is only passive as a member (assuming an LLC that is managed by managers), and that partner is 2% and has no say in the management or voting rights, if a creditor takes that partner’s interest, that will NOT interfere with the operations of the LLC.

Ultimately, the judge may allow the creditor to levy against the 2% partner’s interest and sell it off. At the end of the day, if there were no adverse impact on the non-debtor member, the charging order would likely not protect that member’s interest.

Notable cases involving the single-member LLC and the charging order: 

• Colorado In re Albright, 291 B.R. 538 (Bankr. D. Colo. 2003). A 2003 Colorado bankruptcy case, In re Ashley Albright, allowed a bankruptcy trustee to take control of a one-member LLC.
• Florida is based on a 2010 case. In Florida, the Supreme Court held that a judgment creditor with a charging order against a single-member LLC might take full membership rights in the LLC in single-member LLCs. Not long after the Florida Supreme Court’s decision, however, the Florida legislature amended the applicable law to limit the rights of a judgment creditor to a charging order or foreclosure. Sec. 608.433, Fla. Stat.
• Lousiana in a case in 2020. First, The District Court held that the Louisiana charging order statute did not apply in the context of a single-member LLC owned by the debtor since there is no non-debtor member with interests to protect from the creditor. On appeal, the Louisiana Court of Appeals reversed, essentially saying that Louisiana charging order statute limits the rights of a judgment creditor to “only the rights of an assignee of the membership interest,” i.e., what is known as an “involuntary assignee.” Because there has been no reverse piercing of the veil in this matter, we find that a plain reading of Louisiana’s charging provision for LLCs provides the exclusive remedy of a judgment creditor.

Bankruptcy courts are more open to allowing creditors or trustees to exercise control over debtor membership interests. Bankruptcy courts look to Section 541 of the Bankruptcy Code and applicable state LLC Law on this question.

Some states say the single-member LLC will provide the charging order protection as an exclusive remedy. 

• Alaska
• South Dakota
• Nevada
• Wyoming

Some states allow the charging order to LLC and foreclosure as an option for creditors: 

• California
• Colorado
• Hawaii
• Montana
• Utah

After years of speculation and the lack of solid case law, the issue of whether single-member LLCs are afforded the protections of the charging order was finally addressed by a U.S. bankruptcy court in Albright, No. 01-11367 (Colo. Bkrpt. April 4, 2003). The
judge in Albright held that charging order protection does not exist for a single-member LLC because there are no non-debtor members to protect. The court granted full economic and noneconomic rights to the trustee, allowing the bankruptcy trustee to manage the debtor’s
LLC. The trustee subsequently sold the LLC’s property and distributed the net proceeds to the bankruptcy estate to satisfy creditors’ claims.

The Colorado Act provides that where the LLC has no members (such as in the case where the single-member loses her membership interest through foreclosure or as a result of a conveyance to a bankruptcy trustee upon filing a petition in bankruptcy), the non-member assignees “of the last remaining member” may, by the unanimous consent of the assignees, “be admitted as a member or members.” This would include a bankruptcy trustee, a creditor foreclosing on the single-member membership interest, or an heir upon the death of the single-member.

Does this mean a single-member LLC is worthless in these states where the charging order does not protect the member from a lawsuit unrelated to the operating business? No.

The single-member LLC is still a valuable tool against internal liability once that is against the operating company directly.

For example, if you own real estate and a single-member LLC owns it, and a tenant sues the LLC,  if the single-member LLC is adequately capitalized, is not the alter ego of the sole member, and is not used to perpetuate a fraud, the tenant may not assert liability against the member. Often, we will structure multiple single-member LLCs owned by one LLC taxed as a partnership to get the best of both worlds.

Shopify Sales Tax Requirements

If you are selling through Shopify or your own website, you may have crossed the economic thresholds in several states, which means you have a responsibility to register for a sales tax permit, update your Shopify tax settings (or shopping cart), and collect and remit sales taxes.

Even as a non-resident selling in the U.S., it is essential to protect your brand and profits by knowing when to register so your customer pays the sales tax, not you.

Note for Non-Residents: You may have been told the only way to register for U.S. sales tax is through a U.S. company. That is not true.

NCP can set up a U.S. company for Walmart or U.S. insurance, but it is NOT required to register for sales tax.

It takes longer as many states do not allow us to register online; we need to mail the application to the states. And we do partner with Avalara, Taxjar, and others, but most can not file your sales tax returns unless you can do an ACH pull through a U.S. bank account requiring a U.S. entity. We work with a provider that can file your sales tax returns without a U.S. bank account on your foreign entity.

BUT… we have another option with a partner firm that can do all your sales tax registrations and wire the sales tax due.

What are the economic thresholds?

If you make over $100K in sales in a state or have over 200 separate transitions in the current or prior calendar year, you may have economic nexus and be required to get a sales tax permit. Some states, like California and Texas, only have thresholds of $500K in sales.

Update on economic nexus thresholds changes: Maine removed the 200 transactions in January of 2022 and South Dakota in July 2023, and Louisiana in August 2023.

Warning: Do NOT turn on the tax settings for states where you have crossed the thresholds BEFORE registering with a sales tax permit.

Collecting tax without a permit is illegal and could be considered tax fraud. At this point, you must get registered.

Methods to Calculate When You Cross Nexus Thresholds:

There are four methods states for you to use to determine when you cross economic nexus thresholds in each state.

If you are a Shopify seller, this is why you have seen more updates on your sales tax liability dashboard since January because your company has crossed economic nexus thresholds during the previous calendar year.

1. Previous calendar year: This means you count sales up until the end of December for that state to determine if a company has crossed economic nexus. If yes, you are responsible for collecting and registering in January next month (and year) moving forward. If you do not cross that state’s economic threshold in December, you can wait another year and recheck the following December.
2. Previous calendar year OR current calendar year: You check sales the previous year until December, or at any point during the current calendar year, you would register. But you do not cumulate sales from the previous year. If you did not cross economic nexus thresholds in that state by December, you start at zero sales again in January and see if you cross the thresholds at any month during the current calendar year, and if you do, register the following month. Some states say you must register the following day, the following transaction, 30 days…This is the most common method by states.
3. Prior 12 months: You only look at the prior 12 months at any time. Each month you would need to calculate the sales for the previous 12 months to determine if you cross economic nexus thresholds in any state. Includes CT, IL, MN, MS, TN, TX, and VT.
4. Prior four quarters (only NY): You only look at the previous four quarters and check every quarter to see if you crossed the economic nexus threshold in NY, which includes $300K in sales AND 100 transactions.

Reminder, if you are a marketplace seller only, such as on Amazon, or Walmart, the marketplace collects and remits on your behalf (in almost all the states).

Don’t rely solely on Shopify’s sales tax tool to help determine when you cross thresholds because there are limitations, especially if you sell on a marketplace such as Amazon or Walmart.

What to learn more first about our registration process?

Here are our updated sales tax registration options and pricing with our sister brand, Sales Tax System.

Our fees are $125 per state for our comprehensive service, including if you don’t have an SSN. State fees may apply to some states.

If you don’t have an SSN, in some states, if we have to mail your sales tax application, an additional $10 fee per state will apply.

After you fill out our sales tax application, we will let you know your state and mailing fees and which states you want us to register you.

If you want to know your total costs upfront, please send us an email with the states you want to get registered.

We are partnered with all the sales tax firms that file sales tax returns from the software companies and those that provide a more hands-on experience. We can refer you to them after the registration process to help save you time and money.

Economic Nexus Map with Methods to Calculate for Shopify Sellers Register below, and we will send out an automatic email with an overview of the basics of sales tax compliance in the U.S. You will receive a chart simplifying sales tax and a video overview plus steps for compliance. First Name * Last Name * Email * Country * Please select oneAfghanistanÅland IslandsAlbaniaAlgeriaAmerican SamoaAndorraAngolaAnguillaAntarcticaAntigua and BarbudaArgentinaArmeniaArubaAustraliaAustriaAzerbaijanBahamas (the)BahrainBangladeshBarbadosBelarusBelgiumBelizeBeninBermudaBhutanBolivia (Plurinational State of)Bonaire, Sint Eustatius and SabaBosnia and HerzegovinaBotswanaBouvet IslandBrazilBritish Indian Ocean Territory (the)Brunei DarussalamBulgariaBurkina FasoBurundiCabo VerdeCambodiaCameroonCanadaCayman Islands (the)Central African Republic (the)ChadChileChinaChristmas IslandCocos (Keeling) Islands (the)ColombiaComoros (the)Congo (the Democratic Republic of the)Congo (the)Cook Islands (the)Costa RicaCôte d’IvoireCroatiaCubaCuraçaoCyprusCzech Republic (the)DenmarkDjiboutiDominicaDominican Republic (the)EcuadorEgyptEl SalvadorEquatorial GuineaEritreaEstoniaEthiopiaFalkland Islands (the) [Malvinas]Faroe Islands (the)FijiFinlandFranceFrench GuianaFrench PolynesiaFrench Southern Territories (the)GabonGambia (the)GeorgiaGermanyGhanaGibraltarGreeceGreenlandGrenadaGuadeloupeGuamGuatemalaGuernseyGuineaGuinea-BissauGuyanaHaitiHeard Island and McDonald IslandsHoly See (the)HondurasHong KongHungaryIcelandIndiaIndonesiaIran (Islamic Republic of)IraqIrelandIsle of ManIsraelItalyJamaicaJapanJerseyJohnston IslandJordanKazakhstanKenyaKiribatiKorea (the Democratic People’s Republic of)Korea (the Republic of)KuwaitKyrgyzstanLao People’s Democratic Republic (the)LatviaLebanonLesothoLiberiaLibyaLiechtensteinLithuaniaLuxembourgMacaoMacedonia (the former Yugoslav Republic of)MadagascarMalawiMalaysiaMaldivesMaliMaltaMarshall Islands (the)MartiniqueMauritaniaMauritiusMayotteMexicoMicronesia (Federated States of)Midway IslandsMoldova (the Republic of)MonacoMongoliaMontenegroMontserratMoroccoMozambiqueMyanmarNamibiaNauruNepalNetherlands (the)New CaledoniaNew ZealandNicaraguaNiger (the)NigeriaNiueNorfolk IslandNorthern Mariana Islands (the)NorwayOmanPakistanPalauPalestine, State ofPanamaPapua New GuineaParaguayPeruPhilippines (the)PitcairnPolandPortugalPuerto RicoQatarRéunionRomaniaRussian Federation (the)RwandaSaint BarthélemySaint Helena, Ascension and Tristan da CunhaSaint Kitts and NevisSaint LuciaSaint Martin (French part)Saint Pierre and MiquelonSaint Vincent and the GrenadinesSamoaSan MarinoSao Tome and PrincipeSaudi ArabiaSenegalSerbiaSeychellesSierra LeoneSingaporeSint Maarten (Dutch part)SlovakiaSloveniaSolomon IslandsSomaliaSouth AfricaSouth Georgia and the South Sandwich IslandsSouth SudanSouthern RhodesiaSpainSri LankaSudan (the)SurinameSvalbard and Jan MayenSwazilandSwedenSwitzerlandSyrian Arab RepublicTaiwan (Province of China)TajikistanTanzania, United Republic ofThailandTimor-LesteTogoTokelauTongaTrinidad and TobagoTunisiaTurkeyTurkmenistanTurks and Caicos Islands (the)TuvaluUgandaUkraineUnited Arab Emirates (the)United KingdomUnited StatesUnited States Minor Outlying Islands (the)Upper VoltaUruguayUzbekistanVanuatuVenezuela (Bolivarian Republic of)Viet NamVirgin Islands (British)Virgin Islands (U.S.)Wallis and FutunaWestern SaharaYemenZambiaZimbabwe Phone Detailed Notes: *Indicates a required field  Send Me Your Sales Tax Chart and Video Overview

Walmart W-9 Mistakes to Avoid for Non-Residents

Expanding to Walmart is a popular trend for non-resident sellers who have shown success on Amazon.com.

There are many steps involved in correctly forming a U.S. LLC for your e-commerce business (when required), and one of the key areas is to avoid issues with both the marketplace and the IRS.

We have seen sellers reach out to us and share what others have told them to do when forming a U.S. single-member LLC and this will (when caught) create a major issue for either your account or with the IRS.

Here are the Walmart W-9 Mistakes and what sellers need to know.

If you are a non-resident looking to form a U.S. LLC to sell on Walmart, you will need to fill out the W-9, which will create a U.S. taxpayer. A U.S. taxpayer is an entity such as an LLC taxed as a corporation or a partnership that will file a separate U.S. tax return and pay U.S. taxes. A tax treaty will, in most cases, offset the partnership taxes (distributions) to some level with your country.

Of course, creating a U.S. taxpayer gets more complex, so what is being taught by “agencies” and on Youtube is form a single-member LLC disregarded and fill out the W-9.

This next part is incorrect, but what is being recommended:

On line 3, check the box Individual/sole proprietor or single-member LLC (this part is technically correct), BUT…

Part II, under Certification, has a few statements, and one says 3. I am a U.S. citizen or other U.S. person (defined below);

As a non-resident, you are NOT a U.S. citizen. What are the definitions of a U.S. taxpayer?

Definition of a U.S. person.

For federal tax purposes, you are considered a U.S. person if you are:

• An individual who is a U.S. citizen or U.S. resident alien;
• A partnership, corporation, company, or association created or organized in the United States or under the laws of the United States;
• An estate (other than a foreign estate); or
• A domestic trust (as defined in Regulations section 301.7701-7)
• The most common option is a U.S. corporation or partnership. That can be an LLC taxed as a corporation or partnership.

A single-member LLC disregarded owned by a foreign entity, or a non-resident individual is NOT a U.S. taxpayer.

In conclusion, you committed perjury if you completed the W-9 as a non-resident in this manor for either Walmart or Amazon. And they both are aware of it. The W-8BEN or W-8BEN-E was the proper form with a U.S. single-member LLC disregarded owned by a foreign individual or foreign entity.

This is one of the top Walmart W-9 mistakes to avoid for non-resident sellers. You need to connect the dots when you sell on a U.S. marketplace, even as a non-resident seller, whether you need U.S. insurance for Amazon, sales tax registrations for Shopify, or you are attempted to get approved by Walmart, make sure you work with someone that understands all the key points.

Amazon Seller Insurance Requirements for Non-Resident Sellers

Amazon is now enforcing insurance requirements to sell on their marketplace. Per Amazon’s terms of service, business liability insurance protection is required for all sellers. Do you carry business liability insurance? If not, your Amazon seller account is not protected. Take the steps now to avoid any limited access or account suspension. Don’t drop your seller rank. I’d like you to learn the steps to get into compliance.

Update February 2024: Many non-residents who had insurance from their own country from a U.S. insurance company with global branches have found their insurance policies are being canceled and reported to Amazon (a requirement). Many non-residents who do not want to risk a disruption in their Amazon account are looking for U.S. insurance providers. That is exactly who we help. Unfortunately, most sellers take shortcuts, resulting in no coverage when needed by insurance underwriters.

Update December 2024: On the eve of the Corporate Transparency Act going into place, non-resident sellers with U.S. LLCs doing business on Amazon for insurance purposes, now more than ever, need to be clear between what is required for complete insurance coverage from a U.S. underwriter (most will not have complete coverage), changes to an existing Amazon account and creating a U.S. person, the changes to your U.S. tax responsibilities, and now the owner of the U.S. LLC and reporting the beneficial ownership information in 2024, and updates beyond. All these components are critical for your compliance and protection of your brand. NCP is your only one-stop-shop solution that works with the top U.S. e-commerce insurance providers. Proper insurance coverage is necessary for selling a high-risk product in the exercise, baby/children, or supplements niche.

Update August 2022: Amazon Reversal—update on commercial liability insurance policies for sellers.  On June 13, 2022, we updated our Commercial Liability Insurance policy to require zero-deductible policies from sellers. Following this update, several sellers told us about their challenges in procuring zero-deductible policies. We thank our sellers for this feedback, and we won’t proceed with this change.

We will continue to allow policies with deductibles for sellers on Amazon and have reverted to our previous policy requirement: The deductible for any policy(ies) must not be greater than $10,000, and any deductible amount must be listed on the certificate(s) of insurance. We will reflect this update on our Commercial Liability Insurance policy in the coming days. For more information, visit Business Insurance and A-to-z Claims Process for Property Damage and Personal Injury.

Update June 13th,  2022: Amazon tightens liability insurance rules for sellers under $1 million in sales. Now, sellers whose gross sales are $1 million or less may not have any deductible. Small sellers incur higher costs since no-deductible insurance plans usually have higher premiums. This change will take effect seven days after the announcement.

Update 2022: Buy Box Experts interviewed Scott Letourneau, CEO of NCP, and Matt Lovell of Well-Insurance.com about what Amazon requires. The complete interview is available at this link. 

Here are the two changes:

• Your policy can include a deductible if (i) your gross proceeds from sales of your products in the Amazon.com store exceed USD 1 million in the last 12 months, and (ii) the deductible is listed on your Certificate of Insurance;
• For single-member LLCs, the insured name can match either your legal entity name or the name you publicly use to identify your business (“trade name,” “doing business as,” or “DBA”);

Update: Amazon has made an essential update to terms of service (TOS) insurance requirements. As of August 10, 2021, sellers received an e-mail announcing a revision of Amazon’s A to Z Guarantee program. In that announcement, Amazon announced that on September 1, it is changing when a seller needs to obtain liability insurance. The seller will need liability insurance when they have reached $10,000 in sales for three consecutive months or once they obtain $10,000 in sales in any month. Amazon sellers are on the hook for claims above $1,000. That means you have a lot of exposure, especially if you are hit with a lawsuit. $1 million in coverage is required, but you may need more than that to protect yourself. Please look at Amazon’s Notices to Seller Requiring Proof of Insurance.

Foreign sellers must purchase in their local country and have a global protection policy (if you can even find anyone to insure you). If not, I’ve outlined your best option below with forming a U.S. company, if you don’t mind. Most sellers received an e-mail on September 13, 2021, and a second notice was received on October 29, giving a reminder to provide the certificate of insurance within 30 days.

Update from March 2022: many of the same sellers receive notices who received their first notice in September or October. They are past 90 days, and their accounts have not been suspended. This can change at any time. Likely, Amazon has had challenges providing options for non-residents, which has slowed the process. But why risk your account? Could you schedule a call with our team now? Our team has a 100% success rate with getting approval from Amazon for non-residents.

Insurance providers receive email notices from Amazon to verify the seller’s information, including the name and DBA name on the insurance, the policy number, the expiration date, and policy coverage. We don’t know what happens if your insurance company does not respond to these requests (not because they don’t want to, but because thousands of requests are going out). If you make monthly payments to your insurance provider, ensure your payments are current and your credit card is being charged. Otherwise, your policy will not be approved, and the insurance provider must report if your policy is inactive due to non-payment.

From Amazon: If we don’t get your proof of insurance within 60 days of the first notification by Amazon or we cannot confirm the information you provide, future disbursements will be held in your seller account until we can verify your proof of insurance. If you still need to take action or we cannot”    properly verify your proof of insurance within 90 days of the initial notification, we may not allow you to continue selling on Amazon.com.

Strategy: There is a disconnect between using the LLC to obtain the certificate of insurance and what names go on in addition to the LLC. There is a different tax impact when the LLC is for the insurance, but not to operate your Amazon business. Using a U.S. LLC to operate your Amazon business is more involved and is different for this situation. We have pointed it out to Amazon and have a solution for you when you work with NCP. Please review our video below for an overview of how we will help you get into compliance. 

What is required for Non-Resident Amazon Sellers to Obtain a Certificate of Insurance from a U.S. insurance company and keep their account active?

Here is your checklist to obtain a Certificate of Insurance from a U.S. insurance provider (our recommendation is Well-Insurance.com).

• A U.S. entity. [Important note] A U.S. insurance policy must be written on a U.S. company to provide proper coverage. Don’t assume that if you obtain a certificate of insurance with only an address and EIN, and Amazon accepts it, it will be valid long-term. Amazon wants companies to have the proper coverage to protect you if required.
• A U.S. address (not a PO Box)
• An EIN from the IRS (now taking about 7-10 business days). Note: The IRS requires the EIN to be faxed to a U.S. company vs. a foreign company, where you can call over the phone.
• Obtain the COI (a quote will be provided after your U.S. company is in place)
• Update your Amazon Seller Account properly and receive address verification (NCP provides all these steps)
• Upload your certificate of insurance

Other key support areas: 

• Our partner CPA firm will file this strategy’s appropriate U.S. tax returns.
• Which U.S. state best lowers your insurance costs and gives you the best option for compliance if a utility bill is required?
• What U.S. tax returns are required, and what fees are involved based on your situation?
• What annual requirements are triggered with my U.S. entity formation?
• Complete support between your U.S. entity formation, your certificate of insurance, and updating Amazon correctly to keep your account active. All our clients are getting approved when you follow our steps.

Click Here to Book a Call with our Team

We will share our best options to help you solve your certificate of insurance requirements to keep your Amazon account active.

Our clients have a 100% success rate when following our steps. This is the result you want in your Amazon account.

Amazon’s 30-Day Notification and Insurance Requirements

Sellers with professional selling plans on Amazon.com must provide proof of Commercial General Liability insurance or Certificate of Insurance (COI). This insurance, obtained at the seller’s expense, shall cover up to $1,000,000 per occurrence and in the aggregate and must include product liability, bodily injury, personal injury, property damage, and other requirements as stated in the Participation Agreement. The insurance must indicate that “Amazon.com, Inc., and its affiliates and assignees” are added as additional insureds.”

As we mentioned earlier, this was amended. A seller must obtain liability insurance once they have reached $10,000 in sales for three consecutive months or once they obtain $10,000 in sales in any month.

Amazon said it would pay for A to Z guarantee claims seeking compensation for personal injury and product damage under $1,000 and will not seek compensation from sellers with valid insurance.

With these new changes, you may receive a notice within 30 days to provide proof of insurance. The goal is to avoid suspension with your Amazon account.

The challenge is that your insurance rates may be much higher or impossible to obtain as a non-resident. For example, most foreign insurance companies don’t want to insure supplements due to the risk. Those companies are partnered with American insurance companies.

U.S. Company Formation Strategy

For the American insurance company to underwrite your policy, you must operate through a U.S. entity. A U.S. LLC is the most common. The key is ensuring your U.S. LLC is appropriately established, especially with the IRS, so you avoid any necessary audits. You can learn more about U.S. taxation requirements for non-residents and the components of a complete U.S. LLC formation.  

The strategy is different in this situation and will also impact (in your favor) U.S. taxes and tax filing requirements.

Once you have the U.S. LLC, the insurance provider can quote you. An EIN is required, but it must be attached to the file. Typically, you can receive a quote before having your EIN in place.

How to Classify Your Insurance Correctly for Proper Coverage when You Import Your Product from China

Amazon wants you to provide them with a certificate of insurance (COI). Amazon does not know the difference between a basic policy that is classified and rated for an “online retailer or e-commerce retailer” vs. a policy that has been rated as an “importer” or “manufacturer” of some type. But this should be a big difference when protecting your brand and business. Also, Amazon must be added as an additional insured and notified if the policy is canceled or expires. Don’t be surprised if you receive different insurance rates due to these factors. 

If you are dropshipping someone else’s brand, a basic insurance policy such as an “online retailer or e-commerce retailer” will be sufficient as long as supplement sales don’t exceed 25% of your total sales. These are less money also. This is sufficient because if there is a lawsuit, it will be pointed to the brand you are dropshipping, not necessarily you as the seller. That does not mean you can’t be sued, but lawsuits are about going after deep pockets at the end of the day.

If you sell private label products, you do NOT want to be classified and rated as an “Online Retailer” or “eCommerce Retailer.” Suppose you want accurate coverage for your brand, not only to appease Amazon’s certificate of insurance requirement. This will not be sufficient coverage in the event of an actual lawsuit. Why? You, the seller, assume all the liability exposure, even though your products were manufactured in China because you can NOT subrogate back against a Chinese manufacturing facility. What does subrogate mean? Subrogation describes a legal right held by most insurance carriers to pursue a third party that caused an insurance loss to the insured.

If you are a private label seller, you want to be correctly rated and classified as an importer or manufacturer of some type, which will come with a higher insurance premium.

Now, you will have the proper coverage if your company is sued. If your products are manufactured in the U.S., you expect your premium to be slightly lower (all other factors). Of course, if you are selling products subject to more liability, that will also impact your premiums.

Your insured name must match the “legal entity” name you provided to Amazon for your certificate of insurance (COI) to be accepted.

Ultimately, you want to work with an insurance provider that will give you the proper coverage for your business and family to protect your brand, not only to provide Amazon or other marketplaces with a certificate of insurance.

What is the Time Frame to Obtain Liability Insurance?

A quote can happen within a day or two if straightforward but may take a few more days if it is more complex. The key is someone filling out the application correctly. The certificate of insurance (COI) will come in about 2-3 days after the application is submitted, and the first payment to the insurance provider, monthly, quarterly, or annual. This is important because Amazon gives 30-day notices to update your account to avoid a suspension.

You may also ask for worldwide coverage, which is only another $200 + or so in many cases.

Estimated Insurance Costs?

You will want to know your Amazon business’s estimated liability insurance cost. The best way is to obtain an estimate when your U.S. LLC has been formed. Please look at our U.S. Entity formations page for U.S. LLC services and details of our support.

Here is an overview of what liability insurance may range for a year.

• Basic household items range from $400 to $600.
• Higher-risk products such as supplements, children’s items, exercise/sporting goods, cosmetics, and nutritional products may range from $1,000 to $10,000. The average in these categories is around $3,500.

If you would like an accurate price quote for the proper coverage, whether you are dropshipping or a private label seller, please contact Well Insurance.

Liability Insurance

Amazon is one of many marketplaces that requires liability insurance. Here are a few of the major ones that will also want to see your certificate of insurance.

• Target
• Walmart
• Wayfair

What Will Happen if Amazon Sellers Don’t Have Insurance After Their 30-Day Notice?

Update: After speaking with one of the Amazon insurance providers, they have revealed that Amazon plans to send out an e-mail a week or two after September 1 for all those who did not comply, giving a 30-day final notice for compliance. This is much more serious. Will they suspend your account after that 30-day notice? That is not likely, but limited access to funds may be an option. Will foreign sellers in some countries be given more time because it is harder to obtain insurance?

That is possible. Could the 30-day notice changed to a 60-day notice? That is possible. As of January 2024, most sellers who have received several notices in the past 90 days have not been suspended, but that can change any day.

Timing is Key 

Once you hit the $10K sales threshold in a month, you must provide insurance to Amazon.

Could you be sure to obtain liability insurance before the last minute? Even though it can happen quickly, you must ensure your U.S. entity is appropriately formed with the state (the easy part) and the IRS. Internal documents are drafted correctly to make sure your Amazon.com business is protected.

Since our team has worked closely with the Amazon team in the past, we have the correct steps to help you update your Amazon seller account after formation to ensure your account is not suspended. Yes, we even can provide the “dreaded” utility bill (only on companies we form) if required.

Are You Stuck? 

Did you already obtain a certificate of insurance, but Amazon is not accepting it? Did you form a U.S. LLC?

Do you need help with what to update on Amazon or what U.S. tax responsibilities you may have triggered?

We can help you with our strategy calls to solve these and other challenges you may be having with protecting your Amazon account. You can learn more at this link.

How to Protect Your Cryptocurrency From Liability

Cryptocurrency is classified as property by the IRS.  Property can be a target of legal action, similar to real estate, and you can lose 100% of your property, or in this case, your cryptocurrency, even if it is DEFI.

The blockchain allows the tracing of all transactions involving a given bitcoin address, all the way back to the first transaction. If a crypto investor is involved in litigation or has a creditor, the Court can demand a disclosure of all relevant cryptocurrency assets that a defendant owns.

Bitcoin, Ethereum, and other popular cryptocurrencies, even though they promise full anonymity, it cannot be guaranteed 100 percent as most blockchain transactions are recorded on the public ledger. This makes for the cryptocurrency to be easily tracked by government agencies.

There are many articles about protecting your cryptocurrency from hackers, which is vital to protecting your asset from that point of view. This post will address the key points to protecting your cryptocurrency from lawsuits and probate.

Five Strategies to Protect Your Cryptocurrency from Liability:

1. Understand the difference between protecting your crypto account from hackers vs. liability. Yes, it is vital to protect your crypto account from hackers and theft and be organized, depending on how you set up your account. Protecting your crypto account from hackers includes steps around the type of crypto wallet, whether it’s a paper, cloud-based, or non-custodial online wallet.

Update: Since the FTX bankruptcy filing 11-11-22, many crypto holders are withdrawing their crypto from other exchanges into cold wallets for storage. The crypto industry’s golden rule is “Not your keys, not your coins.” And it comes down to the fact that when you turn your coins over to an exchange to hold and keep secure, you’re giving control over them.

You have given up control when you leave your crypto on an exchange; whether centralized or decentralized, it’s far safer to have custody of your assets. This means keeping them in a physical hardware wallet similar to a USB drive or, alternatively, an online software wallet. In both cases, you are the one who maintains control over the coins, and access to them is protected through private key cryptography.

Your next step is understanding that crypto in a cold storage wallet may be safe from an exchange collapse but not from liability. Protecting your crypto account from personal liability is centered around asset protection of a safe asset. Crypto is similar to an investment (although not according to the IRS) because it is considered a “safe asset.”The asset is not going to cause direct liability to the owner.

The opposite is considered “risk assets,” like real estate, a business, a boat, or a car, that can cause direct liability. Safe assets are typically held in a separate entity that only owns other safe assets, including stock in other companies or investments in the stock market.

Your cryptocurrency is subject to being lost in a personal lawsuit when you own it personally. Most individuals own cryptocurrency in their name, personally. For example, a Coinbase Wallet is a cryptocurrency wallet and DApp browser controlled by you and only you. This means that your wallet’s private keys (representing ownership of the cryptocurrency) are stored directly on your mobile device and not with a centralized exchange like Coinbase.com.

When you open a Coinbase wallet, you can only fund it individually. This means the asset will be titled to your name only.

This is similar to opening an Etrade account and buying stock in Tesla. You have invested in a company’s stock (a safe asset) and directly own it. The critical question is, how could you be personally sued? Let’s assume you have an e-commerce business on Amazon, and you diversify a percentage of your profits into cryptocurrency as a hedge against inflation vs. investing 100% into more inventory.

Your e-commerce business should be established as a separate legal entity. The U.S. is the largest consumer market globally, but the downside is that we have the most lawsuits, especially regarding product liability. Most Amazon sellers know you must obtain product liability insurance once you cross $1 million in sales, but Amazon does not enforce that rule.

Litigation costs small businesses more than $ 100 billion annually in the United States. It’s not a matter of “if” it will happen to your business, but “when.” “By some estimates, over 40 million lawsuits are filed annually. What happens if your company is sued for product liability, loses in court, and doesn’t have any insurance?

Let’s assume you lost the product liability case, and a judgment is filed against your company. If your company did not have the cash to satisfy the judgment, the plaintiff might move to pierce the entity veil and go after you personally. Most form a cheap LLC online and have ZERO protection because there are no corresponding operating agreements and formalities for the LLC. Most likely, if your LLC is sued, you will also be personally sued as the manager or member. Let’s say that aside from the equity in your home that is not protected by a homestead, your most significant personal asset may be the cryptocurrency you have accumulated over the last couple of years.

You might say, “My crypto account is private. No one can access it without a public or private key and a password.” This falls under privacy and asset protection. Yes, it is helpful if no one knows what assets you control and under what entity or name, but if you have a judgment against you and hid personal assets, that is a big problem with a judge.

The best approach is to assume your crypto account can be found. If it is, would it be protected if a personal lawsuit results in a judgment against you? Here are some other ways you could be individually sued and lose control of your crypto assets. Social media posts tear down your competitors. For instance, suppose you personally created an ad campaign for your corporation criticizing a competitor. The competitor views the campaign as malicious and untrue and decides to sue.

They might personally sue your corporation and you as the ad’s creator. While you would not be liable for any settlement the corporation has to pay due to the suit, your assets could be attached to pay off any judgment the competitor won in its case against you, the individual.

What else can be taken in a lawsuit against you? Savings accounts are usually fair game in a lawsuit. However, retirement accounts, such as 401(k) and IRAs, are typically protected from a liability lawsuit.

Although 401(k) retirement plans are protected under the Employee Retirement Income Security Act of 1974, individually held IRAs get only a partial exemption in bankruptcy. You would have to rely on state laws for protection.

Some attorneys will go after everything else when collecting assets to satisfy a judgment, including your crypto account. They ask for all checking and savings accounts, partnership agreements and records of partnerships, real estate (including timeshares), trusts, contents of all safe deposit vaults, titles to all properties, and a complete list of jewelry, art objects, and personal property. A defendant could lose his car, cash, or other assets to satisfy a judgment.

2. How Do the Courts Know What Crypto You Have?

But how does the court know about your assets? A creditor can require your appearance in court for an asset hearing. The creditor can ask you questions under oath about your assets and demand you produce documentation regarding your wealth and ability to pay. Failure to appear at an asset hearing generally results in a bench warrant issued for your arrest. The creditor can then request a cash-only bond in the amount of the judgment. That could cause you to be held in custody until the judgment is paid in full, a new asset hearing can be held, or until the judge lowers the bond.

Do you need liability insurance? Yes. “Without liability insurance, you’re responsible for damages and injuries if you caused them.

3. What amount of crypto in your name is worth protecting with a separate legal entity? Do you need to ask how much you would be willing to lose in a personal lawsuit? If you had $5K in a brokerage account invested in Apple, would you form a separate LLC for only $5K to protect that as your only safe asset?

Probably not. That might be different if you had other safe assets, such as stock in a start-up, plus the $5K. You will want to determine your risk tolerance and the level of protection required for your situation. The other factor with cryptocurrency is very volatile, especially on the upside. If your Bitcoin was at $43K in April 2022, would it be in April 2023? Right now, Bitcoin is way down, and you may buy more in hopes of increasing value over time.

If you have $100K in crypto or other safe assets, which is 20% of your net worth, you will likely want to protect those safe assets using another entity or structure. If the $100K is 5% of your net worth, you still might consider a separate structure to protect your safe crypto-asset due to the potentially explosive upside over the next 1-3 years.

Your age will also be a factor. If you are 21 with $50K in Crypto, you have less risk and the ability to start over, vs. someone at age 65 with the same amount.

4. Why do I need to protect myself if I have insurance? We always recommend the correct entity structure to protect your assets, whether your business, real estate, or safe assets such as cryptocurrency. Besides, we recommend you have business liability insurance, product liability insurance, homeowners and car insurance (of course), and a personal umbrella policy covering any overflow.

Insurance does not cover some things, including breach of contract, defaulted loans, family disputes, fraud,  and sexual harassment. Over the years, insurance has developed more and more loopholes, separate from pre-existing conditions, exclusions, incomplete documentation, and including less coverage due to excess claims – for example, in-mold cases, needing to report the gathering of water on your property within 72 hours and reporting it vs. months later, when it won’t be covered, in many cases. Insurance is a great idea but not enough to protect your crypto for all these reasons.

You might ask whether I can buy insurance designed to protect my crypto. In 2020, Gemini Exchange, a regulated cryptocurrency exchange, wallet, and custodian, formed its own insurance company to cover up to $200-million for crypto custody. Lloyd’s Launches Cryptocurrency Wallet Insurance Policy. Lloyd’s did create a space for insurance to protect against your crypto being stolen, https://www.insurancejournal.com/news/international/2020/03/02/559855.htm. 

5. What Entity Options or Structures are Available? If you hold your crypto directly in a self-directed IRA, it is protected while in the IRA. Once the money is distributed based on IRA rules, the asset may or may not be protected, depending upon state law. What about using your living trust to protect your cryptocurrency?

A living trust is a good idea for protecting your assets from the probate courts after death, but not against liability. Most people seem to forget all assets held by a living trust are not protected against liability. The key to passing on your crypto assets according to your estate plan is to make sure your estate plan provides for disclosure of your crypto assets and provides for a secure method of transfer of the private key to your heirs (if that is the case) and your passwords on any accounts.

Should you consider an LLC or limited partnership to protect your cryptocurrency? These are traditional tools to protect safe assets, and the key is to know which entity is best and how to transfer your crypto account to an entity. The other key component is assigning your crypto to the legal structure, assuming your account is set up in your own name.

There are situations where an asset protection trust (not a living trust) will provide another level of protection, but that usually involves a two-year or longer statute of limitations.

From a tax point of view, selling, exchanging, or using cryptocurrency triggers capital gains and losses for traders. The IRS treats cryptocurrencies as intangible property. More IRS scrutiny is scheduled for 2022 in the crypto world, and make sure you amend any previous returns where you have not claimed your crypto income or gains or losses before you receive an IRS notice.

A Legally Clear Name for Your Business

Every successful business counts on countless good decisions – enough to overcome those that inevitably prove totally wrong. A good business proves itself over and over in its resiliency.

I challenge anyone to think of a bigger decision than to find a LEGALLY CLEAR name for your new business or product start-up. A LEGALLY CLEAR name shadows, even if the name is a great name. It makes all the difference because absolutely everything you do, from answering the phone to launching a multi-media ad campaign, stems from THAT decision.

Ignorance Is Not Bliss

Why are people so sloppy, cavalier, assumptive, and willingly ignorant of the fact that without a LEGALLY CLEAR name as a cornerstone – no matter if every future decision they ever make is the best one – their business can fail tomorrow when they get a cease up to 6-10 years later, a refusal from their distribution channel to carry their goods or a block the US or Canadian Customs.

9 Facts To Show Why Your Intellectual Property is Crucial

1. The fact is 35% of names ARE LEGALLY BLOCKED when comprehensively researched. 40% in more competitive industries. 60% if you have what you think is a great name.
2. The fact is CIPO, and the USPTO only research their own database – not the other 88% of names in commerce that have rights BEFORE you under Common Law or a State trademark in the USA.
3. The fact is a basic search at the USPTO, or CIPO is merely direct hit searches – just a small fraction of what may legally affect your mark.
4. The fact is SIMILARITIES in SOUND, APPEARANCE, and MEANING do matter.
5. The fact is some companies overreach.
6. The fact is the USPTO takes 4 months and CIPO 12 months to get around to your new filing.
7. The fact is your new trademark filing can be opposed – even if registered – for up to 6-10 years.
8. The fact is it does take 8-10 hours to get a successful trademark – in staff time and trademark attorney time – including paid database fees.
9. The fact is YOUR intellectual property is crucial to get right – from the start.

A guest post by Trademark Express®, a leader in trademark registrations. 

U.S. LLC Questions to Ask Before Your E-Commerce Expansion

There are many U.S. LLC questions to ask before formation when you expand your e-commerce business to the U.S. These questions could be more precise. Most sellers only anticipate 1-2 steps ahead (or questions) with their U.S. formation and need to be made aware of these costly mistakes they have already made. Why does this happen?

Forming a U.S. LLC online is simple.

Several online entity formation companies give you this impression.  Unfortunately, they leave out all the complicated yet vitally essential parts to get you to do a filling.

We approach business differently, working mainly with more successful 6, 7, and 8-figure sellers. Successful sellers realize much more is involved than filing the LLC online and obtaining an EIN with the IRS.

Here are the key U.S. LLC questions you should be asking before, during, and after a U.S. formation:

• When is it recommended to form a U.S. LLC? When is it for Amazon, Walmart, Shopify, or setting up a Stripe account? Hint: Most non-resident sellers do not have a U.S. LLC for Amazon unless they cannot obtain insurance from their home country.
• If you form a U.S. LLC, how should it be taxed? I have read about four options, but the S corporation option does not apply to my situation. Which one is best for my situation?
• Who owns the U.S. LLC, and how does that impact U.S. banking?
• How do I know if the operating agreement is correct for my situation? When do I need to file form 8832?
• I read situations where my foreign entity needs an EIN because it will own the U.S. LLC. Is that true or not?
• If so, what happens if the start date on my SS4 application was in prior years? I heard the IRS has huge fines for some forms if late.
• Who should be the manager vs. the member of the LLC?
• What are my U.S. tax responsibilities if I am engaged in a U.S. trade or business? What do I need to do to avoid a permanent establishment?
• Do you have a tax firm that can file protective tax returns in the U.S.? Are they on the same page with these different scenarios?
• What are my U.S. sales tax responsibilities, mainly if I sell on Shopify or my website?
• What happens if I want to sell from my Shopify store from the same legal entity as my Amazon business?
• What impact does that have on my sales tax requirements?
• If I use Taxjar or Avalara, will they take care of everything regarding sales tax, and what happens if I don’t have a U.S. bank account (FYI, Taxjar and Avalara are both partners)?
• How do I update my U.S. e-commerce account with my new LLC information? Is it even possible to update? Do I need to create a U.S. taxpayer?
• When do I update my new U.S. address on my existing e-commerce account, and what verification measures are currently used? Does that include a utility bill?
• How do I update my tax settings with my new U.S. entity in Amazon or other marketplaces?
• How do I transfer income from my U.S. LLC to my foreign company (to avoid unintended tax consequences)?
• When do I owe U.S. taxes? I have read that I only need to file forms 5472 and 1120 proforma, but when is that not the case?
• I don’t want to know that I had other U.S. tax forms to file and a U.S. tax treaty does not protect me.
• Where does the ownership show up for the U.S. entity?
• What bank changes in 2024 will impact your LLC formation strategy?
• How does the BOI fincen.gov report impact your filing?

These questions are the tip of the iceberg of the filing process.

If you are like most sellers, you likely would rather understand these strategy questions before forming a U.S. company, which we cover in a 30 or 60-minute Zoom call.  We work with the top companies in the e-commerce industry and attend the top events, such as the ProsperShow and others. You can learn more about those paid options here.

Another group of our clients likes working with NCP because they know they can get started and realize they don’t have to clarify these critical questions, especially around which state and entity are best.  After all, we include our U.S. entity packages with a detailed video with the best recommendations for most situations and summary slides to form your U.S. entity and tax responsibilities. Our U.S. entity video, part of our U.S. package, includes details on what is recommended and required for Amazon, Walmart, Shopify, Stripe, U.S. tax responsibilities, and which state is best for each situation. Our video training is the most detailed industry and is ONLY available to our clients.

All follow-ups and updates throughout the year are part of our service, separating us from everyone else.  Our team and I will review every order submitted to make sure your choices make sense before we file the articles and fax your SS4 application to the IRS.

Forming your U.S. legal entity is the substantial first step with the foundation of how you will be taxed in the U.S., especially filing your SS4 application after your entity is formed. The real work starts to ensure all the i’s are dotted, and t’s are crossed.   Below is our U.S. complete formation checklist, which provides an overview of the U.S. LLC formation steps.

Yes, there are a lot of “low-priced” LLC options online. Still, if any, very few take a comprehensive approach to all these critical issues for a foreign e-commerce seller looking to expand into the U.S. Our support team is first-class. We have fully vetted partners if additional support is needed on the back end.

If you have U.S. LLC questions about our process, service, or level of support to help you expand, let’s schedule a call and a time to chat at the button below to see how we can help you with your expansion process and ensure you are protected.  If you decide to work with NCP, we will update you on essential changes such as U.S. tax changes, sales tax issues, or other areas to protect you.

For example, we send out recent updates to our clients about Amazon only being able to pull inventory 18 months back and impact sales tax calculations. We have new updates on Amazon and new insurance requirements and a resource, plus updates on digital taxes, those with federal trademarks that still need to be protected, and much more.

All follow-ups and updates throughout the year are part of our service, separating us from everyone else.  If you want clarity on our fees and services with our U.S. LLC formations, please click the link below to schedule a call with our team. There is no fee to speak with a team member (no tax or entity selection advice is provided on a free call). Click here to schedule a call with our team. 

How to Protect Your Corporate or LLC Veil

Learning how to protect your corporate or LLC veil is an important foundation for protecting your personal assets from your business. If you operated your business as a sole proprietorship and sued, you may potentially lose all your personal assets.  There is no separation between you personally and your business. This is the simplest form of business structure but has the least protection. 

The next step is to form a corporation or LLC to separate your business from your personal assets. Now you have a separate corporate or LLC veil that provides this protection. 

It’s essential to do things properly when you incorporate. Your corporation must be treated as such.  If the corporation is sued and there aren’t enough assets or insurance, the plaintiff may decide to go through the corporation and after you personally.  This is called “piercing the corporate veil,” and the consequences to you can be devastating.  This also means that it was proved that you were simply the “Alter Ego” to the corporation or LLC, which means the same. You are essentially a sole proprietorship again, financially paralyzed, with a lawsuit against you personally!

How do you keep this from happening?  Your new corporate or LLC MUST:

1. Follow corporate formalities, keeping recorded minutes and resolutions;
2. Have proper capitalization, which is the amount of money you put into the corporation to get it started; 
3. MUST NOT commingle funds with your personal account. Under no circumstances can you use corporate money to pay for your personal expenses.

Let’s take a closer look at how these three requirements can be breached or compromised:

1. Lack of corporate formalities.  Here’s an example:  When an officer of the corporation goes on a business trip, the corporation must have a meeting to authorize that trip.  This is hard for some to understand, especially if you’re a one-person corporation, and you wear all the hats.  Still, you must show in your corporate meeting minutes that the trip was approved because the corporation is NOT YOU. It must be treated as a separate legal entity. 

Some people will tell you that an LLC doesn’t have to perform the same formalities as an S- or C-Corporation.  (Actually, the main reason that CPAs sometimes recommend an LLC is because of lack of formalities.) While this is somewhat true, it is changing.  

We’ve discovered recent court cases involving piercing the LLC veil, where the judge looked at corporate cases for guidance, particularly concerning formalities. Accordingly, the use of the term “piercing the corporate veil” has evolved to “piercing the entity veil” or “piercing the LLC veil.”  

It is important to note that BOTH LLCs and corporations must maintain formalities. Some people believe that an LLC does not have the same requirement for formalities as a corporation does. In our research, we have found that in court cases on this subject, the judges will look to corporate law and cases when determining what standards to use with an LLC, and guess what? The judges have determined time and time again that an LLC should look very similar to a corporation and have minutes and meetings. All our LLC record books have minutes and meetings and resolutions that match very closely to corporate formalities.

2. Lack of proper capitalization: When you form a corporation, it has to be capitalized. That usually means money is put into a corporate checking account, and stock for the corporation is issued to whoever capitalized it (usually an individual, but it could be another entity.) There are certain guidelines in each state that ask, “Did you capitalize the corporation with enough money/assets, or was it too thinly capitalized?”  
   
   But what exactly is “too thinly capitalized?” 
   
   Lately, an unfortunate trend has been appearing in the courts.  They’ve adopted a sort of “20/20 hindsight” in some situations, and companies in high-liability sectors like manufacturing are especially at risk.  
   
   For example, let’s say you’re a widget maker with five employees. You’re capitalized -at $50,000 and have a $1 million insurance policy – which is appropriate because widgets are cheap, and you don’t sell many.  Then one day, Joe Employee cuts off a hand with the box slicer and saddles you with a $3 million lawsuit.  The court says, “Mr. Business Owner, when you formed this company, you should have known that Joe would slice off a hand someday, and you should have known that your insurance would cover only $1 million of the $3 million he’d want.  Since you only have $50,000 in capitalization, we’re going to consider your company too thinly capitalized.  Therefore, we’re going to allow the piercing of your corporate veil to recover the rest.”  Crazy?  Of course.   But true. 
   
   Nevada, by the way, is one of the few states – if not the only one – that allows you to thinly capitalize the corporation, meaning as little as $100 is sufficient capitalization in Nevada. 
   
   You can capitalize on a corporation or LLC with cash, assets, and, in most states, services. However, services can create a tax problem. For example, say your partner owns 50% of the corporation and capitalizes it with $25,000.  You own the other half, and you capitalize it with services (called “sweat equity.”)  The IRS says you received an asset without paying anything for it; therefore, they treat that $25,000-worth of services as personal income to you.  That means you have to claim $25,000 in personal income… but you never earned money.  You did get stock in a company, and now you have to pay taxes on it!     
   
   One solution might be for your partner to loan $24,000 and then have both partners capitalize on the entity with $1,000 each.  Just remember, the corporation has to pay back the $24,000 as a loan, whereas it was a capital investment that does not have to be paid back in the first case. This is a potential problem with partners when it is unclear whether the money is capitalization or a loan.

3. Commingling of funds.  As a sole proprietor, you no doubt have a company bank account. You can use that money for your business or personal expenses.  At the end of the year, your CPA will help you determine which part of that money was deductible for business expenses and which portion was for personal expenses. Often your CPA will find that you spent a lot of money on personal items that are not deductible business expenses.  Still, the only consequence to you is that your net profit is higher than you thought, so you owe more in taxes than you expected. 
   
   It’s very different in a corporation. There must be a separate checking account used for business purposes only.  Using that money for personal reasons is called “commingling of funds,” and the consequences are dire.  A judge may actually set aside the corporate veil because you ignored the fact that the corporation is a separate legal entity from yourself – leaving you totally exposed. 
   
   The other most common way the corporate or LLC veil is pierced is for FRAUD. This could be as simple as forming an entity and then ensuing liability in the company’s name with no intention of repaying those liabilities. The business owner cannot rely on the corporate veil’s protection to avoid paying for the liability.
   
   The main principle here is that you cannot use the corporate veil to shield liabilities, which you never intended on repaying. If ever litigated, the court may see the judgment creditor as being defrauded by the company.
4. Gross negligence is another common way the Corporate Veil can be pierced and occurs when the business commits grossly negligent or reckless acts. Gross negligence occurs when the business intentionally fails to perform duties or commits reckless acts. Ordinary negligence can arise from simple inadvertence. However, ordinary negligence is not enough to pierce the Corporate Veil. In sum, if a plaintiff can show that the business committed reckless or grossly negligent acts, then a court may allow a plaintiff or creditor to pierce the corporate veil.

Here are some other tips to protect your corporate or LLC veil: 

1. Maintain an active status for your business entity with the states you are authorized to do business in. This usually requires a simple filing and payment of an annual fee to the State. Failing to stay current with the State will cause your entity to become in-active or delinquent, and the state will assess you additional penalty fees for not meeting your annual deadlines. Moreover, if the state dissolves the entity, your protection ends on that date.

2. Own your business assets (e.g., real estate) in the name of the entity and execute all contracts and legal documents in the name of the entity. This may require new deeds or updates to contracts. Do not sign personally. You are signing on behalf of the corporation or LLC with your proper title. 

3. Hold annual meetings and complete annual minutes. Plus, throughout the year as necessary. 

4. Create letterhead and business cards for each business operation and use them. You want it to be clear that you are acting on behalf of your company and not in an individual capacity.

5. Maintain a separate checking account for each company and don’t co-mingle business assets with personal assets. Using your personal account for business activities shows a complete disregard for the Corporate Veil since you are not treating the company as a separate entity from the business owner.

6. Receive business income in the business’s name and pay for business expenses out of the business bank account(s). 

7. Form a Nevada Corporation or LLC and foreign qualify or register in the state you are doing business. Nevada is the state of domicile. If your company is sued, it will most likely be in your home state. If the plaintiff (the person suing you) wants to go beyond the corporation (or LLC) and after you, the case will most likely go back to the state of domicile, which in this case is Nevada – where you get the most protection.

However, if you incorporate in a weaker state (without Nevada’s exceptional protections) and your veil is pierced… That’s right. You’re right back where you did not want to be. You can be held personally liable. You might lose the lawsuit – and you may lose your personal assets. 

Even if you have formed a Nevada corporation or LLC, we still strongly recommend following all the tips and steps to protect the entity veil. You do not want to give anyone any ammunition that it may be easier to pierce the entity veil and go after your personal assets.

12 Questions to Ask Before and During Forming a U.S. Entity

Forming a U.S. entity correctly is a crucial step to protect your business as it grows for either sale or a profit center to support you and your family.

Nothing is worse than building a U.S. brand, working 12+ hours a day to build it up, getting ready to sell, and losing everything because you thought you were protected.

We receive weekly emails from e-commerce sellers worldwide, looking to clarify several key issues before forming a U.S. entity.

They know they can go on an essential website and form an LLC for $150-$300 but realize there must be more to all the tax ramifications than is being shared, and they are correct.

These are the 12 most essential questions you should be asking Before and During the Formation of a U.S. Entity :

The critical questions below are essential for getting the best answer and support. They apply to all foreign e-commerce sellers looking to establish a U.S. entity.

The good news is when forming a U.S. entity with our packages, we either have resources for each question or these are addressed with our complete U.S. entity formation packages.

1. What Factors Should You Consider to Determine Which State are Best to Incorporate? Knowing the factors and which ones are most important to YOUR situation is most important. It is essential to determine your overall risk both in your home country and in the U.S. The key is to determine which factors match what you want to accomplish. Our 45-minute video in our U.S. entity formation package is comprehensive and covers your best options.
2. What Factors Should You Consider to Determine Which Type of Entity and Taxation Type is Best? Getting these factors out of order may cost you a small fortune in unnecessary U.S. taxes. If an LLC, how should it be managed, managed by managers or members? Which gives you the most flexibility to open a U.S. bank account and secure the proper foreign ownership? Also significant, but not often discussed, is your U.S. entity’s ownership, and which US tax returns does this trigger? Our 45-minute video included in our packages is comprehensive and covers your best options.
3. What Factors Should You Consider BEFORE Choosing a U.S. Company Formation Service? This goes way beyond prices and service (hint: look for a company with a 20+ year track record, video endorsements, and relationship with top firms, not just the cheapest; they don’t always have the resources to hire tax firms to provide when with the correct information…).
4. Does Forming a U.S. Entity Mean I Will Pay U.S. Federal Income Taxes on Profits? Avoid the misinformation and confusion on this must-know subject. You must be realistic in your profit goals, and where do you want the profit to end up in your country or the U.S.? What about the sales tax requirements, especially after the June U.S. Supreme Court Wayfair vs. South Dakota? Do you know which states you have to register even if you are not selling on Amazon FBA?
5. What Type of U.S. Address is Best for my U.S. Company Formation? There are different approaches and consequences if you don’t get the right one for your situation (now scanning is more important than ever). More expenses are involved in lost time, fines, and penalties for not receiving important mail from the state or IRS in time. This can be avoided.
6. Do Federal Tax Treaties Come into Play in My Decision Making? And if they do, are they straightforward? Not owing any U.S. tax is very different from needing to, or recommended to, file a U.S. return. (our package includes training with a U.S. tax attorney on this important subject)
7. When is a U.S. Bank Account Recommended? It may not be a must, but if it is, do you have a shot to open one or not? Does the bank require both partners to be present? Do we need the IRS letter? A lease agreement? Banking is a big moving target that changes every year. We always have the latest options for our clients. One main reason is our 26-year track record, and we work with the best. We don’t remember a bank with an office in California, especially if your company needs to catch up on sales tax. 
8. What Factors Need to be Considered to Open a U.S. Merchant Account? This is another moving target. It would be best if you got your hands around it. Do you know if an offshore merchant account is your only option? Are Shopify payments possible? 
9. What Support is Critical After I Form a U.S. Company? This is how you avoid real trouble. What is most valuable when you form a US entity is the clarity about the formation upfront. It becomes accessible to the right resources, tools, and expertise when and if you need access. Nothing is worse than getting filed and being on your own to figure everything else out. 
10. What are my Annual Tax Requirements After I Form a U.S. Company? Not knowing and being late is very expensive (some have fines of up to $20K if late). Should you or your foreign company file a protective return in the U.S.? The critical question to address concerns whether or not your company is engaged in a U.S. trade or business. Most CPA videos online don’t detail the details of this definition. You may not be paying U.S. taxes, but you certainly want to ensure you file the proper tax returns with treaty benefits. 
11. How will Factors Determine the Length of Time to Form a U.S. Company? Time frames may vary significantly and affect your deadlines and business launch (the key is to read through the overpromising that occurs online).
12. What Factors Do I Need to Consider in Transitioning to Selling from my Foreign Company to a U.S. Company? These are missed often and will become severe issues down the road (this is why we did training with an expert firm on selling a U.S. company, so you have the end in mind as you get started with NCP).

Ultimately, NCP will be your best resource to support you after you form your company with us. As a client, you will have access to over 20 vetted referral partners in areas that may come into play for support as needed.

When to Form Another Entity?

There are a lot of steps to protect your business and your family properly. 

Here’s a common question that is important that comes up often: “When should I form another entity for my business?”

Actually, the more I think about it, that question is not as common as it should be. It is like the quote on common sense: “It is not as common as it used to be”!

As you know, lawsuits are filed at an epidemic rate these days, and it’s only predicted to get worse.

As uncertainty in the stock market is increasing again, global tensions, trade wars heating up… you’d be well advised to prepare yourself to hold onto your net worth!

When should you consider a second entity for your business? Should you wait until after your first year… two years… a certain revenue landmark of $1 million? No. The answer is based on your risk tolerance and some basic common sense.

First, the longer you have been in business, the riskier it is to operate under one legal entity. If your business has been around for 10-15 years and operates entirely out of one legal entity, that’s an extremely dangerous position to be in. Why? Just one lawsuit against that single entity can destroy 10-15 years of hard work. The saying, “Don’t keep your eggs all in one basket,” would be well applied to your business assets!

Perhaps your domain names are responsible for a great amount of traffic to your website. In that case, you may want the ownership of your domain names held by another legal entity separate from that of your operating business.

Operating as a C corporation? Who owns the stock of your company? If you do personally, that could be an enormous problem. Why? Consider this true story:

One business owner’s 17-year-old son had a DUI and seriously injured someone in a car accident. The family was sued personally for $4 million, and though their insurance covered $1 million, they were PERSONALLY on the hook for the other $3 million. Their biggest asset? Ownership in the C corporation that ran their $3 million business. That business was lost entirely — a devastating situation that could have been prevented had the owner put another entity in place.

One way to protect your business is to have an LLC hold the ownership of the C corporation’s stock (See the diagram below.) The LLC has an extra layer of protection called the “charging order,” making it more difficult to lose control of the operating business. (By the way, a living trust does NOT protect assets from liability, only from probate and estate taxes. This mistaken belief is the number one reason in my opinion that so many Americans have almost no asset protection.)

1. C corporation with stock owned by LLC taxed as a partnership: 

When used: When the C corp has a high net value or grows enough to need protection from personal lawsuits.

Even if you have an LLC for your operating business, if one partner is sued for something unrelated to that business, a “charging order” will help protect the LLC (though it still may be very disruptive to the operating business.)

A “charging order” makes it more difficult for the creditor to access an ownership interest of the operating LLC. But the suing party may subpoena bank records of the operating business to gain access to more financial information.

This especially happens when two people start a successful business together. It’s amazing to see how quickly people come out of the woodwork looking for handouts! How can you prevent this from happening?

Have both partners form a second LLC to own the ownership interest in the operating company. If there is a legal issue with one owner, it will only affect that person at their own personal LLC level, not at the LLC operating the business.

Most partners ask me, “Can we do this second layer later?” Yes, but you run the risk of putting it off until it’s too late.

Sadly, once most partners are planning and foundation stage, most never return to take that second crucial step, which is a big mistake.

2. LLC with members also LLCs

When used: When an LLC makes a high enough net profit, it’s worthwhile for the entity to be protected from any members’ personal liability. You would prefer these LLCs only to own a safe asset, which is the membership interest in the main operating LLC, not own real estate or other risk assets.

Do you need support to form another entity to prevent any of the above costly mistakes? If so, click on this link to learn more about our complete formation packages. State fees are separate, and we do incorporate them in all 50 states (not just Nevada).

What do others say about working with NCP? Go to this link to watch, listen, and read feedback from our valued clients.

Coronavirus Financial Survival Strategies

Even with the government’s $2 Trillion aid package, it is key that you have the right information for the best coronavirus financial survival strategies. In a recent interview with Todd Rooker, the #1 financial crisis recovery expert in the U.S., he blew everyone away with very detailed steps that any business owner must take to protect their business and family.

He even covered the worst case, bankruptcy, and how to navigate getting back on your feet within 12-24 months. Most importantly, he covered the key mistakes (caused by misinformation and emotion) that most business owners make during a financial crisis.

Your beliefs, and what you thought about credit, money, how SBA loans work… will be challenged.

In the end, even during COVID-19, there are opportunities for everyone, if your first plan for the worst-case scenario and conserve cash. You will learn how in our recording below. Even as the country opens back up for businesses, there are substantial liability risks facing employers and business owners. Now is the time to learn the steps to make sure your financial assets are protected. You may need more support with the best structures to protect your safe and risk assets if you need that type of support to learn more about asset protection strategies here.

You may be the type that prefers to jump to the subjects most important to you (very understandable). 

If you are short on time, we created this timeline to get you to the coronavirus financial subject you need help with. Of course, we recommend you listen to the entire video, but we know your time is at a premium right now. It is also on the video summary.

8:09- Why you won’t get the best advice (until now)

9:20 Lower taxes vs. financing dilemma (mistakes to avoid moving forward)

10:46 Why an attorney can’t help with creditors (this is not what you think)

12:56 How money is made and lost during a financial crisis (one of the top reasons to listen to this entire training and how you may position your business financially)

17:29 If you are losing money (burning cash), here is what you must do (and what action steps you must take now)

19:57 What you MUST know about deferring payments (this could tank your financial future)

22:10 What you must know about the credit bureaus (what you never heard before)

24:53 Are you in denial? How you must think differently

26:24 What you don’t know about creditor negotiations and what you must do

29.00 Take cash out of your retirement or not? How to protect your exempt assets

33:36 Lock yourself down BEFORE an SBA loan? Good idea or not? How long will these loans take?

36:26 Why you must have plan A, B, C, D, E, and F. Best to a worst-case scenario

38:13 Strategically, when does bankruptcy make sense? $100 million examples and rebuilt in two years.

41:25 Bankruptcy on an SBA loan will result in severe consequences

43:46 How to protect your cash (and other assets). What happens if your bank account is locked?

45:36 What to do with partnership assets. What can be taken?

46:54 Q & A with the audience – how to build cash

50:59 Credit score secrets you have never heard explained like this before. You masters course in 10 minutes!

Whether your business is doing under $1-million or over $50-million (many of Todd’s clients are in this range), you will learn prudent, smart financial steps to immediately take for your current and future financial survival.

Get ready to be shocked by this riveting call, which will surely challenge your beliefs on how the financial system really works. You will learn the steps you must take to be protected from this coronavirus financial crisis. After watching the video, if you feel you need one-to-one support from Todd Rooker, you may reach out to schedule an appointment at todd@asktoddrooker.com. 

Todd’s rate is $300 per hour and is worth every penny to gain clarity and confidence regarding your best financial options. 

Separately, if you need support with restructuring your assets, forming a new entity to protect your cash, real estate, or other investments, you may schedule a strategy session with Scott Letourneau. See my options at this link.

Sole Proprietors Are Rolling the Dice

Sole proprietors are taking a significant risk in today’s business climate, much more than they have been told. It is time they know the facts and what they are up against to put the odds back in their favor.

In today’s ultra-competitive and dangerously litigious business climate, you can’t afford to throw the dice with your most valuable asset. Your exposure is far greater than you may think, personally and professionally. As a sole proprietor, you have unlimited liability if your company is sued, regardless of size. You could lose all of your assets.

Most accountants and CPAs advise clients that they can only incorporate once they reach a certain profit level – say, $ 30K- $ 50K. Why? Most CPAs realize 50% of businesses don’t make it past year one, and the others lose money that will show up on Schedule C. They understand their clients want to avoid filing and paying for a separate tax return. Could a lawsuit be devastating? Of course, it is likely the first year, perhaps not, but continuing this path can lead to financial paralysis.

Here are just a few things you would struggle with or be completely unable to do if your business is sued:

•  You may not be able to get a loan for a new home, refinance or take a second mortgage on your current home. (We’ll explain why in a moment.) At best, you’d have to pay a much higher interest rate because you’re now considered a higher risk to the lending institution – through no fault of your own.

•  You may not be able to finance a new car.

•  You may not be able to lease office space.

Why do lawsuits cause such a problem with loans? If you have yet to recently apply for a home loan, a second, or financing for a car, you may not be aware of how times have changed. Five years ago, financial forms asked, “Do you have any judgments against you?” That meant, “Have you been sued, lost the suit, and had a judgment levied against you?”

However, financial institutions have gotten smarter. They’ve tightened up the system they use to rate levels of risk for loan applicants. Today’s loan applications ask a very different question: “Are you currently involved in a lawsuit?” That means that if anyone tries to sue you for any reason, frivolous or not, at the very least, you’ll be rated as a much higher risk. (Remember, that’s before the
suit is even decided.) And that translates to a lot of money out of your pocket! Result: You may be financially paralyzed!

Are you willing to forego that dream home, that new car, because someone tripped on a pavement crack in your business’s parking lot? And imagine what being unable to lease office space could do to your business.

Creating a legal entity separates the business from you so that any legal action can only affect that entity – not you personally!

This is by far the biggest reason to incorporate or form an LLC. It makes no sense to have a sole proprietorship unless you have no assets or future assets; in this case, you shouldn’t – and wouldn’t – be in business.

Sole Proprietors Are Risking Their Credit And Capability For Future Financing!

You may think, “I don’t plan to have a sole proprietorship. I’m convinced that I need to form an entity.” Could you let me know when you’ll take action? If you wait 30 days or longer, do you realize the negative impact on your business? Although a lawsuit can pop up quickly, a MUCH more significant (and disturbingly common) mistake lurks at this vital business start-up phase.

Using your credit cards to finance the start-up of your business is the most widespread mistake. Added to the folly of operating as a sole proprietorship with a “Let’s see how we do first before we incorporate” mentality, it’s a recipe for disaster. Here’s why:

Financing your business with your credit (credit cards, home equity line of credit, etc.) negatively affects your “revolving debt ratio.” That ratio is a significant factor in your new corporation or LLC’s ability to obtain a business credit card at the start… and, later, a business line of credit.

Why is this so important? The #1 reason business owners fail, especially during the first six months, is the need for cash flow. That’s when the folly of overestimating revenue and underestimating expenses rears its ugly head. And for most small business owners, that behavior is as predictable as the sun.

NCP is one of the few, if not the only company, that literally “Cracked the Bank’s Code” on your business lines of credit. We spent more than four months going back and forth with a major bank to figure out exactly how they decide who does not get those valuable lines of credit, who does, and how much they get.

Factors such as the “liquid credit score,” the risk category of your business, gross revenues, personal credit score, derogatories, and revolving debt are all considered.

Here’s the bottom line: If you’re starting your business by nearly or entirely maxing out your credit cards, the bank will ignore you. Even with a 700 personal credit score, if your revolving debt is close to 90% maxed out, that sends the bank an obvious message that you cannot manage your debt. Why give you money to start a business? You’re on your own financially.

Don’t be misled by TV or Internet ads about “business credit,” either. Usually, they refer to “trade lines of credit,” which don’t give you actual cash to use as you choose in your business. If you’re building homes or have over 30 employees, developing trade credit can be important — but it still needs to be cash. You can’t use trade credit to make payroll spend on pay-per-click advertising or any other strategies you need to start doing quickly to gain that all-important competitive edge.

Want a simple solution?

•  STOP using YOUR CREDIT CARDS ASAP!

•  Incorporate or form an LLC

•  Open a BUSINESS CREDIT CARD and use that ONLY for your business expenses.

Yes, it is personally guaranteed, but it will NOT negatively impact your revolving debt ratio.

That’s critical advice as your business gets started. Remember, when your corporation or LLC applies for a business line of credit, half of the bank’s formula in determining eligibility is your credit score — and, most importantly, the revolving debt ratio.

Sole Proprietorships Are 300% More Likely To Be Audited By The IRS. Even By Las Vegas Standards, Those Are Incredible Odds!

Fact: The IRS is currently targeting sole proprietorships. Why? In a self-audit last year, the IRS discovered a $300-billion tax gap — meaning that more than $300 billion of taxes go unpaid annually. They concluded that the biggest offenders were not large corporations but small business owners who owed around 70% of that $300 billion. Of that group, 1/3 were sole proprietorships. You can bet the IRS isn’t going to ignore that low-hanging fruit! You are 300% more likely to be audited if you file a Schedule C.

Is Your Business a Hobby or a Business?

Most people enjoy a hobby — golf, tennis, cooking — and while they’ll spend money on those activities, they’re not a business. Yet when most people join a business opportunity or start a business, though they don’t consider it a hobby, that’s often what they create because they don’t know the game’s rules.

But they have a problem: The IRS is getting tougher on this subject. The #1 reason the IRS goes after business owners is the failure to use proper analytical records. You’d be well advised to use software like QuickBooks® to determine how your business is operating — to update your gross revenue, cost of goods sold, and income.

New business owners make the biggest mistake of using their online bank balance as their only business financial barometer. First, that’s the wrong way to make financial decisions. Second, it sends the IRS an obvious message: you must be more serious about your business. This single mistake may cause the IRS to consider your business a hobby. If they do, you cannot write off your hobby’s losses against your earned income — and that kills one of the biggest reasons to start a business in the first place.

67% Of All U.S. Businesses Operate As Sole Proprietorships. If Your Clients Are Business Owners, How Do You Protect Yourself?

If everything we’ve told you is correct (and it is), how do you keep your own business safe? To understand the mindset, consider these three simple yet costly myths:

•  Myth #1: Sole proprietorships are simple — the most comfortable business structure to operate. As you know by now, the worst choice is to operate as a sole proprietorship. Unfortunately, simplicity and asset protection are “inversely related,” meaning the more protection you have, your situation may become more complex. I know that does not resonate with many of you. But your goal is to accumulate profit and assets; the more assets you collect, the more you must protect them.

The good news is that you need not go it alone. The key is strategizing with a knowledgeable, experienced advisor to develop your optimal protection plan. After all, it would be best to stay focused on adding value and profit to your new venture, not become an expert on business start-up methods. It would be best if you only had to do that once — but do it right.

•  Myth #2: Most start-up business owners cover only one component of the big picture by getting tax advice from their professionals. But there’s more. Could you benefit by having a separate legal entity to help save on taxes? Which entity is best for your venture? As you know now, there are many elements to consider.

•  Myth #3: I’m a good person and have insurance. Why would anyone sue me? That’s admirable, but that’s not how the game is played. Desperate people don’t care if you’re a “good person.” If you have money — or the perception of money — you’re a potential target!

Don’t bury your head in the sand. Now that you’re aware of the pitfalls take action yourself and arm your clients with the tools and information to be successful. After all, ensuring your clients prosper is in your best interest! How do you make that happen? Call NCP and ask for more information on how we can help your clients and your business!

We touched briefly on the question of insurance just now. Let’s go a little deeper.

Insurance Is Not A Fool-Proof Safety Net 

Even though many professionals tell you you’re protected by insurance, you can still spend a lot of money defending a lawsuit without ever having a claim against your insurance policy.

But what if a claim is made? Insurance may provide some level of protection – but the worst case is that protection may be only as good as the legal representation you can afford. (I need to find out how many clients had found that their insurance companies weren’t nearly as friendly when they filed a claim as when they first signed up!).

True, you can get Errors and Omissions insurance (or “E&O”), business liability, and even officers’ and directors’ insurance — and again, a good policy should provide some protection. But NONE of those will help you protect the corporate veil (a hugely important benefit that we’ll discuss later.)

NO insurance policy in existence can do that.

If you have a minor insurance claim of $10,000, your insurance company will usually pay it. However, if you claim $900,000, put the coffee on because you can expect a visit from your insurance company’s attorneys. Why? You can find a loophole in your policy so they don’t have to cover you. And, of course, even if they cover you, your rates will skyrocket – if your policy isn’t canceled!

Don’t Expect Sympathy from the Courts, Either.

Are you a landlord now, or do you have plans to own real estate in the future? If you’re ever sued, remember that juries are made up mostly of tenants, jealous tenants who don’t own a house – yet you have several. This is their chance to get even with every landlord who hit them with a late-rent charge or made them get rid of that pet. It’s pay-back time! Is it fair? No – but it’s human nature.

And consider this: Most judges earn less than you do. How sympathetic could they possibly be? Unless you know NCP’s asset protection strategies, you should hand over your checkbook and the title to one of your houses.

The bottom line? Win or lose, even with insurance, you could become financially paralyzed by being a sole proprietor.

Does it make sense to leave yourself exposed? Of course not, especially when the solution is simple, sophisticated, and reserved for the AT&T of the world. The answer is to incorporate it! Creating a legal entity separates you from your business so that any legal action will not affect you personally.

Here’s an added benefit of incorporation: As any good marketer will tell you, perception is everything in the marketplace. That “LLC” or “Inc.” after your name helps people perceive you as more significant than you may be. Plus, it adds to your credibility – as well as it should. It shows that you’re aware of the pitfalls lurking, you’ve done your homework, and you’ve taken the appropriate steps to protect yourself and your company. You’ll be around next year and the year after that. And that message to the marketplace translates to a direct effect on your bottom line.

Be Sure To Play By the Rules

It’s essential to do things properly when you incorporate them. Remember, when your company incorporates, you create a separate legal entity. Your corporation must be treated as such. If the corporation is sued and there aren’t enough assets or insurance, the plaintiff may decide to go through the corporation and after you. This is called “piercing the corporate veil,” and the consequences can be devastating. (Please take a look at that later. You are essentially a sole proprietorship again, financially paralyzed, with a lawsuit against you!

How do you keep this from happening? Your new corporate entity MUST:

•  Follow corporate formalities, keeping recorded minutes and resolutions;

•  Have proper capitalization, which is the amount of money you put into the
corporation to get it started;

•  MUST NOT co-mingle funds with your account. Under no circumstances
can you use corporate funds to pay for your expenses?

We’ll take a closer look at how these three requirements can be breached or compromised.

•  Lack of corporate formalities. Here’s an example: When a corporate officer goes on a business trip, the corporation must have a meeting to authorize that trip. This is hard for some to understand, especially if you’re a one-person corporation and wear all the hats. You must still show that the trip was approved in your corporate meeting minutes because the corporation is NOT YOU. It must be treated as a separate legal entity.

Some people will tell you that an LLC can perform different formalities than an S- or C-Corporation. (CPAs sometimes recommend an LLC mainly because of a lack of formalities.) While this is somewhat true, it is changing.

We’ve discovered recent court cases involving piercing the LLC veil, where the judge looked at corporate cases for guidance, particularly concerning formalities. Accordingly, the use of the term “piercing the corporate veil” has evolved to “piercing the entity veil” or “piercing the LLC veil.”

NCP maintains corporate formalities for LLCs, as well as for corporations. Our LLC record books have more than 50 pages of resolutions to protect our LLC clients. (We’re one of the few companies in the U.S. to do so for our LLC clients.)

•  Lack of proper capitalization: It has to be capitalized when you form a corporation. That usually means money is put into a corporate checking account. The corporation’s stock is issued to whoever capitalized it (usually an individual, but it could be another entity). Specific guidelines in each state ask, “Did you capitalize the corporation with enough money/assets, or was it too thinly capitalized?”

But what exactly is “too thinly capitalized?”

Lately, an unfortunate trend has been appearing in the courts. They’ve adopted a sort of “20/20 hindsight” in some situations, and companies in high-liability sectors like manufacturing are especially at risk.

For example, you’re a widget maker with five employees. You’re capitalized at $50,000 and have a $1-million insurance policy – which is appropriate because widgets are cheap, and you sell only a few. Then one day, Joe Employee cuts off a hand with the box cutter and saddles you with a $3-million lawsuit. The court says, “Mr. Business Owner, when you formed this company, you should have known that Joe would slice off a hand someday, and you should have known that your insurance would cover only $1 million of the $3 million he’d want. Since you only have $50,000 in capitalization, we’ll consider your company too thinly capitalized. Therefore, we’ll allow piercing your corporate veil to recover the rest.”

Crazy? Of course. But true.

You can capitalize on a corporation or LLC with cash, assets, and, in most states, services. However, services can create a tax problem. For example, say your partner owns 50% of the corporation and capitalizes it with $25,000. You own the other half and capitalize it with services (called “sweat equity”). The IRS says you received an asset without paying anything; therefore, they treat that $25,000 worth of services as personal income to you. That means you have to claim $25,000 in personal income. But I don’t remember you earning money. You did get stock in a company, and now you have to pay taxes on it!

One solution might be for your partner to loan $24,000 and then have both partners capitalize the entity with $1,000 each.

Remember, the corporation has to repay the $24,000 as a loan, whereas it was a capital investment in the first case, which does not have to be paid back. This is a potential problem with partners when it is unclear whether the money is capitalization or a loan.

•  Co-mingling of funds. As a sole proprietor, you no doubt have a company bank account. You can use that money for your business or personal expenses. Your CPA will help you determine which part of that money was deductible for business expenses and which portion was for personal expenses at the end of the year.

Your CPA often finds that you spent a lot of money on personal items that are not deductible business expenses. Still, the only consequence to you is that your net profit is higher than you thought, so you owe more in taxes than you expected.

It’s very different in a corporation. There must be a separate checking account used for business purposes only. Using that money for personal reasons is called “co-mingling of funds,” The consequences are dire. A judge may set aside the corporate veil because you ignored that the corporation is a separate legal entity from yourself – leaving you exposed.

Summary: Incorporating your company helps separate your identity from your business. Sole proprietors and partners are subject to unlimited personal liability for business debt or lawsuits against their company. Creditors of the sole proprietorship or partnership can bring suit against the business owners and seize the owners’ homes, cars, savings, or other personal assets. Once incorporated, the corporation’s shareholders have only the money they put into the company to lose, usually no more.

Benefits of Changing Your Nevada Registered Agent Service to NCP

You will benefit greatly by having NCP as your Nevada Registered Agent. Our process, training, and bonuses make our service the best overall value.

Every entity filed in Nevada (NRS 86.231) requires a registered agent.  A registered agent receives important legal and tax documents on behalf of a business, including important mail sent by the state (annual reports or statements), tax documents sent by the state’s department of taxation, and Service of Process—sometimes called Notice of Litigation, which initiates a lawsuit.

Commerce Registered Agent in Nevada

Pursuant to NRS Chapter 77, effective October 1, 2013, any registered agent with 10 or more represented entities is considered a commercial registered agent and must register with the Secretary of State by filing a Commercial Registered Agent Registration Statement.

Registered Agent’s Responsibilities

There are certain requirements a company’s registered agent must meet, characteristics around who can be a registered agent, and how the registered agent’s information is treated.

Availability and physical address. The registered agent must be available during normal business hours and have a physical address in the state of incorporation or qualification. Post office boxes and private rented mailboxes are not allowed. 

The Address is publicly-accessible. Additionally, the registered agent’s address is a matter of public record, meaning anyone can access it. A company’s formation and foreign qualification documents filed with the state are publicly-accessible. In states that do not require a company’s legal address and the formation or qualification documents, the registered agent’s address is the only address on file with that company’s state.

NCP’s Registered Agent Renewal Process and Bonuses:

NCP has now been in business since 1997 and is a leader in the corporate planning industry. NCP has been a member of the Better Business Bureau for fourteen years and boasts a complaint-free track record. You can rest assured that you’ll receive only the most ethical service, advice, and support available.

It is one of our NCP goals to make sure your registered agent service stays current each year. NCP has a 15-step registered agent renewal follow up process combined with a letter, emails, and phone calls to ensure your registered agent service is current.

You will also receive valuable business growing bonuses when you renew your registered agent services in the areas of growing and protecting your business. These powerful bonuses include interviews with world-class experts on each area of asset protection, compliance, sales tax, tax strategies, joint ventures, and other business growth strategies. Each bonus comes with either a video, audio, and or transcripts.

Here is a sample of the bonuses you will receive (they change as updated content and bonuses are available):

• How to Build an Ecommerce Business You can Sell for 6-8 Figures with Mark Daoust, founder of Quiet Light Brokerage.
• Strategies to Protect Your Wealth. Discover the key strategies to protect your safe assets, real estate, and business assets. Need support with a COMPLETE FORMATION?
• LLC or Corporation Best? Discover the Key Factors.
• Which State Which Entity Factors for U.S. Formation.
• Advanced Asset Protection Strategies with Attorney Robert L. Bolick.
  This training covers these key topics on this powerful asset protection tool, including:
  -The Nuts and Bolts of Asset Protection-Real Life Stories – and Insane Verdicts
  -The asset protection tool you may need for greater protection
  -What is the tool, and whom does it benefit? Is the tool necessary in your situation (beyond your current structure you have in place)?-How does the tool work (provide protection beyond other tools)?
  -What state is best to establish the tool?
  -Are there different states that offer the tool, but the statutes read differently? For example, some states have no statutory exception creditors. Exception creditors are classes of creditors that can access the tools assets despite the existence of the applicable tool’s statute because that state’s public policy protects that class of creditors. This is VERY important to know the best state option.
  -Once your assets are protected inside the tool, which creditors (including state and federal) will no longer have access?-How do you use the tool and transfer assets?
  -Which assets should and should not go into the tool?
  -What is the process of implementing this tool?-What mistakes? Do you need to avoid, which may render the tool ineffective?
  -What are the fees upfront and annually to establish this tool properly?
• Trademark training to protect your most important IP.
• Ever consider raising capital to grow? What is involved from a legal point of view? 
• How to become more productive and get more results in your business in life. The hidden culprit is typically being overwhelmed with so many responsibilities, roles, and tasks. Here is the best strategy to overcome this profit killer and become more productive than ever before.

Rewards of NCP as your RA             

Our professional, well-trained staff will handle any service of process we receive for your company efficiently and professionally. 

You will have 12 months of free access to NCP’s Members area to help launch your business with confidence and keep in compliance. You will have access to free training on trademarks, payroll, estate planning, corporate compliance, business credit, merchant accounts, and our launch your business with confidence webinar to help your business with a complete foundation (even if you have already been in business for 5+ years).

You will receive important email updates throughout the year on entity structure, tips to protect your assets, and how to pay less in taxes. Our timely tips will help you stay in compliance and be protected.

You will receive reminders for your entity regarding important tax deadlines throughout the year. 

You will receive several checklists to help make sure you have a complete foundation and are protected, including our Launch with Confidence Checklist, How to Transition from a Sole Proprietorship to an Entity Checklist, How to Transfer Assets to an Entity, Record Book Training Checklist, How and When to Pay Yourself, plus several others.

You will also receive free training to help protect your intellectual property, free downloadable resolutions for LLCs and Corporations, special offers, and discounts. You will receive a special invitation to training to help protect and grow your business.

Free Referrals to our Business Providers: As a valued NCP client, you will have access to our massive list of professional contacts we have established since 1997. We make it a priority to associate with and refer our clients to only the best of the best, so you get the results you need for your business. Here is a sample of the areas of contacts you will have access to as an NCP client: 

– Payroll- save on your payroll fees 
– Merchant accounts – save money on your monthly fees (plus avoid your account being frozen)
– Tax professionals (to help you every step of the way, from bookkeeping to annual tax returns, helping both our U.S. and international clients). 
– Legal professionals (in the areas of IP, contract law, business law, asset protection planning, estate planning, raising money, HR law…) 
– Sales Tax Permits for e-commerce sellers 
-Plus other referrals, ask!

The Process for NCP to Change Your Nevada Registered Agent Service to NCP:

1. Payment for our fees. Our Annual Registered Agent Fee in Nevada is $200 + the state’s $60 Change of Registered Agent Fee. The total is $260. The fees to renew your entity with the state are separate when due.

2. Complete the state forms to change registered agent (NCP will provide those forms for you)

3. NCP will submit the change of registered agent forms

4. You will receive a copy of your files

5. NCP will send you a list of corporate/LLC documents we will need on file as your registered agent.

You will receive annual updates when your registered agent fee is due again and an outline of the annual state forms required separately.

Do you need a virtual address in Nevada with a lease agreement? That is separate from our registered agent service. See our U.S. Virtual Address Services page. 

Please take the next step and change your Registered Agent to NCP now by simply calling NCP at 1-702-367-7373 or email our team at support@launchwithconfidence.com.

How to Protect Your Safe Assets

Over the years, we have heard the sad stories of clients who had their businesses protected with a separate legal entity. Still, when sued personally, they forgot or never focused on protecting their safe assets (which many times is the savings and investment accounts for their financial future) and lost ALL safe assets.

The reasons why most do not take the time to protect one of THE MOST IMPORTANT personal assets is usually a lack of knowledge and accurate information. The other has to do with faulty beliefs like, “I am a good person…who would sue me personally” (people get pretty upset with car accidents and may see you as their lottery ticket) or “I have plenty of insurance, so that SHOULD cover me” (not always; in fact, the loopholes in your policy, if you understood them, would be shocking).

Let’s take a step back and define what is considered a safe asset. A safe asset is one that does not cause direct liability. In other words, your interest-earning money market account is not going to cause anyone liability the way a car, business, employee, or a piece of real estate can. Many safe assets are already protected because they are in a retirement account such as a 401(k). There are exemptions at the state and federal level that will protect your retirement accounts. For example, 401(k)’s is covered by the Employee Retirement Income Security Act, known as ERISA, and are completely protected from creditors — except when those creditors are former spouses or the I.R.S.

The bad news is that ERISA does not cover individual retirement accounts. If you have filed for bankruptcy, federal law protects up to $1-million in an IRA (individual retirement account) that you contributed to directly and protects the entire account balance if the money was rolled over into an IRA from a company plan.

For anything short of bankruptcy, state law determines whether IRAs (including Roth IRAs) are shielded from creditors’ claims.

Most states, including New York, New Jersey, and Connecticut, exempt 100 percent of the assets while they are in the account. But laws in other states vary widely on whether withdrawals are covered, whether protections extend to inheritors as well as the initial owner, and whether former spouses can reach the funds.

Some states limit how much is exempt — Nevada caps it at $500,000 — while California and other states exempt only what is “reasonably necessary” to support the owner and her dependents. Such wording is, inevitably, an invitation to lawsuits.

What is left unprotected is any money or investments (safe assets) outside of your retirement account, even money or safe assets in your living trust. Many people falsely believe that the living trust will protect assets from liability.  That is not true. They protect from probate, but not from creditors. If you have $50K in a brokerage account titled to your living trust and you are sued after getting in a car accident that your insurance does not cover, your $50K in the living trust is up for grabs. Why? Most living trusts are revocable, which means you may change them. If you can change them, a creditor can change them and take out your assets!

Keep in mind, your risk assets, like your business and real estate, should be held in different legal entities. Why? If you put your safe assets in the same entity as the risk assets and the risk asset entity is sued, that would jeopardize the safe assets. You want to keep separate risk and safe assets.

Which entity and state are best to protect your safe assets?

Typically, an LLC taxed as either a disregarded entity for tax purposes or an LLC taxed as a partnership is the best entity. The LLC has the charging order protection, making it more difficult for a creditor to get after your personal ownership in the LLC. Keep in mind, since it is a safe asset LLC, no one should be suing the LLC directly. That leads to our second point, which state is best? As you know, Nevada is a great state when it comes to protecting the entity veil (which comes into play when the entity is sued directly, and someone is attempting to go through the entity after the individual owner). But in this case, with a safe asset LLC, no one should be suing the operating entity, so Nevada is unnecessary. Your home state is just fine for a safe asset, LLC. Remember, an LLC is a flow-through entity when taxed as a partnership and disregarded entity. Therefore, there are no state tax advantages based on Nevada (most states do not have a state tax on pass-through LLCs; the exception is California).

Once the LLC is established, it is time to transfer your safe assets into the LLC as part of capitalization. If you have a brokerage account in your name, you will establish a new brokerage account in the name of the LLC and the new EIN and have the brokerage firm transfer over the account in the name of the new LLC. If you have cash in your personal account, you will write a check to the new LLC as part of capitalization.

How much value in safe assets do you need before you form a separate LLC?

That depends upon your unique situation, based upon how much you can afford to lose personally. If you have $40K in a brokerage account, 80% of your liquid assets, you may want to form a separate LLC to protect that safe asset. If you have $3K in investments in your own name, that is not something that would warrant a separate LLC to protect.

New Entity or Just File a DBA?

As you grow your product or services with your business, you will come to the point that you may consider forming a new entity or instead just filing a DBA linked to your operating entity. It is one thing to grow a business and your net worth, and it is another to keep it. The key to your financial success over time is to diversify your risk.

Unfortunately, this is a common theme for your investments, but not when it comes to businesses. We all know not to have 100% of our investment money in one penny stock or one gold company. You may have 1/3 of your investments in an aggressive portfolio, 1/3 in a moderately aggressive and 1/3 in a portfolio of safe returns. Your age and risk tolerance should also be considered.  The older you are, perhaps the less risk you’ll probably want with your investments. When it comes to protecting and growing your BUSINESS ASSETS for whatever reason, most ignore a pattern that would make sense. What I find that most do is they have all their money invested in one high-risk investment, rolling the dice with their financial future.

What do I mean by this? I see entrepreneurs who have been in business for 7 or 8 years, still operating 100% of their business through ONE SEPARATE LEGAL ENTITY. That means one big lawsuit against the business (usually by a partner, investor, or customer) could be the end of your business. And if you are personally guaranteeing most of your debt, that means you will be on the hook personally and could potentially lose everything. You might kill the golden egg that provides you with annual income. Think about it. If you net $100K from your business, that is similar to a 5% return on a $2-million investment.

Here are some basic rules to follow to help you determine when to form a new entity or file a DBA to your existing entity:

1. Separate your safe from risky assets. Your safe assets include any assets that will not directly cause any liability, like gold, silver, a brokerage account outside your retirement plan with investments in non-exempt assets (like a mutual fund), an investment in a public company, or a private placement. If you put those in your living revocable trust (which means you can change it), they will NOT be protected from liability.

That’s right. You can get sued personally and lose all your assets from your living trust. I know you thought a living trust would protect your assets. The key question is, your living trust will protect your assets FROM WHAT? A living trust will protect your assets from probate and estate taxes, but NOT LIABILITY.

If your safe assets represent a significant value to your current or future net worth, a separate legal entity (unrelated to your business or an entity holding a risky asset like real estate) would be best.

Typically, this is an LLC taxed as a partnership or a disregarded entity. The worst approach is to “reactivate an older entity in a prior business” to hold your safe assets, to save a few dollars, instead of forming a new one. That may come back to haunt you from both a tax and liability viewpoint.

2. Separate your risky assets from other risky assets. This involves everything from one part of your business and another. Real estate should be owned by a separate entity from your operating business. If you have a successful business and you are going to add another venture (especially with a partner who is not related to the first business), then you must form a new entity for the new business with a partner.

Why have revenue going into an existing entity that you own 100% when you have a new partner involved. Let’s say that your current business is doing very well, and now you are adding a different component. Example: you sell an information product online, and now you want to start doing your events. Your events should be operating through a separate legal entity for liability purposes. The big question regarding real estate is how many properties per entity make sense?

That depends upon several factors, including the amount of equity in each property, the types of property, the risk, and the percentage of your net worth that represents. Does this mean if you have three rental properties, you need three separate LLC’s? No. It does mean you need at least one to own title. If all three have $500K of equity, and that is 90% of your net worth, then three LLC’s would make sense. Yes, real estate is transferred into an LLC has other issues to navigate, including transfer tax, due on sale, and insurance, and refinancing issues.

3. Other assets to separate. Your domain names, if they have value. Each domain name you reserve is virtual real estate that is free and clear. You may have a domain name that is worth $100K or more. The big mistake I see is having either you or your main operating company own your domain names. If you get sued, you can lose control of that asset and, if your company gets sued, you could lose control. It may make sense to have a separate LLC to own all your domain names and lease them back to your operating companies.

4. Ownership in C or S corporations. If you own stock in a C Corporation, you may want to consider protecting that ownership, especially if that is one of your main companies, and it has a lot of value. If you were to be sued personally, you could lose control of your operating company (assuming your insurance did not pick up the entire tab).

The solution is to consider an LLC taxed as a partnership to own the stock of your C Corporation. Now, if you get sued personally, the “charging order protection” makes it more difficult for someone to gain control of the membership interest in the LLC. They may only get access to the distribution of profits if any are made.

An S corporation with NO value in the stock is no need to worry. Suppose there’s no value. Who cares if you lose control of your company (same approach for the C Corporation). If the S Corporation has value, you have the same problem as the C Corporation if you are sued personally. Except, with the S Corporation, the only shareholder that will help can be a SINGLE MEMBER LLC taxed as a disregarded entity. An LLC taxed as a partnership can NOT be a shareholder in an S Corporation. There is an argument that some suggest that a one-member LLC charging order is a little weaker in some states than a two-member LLC. This is based upon a 2003 Colorado court case (similar case in Florida in 2010) where a bankruptcy judge ignored the charging order protection (because of only one member). Initially, the charging order protection came from partnership law, which, of course, meant two partners.

A final reminder. Forming a DBA and linking that to the current operating entity only creates a new name for the business; it does NOT form a separate layer for liability or taxes. It may make sense from a marketing perspective, but it may also create a separate legal entity. If you are starting and testing two or three sources of income, it will make more sense to use one entity and wait until two or more take off to consider separating them.

Should You File a DBA?

Here are more situations and recommendations to consider forming a new entity or just a DBA linked to your current entity. For example, our business name is Nevada Corporate Planners, Inc, and we have a DBA filed, “NCP,” our initials.

You are just starting your e-commerce business, already have a storefront business, and are involved in 2-3 different affiliate products.

Should all be operated through the same LLC (or corporation), or should you have one entity for storefront sales opportunities and affiliate opportunities?  Most likely, if you are starting both endeavors simultaneously, it would be okay for both to be run through the same entity. Typically, an e-commerce business opportunity should not cause much product liability for your storefront business.

In this situation, filing a DBA with your existing entity as the applicant would make sense. Don’t make the mistake of filing the DBA linked to your name, creating a sole proprietorship, and no liability protection.

Check-in after six months; if both are incredibly profitable and successful, you may want to consider a separate entity. For most of you, one entity would be fine in this case. This does not necessitate any changes to the articles of an LLC.

Typically, if a corporation, the articles should engage in any legal business, which gives you the flexibility to operate more than one business. The exception will be if you own real estate outside of your residence. If you own a rental property, that will not go into the same entity as your direct sales opportunity.

The real estate will bring unnecessary risk to the e-commerce business, a low-overhead, and high-profit type business. Plus, if you buy real estate in the future, typically you want a flow-through entity for an e-commerce business, like an LLC, taxed as an S corporation, so you can pay taxes once and then close on a piece of real estate in your name personally, and then transfer it into a brand new LLC after the closing.

If you have a partner in your main business and you start the e-commerce with only one partner, in this case, you don’t want to file a DBA linked to your entity. It would be best if you had a separate entity for the business with your partner. You may consider an arrangement where you are not actually partners in an entity, but one of you is an affiliate or profit partner for the other. In the end, don’t “fake” running an entity with a partner, where there is some side commission deal that is not well written. Otherwise, this typically ends badly and in a lawsuit. Make a clear decision to become partners in an entity or not clarify the commissions or profits to be distributed.

Here is our summary of when to file a DBA to your existing entity and when to form a new entity:

Situations to file a DBA (DBA linked to a current entity) *

• Company domain name
• Company initials (Nevada Corporate Planners, Inc. has a DBA, NCP)
• Your business is not going to operate under the legal name. This is common with having a different domain name from the LLC or Corporate name.
• The new line of business that is not part of your current business name with similar risk
• Franchise owners file a DBA in the name of the franchise agreement.
• Affiliate or commission revenue
• New product brand (same owners, lower risk)

*A DBA name linked to an individual creates a sole proprietorship and provides zero protection. This is a common mistake when someone started a business as a sole proprietorship, later forms an LLC, and forgets to “refile” the DBA linked to the new LLC. A DBA name does not allow for an “LLC” or “Inc.” ending.

Situations to file a New Entity:

• Partner in new business
• New asset class (safe asset vs. risk asset)
• New service or product with higher risk
• Real estate outside of your personal residence
• Looking for investors

Do you see an area where you need support? If so, reach out to our team at support@launchwithconfidence.com.

How to Protect Your Real Estate Investments

Investing in U.S. real estate is still one of the best investment opportunities loaded with tax advantages. The key is to make sure your real estate is protected beyond just having insurance.

When investing in U.S. real estate, it is important to make sure you protect your investments properly. The challenge is real estate has a few technical issues that need to be addressed if you will use LLCs for protection.

Here are important real estate strategies to protect your investments:

1. Never own U.S. real estate in your own name, personally (long-term), unless your primary residence. If you have a mortgage, you will have to typically close escrow in your own name personally, then quitclaim or warranty deed it to an entity (typically an LLC).
2. Do not put all your “real estate eggs” in one basket. If you have four triplexes worth $500K each, that is $2-million of real estate, and if the properties are free and clear (no mortgage) by putting the real estate into one LLC, you are exposing all the equity to a lawsuit by anyone of the properties.
3. You may need 2-3 entities to protect your real estate investments.
4. An LLC (limited liability company) makes the most sense as an entity to protect U.S. real estate (not a Corporation, because of double taxation). The LLC would either be a two-member LLC taxed as a partnership or a single-member LLC taxed as a disregarded entity.
5. If you live in California, for example, and you own property in Florida, if you form a Florida LLC to own that property, California will require that the Florida LLC register do business in California. You have nexus (or a business presence) where you are doing the work (checking your bank balances, transactions) and where the physical property is located.
6. You will need a separate bank account in the name of the LLC.
7. You will need a separate EIN for each LLC.

Overall, investing in U.S. real estate is a great opportunity. The key is to work with a company like NCP, experts who can provide you with the steps, resources, and tax and legal support tools to make this a turnkey experience for you!

Q: How do I protect my real estate investments?

A: Many of our real estate investor clients form an LLC to hold and manage their real estate to protect their other assets from liabilities or lawsuits that might result from their real estate investment.

If an LLC is formed and managed correctly and there is a claim or lawsuit relating to the real estate, then generally, only the assets owned by the LLC, and not the investor’s other personal assets, will be subject to the claim or lawsuit.

The reason being, if you own 2-3 properties outside of your residence, you are a target for a lawsuit, even if you have no equity. Many have lost everything financially and will be looking for alternatives, and lawsuits can be a financial game plan.

Even with no equity, you may have an insurance policy they can collect from. That is a big part of the problem. I will point out that your home (or principal residence) is handled differently.

With that being said, here are the strategies and key points to consider for protecting real estate when transferring it to an LLC.

Keep in mind, almost always, when you purchase a rental property, for example, you will be closing escrow in your name personally, with a personal guarantee. You would typically transfer it to the LLC after the close of escrow, via a warranty deed.

Here are important real estate issues to be aware of before transferring to an LLC.

Four Key points to be aware of when you own real estate and are considering forming an LLC to transfer the property into the LLC (called quitclaim or warranty deed). Typically, a title company would do this for you.

• Due on Sales Clause: Your mortgage company can accelerate your loan if you change the title. When you purchase the property in your own name and then transfer it to an LLC (a different name), the mortgage company can technically call it a mortgage and make you pay off the mortgage.

This rarely happens as long as you continue to make the mortgage payment from the LLC, and the owners are the same, meaning you and your wife owned it before, and now you and your wife are the LLC members. Plus, most mortgage companies resell their mortgages.

• Transfer tax: the county assessor may charge you a transfer tax for transferring the property (from you to the LLC).

Usually, there is an exception if you (or you and your spouse) own 100% of the property before and after the transfer. In that case, there is NO tax. If you change the title and add a new owner to the LLC, that MAY trigger a tax.

If you are not getting the response you want from the county assessor, you can use this approach; The best way to test this is to ask, “Is there a transfer tax if we transfer it to our living trust?”

When the country assessor says, “No, that is an exception,” you can say, “Now that we have established exceptions, are there other ones? See this list of transfer tax exceptions for properties in Nevada.

• Reassessment for property tax purposes-if someone has held onto the property for many years, transferring it may trigger a reassessment for property taxes.

The local county will tell you if that is the case. Many times, areas automatically reassess every few years, and this is not a real concern.

The exception is California (Prop 13), where the values have been frozen for many years, and transferring property could trigger a huge reassessment for property tax purposes.

• Insurance issues: When you go from owning a property in your own name to transferring it into an LLC, the insurance company may charge a higher insurance rate (with more coverage) for you as a landlord because they now look at you as a business.

Sometimes, the increase may be close to 2/3rd higher, making sense to shop around with insurance providers. The key is to make sure you communicate with your insurance company so that if you have a future claim, you do not give them a reason to refuse to write you a check! If the insurance policy was made out to you because you owned the property, and now you have transferred it to an LLC, but the insurance policy is not in the LLC’s name, is that a problem from the insurance company’s point of view? That is what you must find out.

The next step is determining how many entities you need for your properties. The key is not to put all your “real estate eggs” into one basket. Do not just form one LLC to hold five properties representing 90% of your net worth.

If the LLC is sued directly by a tenant and you lose, and your insurance company does not pick up the tab, you may lose 100% of your equity in that one LLC. That also does not mean you need five separate LLCs for each property. The factors you want to take into consideration are the following:

• The number of properties you own
• The equity in each property
• The percentage of overall net worth the real estate represents.
• Your risk tolerance. Usually, older couples have less risk tolerance vs. someone in their 30’s. You likely don’t want to lose all your equity and start over.

For example: if you have two rental properties in Northern Wisconsin that are only $75,000 each, with $10,000 of equity, but this only represents 30% of your net worth, then one LLC is probably fine for both properties. If you have three properties in California with $500K in equity in each and the $1.5 million presents 90% of your net worth, two, if not three, LLC may make sense (even with the $800 per year franchise tax fee per LLC). Again, everyone’s risk tolerance is different.

Finally, if you need funding from the equity in your own properties, usually, you will need to transfer the property back to your name or living trust, refinance, and after transfer back to the LLC for protection.

Could one opt for a robust insurance policy and call it a day? Absolutely, the option is enticing due to its ease. However, the truth of the matter is, as your wealth grows and your desire to safeguard it intensifies, so does the intricacy of measures you need to enact. It is a complexity that runs parallel to the value of your assets – the more you possess, the more multifaceted the preservation strategy becomes.

Hence, our objective is not to complicate but to clarify. To collaborate with you, forming a dedicated team that meticulously designs a bespoke plan for you. So while insurance may provide an initial layer of security, the true strength of your financial fortress lies in proactive, personalized planning.

Sly Like a Fox-Asset Protection & Privacy Strategies

Asset protection and privacy is a necessity to protect your wealth in today’s litigious world. There are over 80-million lawsuits in the United States alone each year. Over $200 Billion in frivolous lawsuits every year. In our research, we found a lady that has sued over 700 people during her lifetime. That was her wealth accumulation strategy!

Here are a few fundamental tips to protect your assets before diving into the “sly like a fox” strategies.

First, separate your safe and at-risk assets. Like gold, silver, crypto, stocks, and investments (which do not cause liability), your safe assets should be in one entity, typically an LLC.

Your business should be a separate legal entity. For many of you, forming a second entity for your business to further reduce your risk may make sense. A separate legal entity should hold real estate outside your personal residence.

If you are upside down in that real estate, you may want to speak to your CPA about the tax ramifications of transferring your property to the LLC (there may be a taxable event in that situation).

The living trust will be the owner of the LLCs and complete your estate planning. Other entities may come into play as needed.

The name of the game in lawsuits is to determine how much is likely to be recovered if someone goes after you and receives a judgment. If you have nothing or appear to have almost no assets, there is typically a lesser motivation to go after you.

Your goal is not to look appealing for someone to go after. Let them go after someone else, like all those sole proprietorships around you who have many assets in their living trust but are not protected from liability, only probate.

Privacy is not illegal. It is generally oversold as a must to protect your assets, and that is not the case. One famous attorney told me, “Scott, if you want to really have protection, plan as if you will have to show the judge your entire plan, where all your entities are, the structure, your assets, and money. If you can sleep at night knowing that is the worst-case scenario, could you live with that?” He meant that if you had a solid asset protection plan for step 1, step 2 would have minimal damage.

In Nevada, many companies offer a “nominee service,” where they will appoint someone to be the manager or director of your corporation or LLC. The challenge with this type of service is since WorldCom and Enron fell apart around 2001. There is a much higher basic fiduciary responsibility for naming officers or managers of your LLC in state records.

A nominee service is where a company will “name” a real person to sign as officers and directors of the corporation (sometimes they do it for an LLC), and you remain in control of the company and the checkbook… It has been popular, over the years, for those needing privacy. The challenge is that most people really needing privacy are usually hiding from something, whether a lawsuit, taxes, a non-compete, divorce…

Some people really have a lot of wealth, and they want privacy for asset protection. Overall, we disagree with the “nominee service” because it becomes a hot spot for IRS investigations (especially those companies who obtain the company’s EIN with their SSN).

If you are in a situation where you would like more privacy and not have your name show up in state records, perhaps have one “public company,” where everything shows up in your name, and one “private” company, where your name does not show up. This may be more of a “holding company” with safe assets like gold, silver, domain names, cash…again not always necessary, but maybe an option to consider.

Here are some advanced strategies to keep “gold-digging scumbags” away from your wealth (those are the ones that make up that $200 BILLION in frivolous lawsuits each year.

1. The layering of entities. This is another key component of your asset protection and privacy strategies. This means not operating your business as one LLC, where you are the owner. There is protection if you get sued personally; the “charging order” kicks in, making it very difficult for someone to get control of your operating company. To avoid a “charging order” that still may disrupt the operating entity, the way to avoid that is to require the members to have their own “safe asset holding LLC” to retain the operating company’s ownership interest. Now, if you, as an owner, are sued personally, you do NOT own any interest in the operating company. If fact, you are technically NOT the owner; an LLC is the owner. You are the owner of the second LLC. If someone asks if you are legally the operating company’s owner, the correct answer is no. This is where many screws up. They basically say too much. There are times when you are the owner: if you are applying for a business credit card over the phone and want to know if you are the owner, tell them you are. You will not explain your 2-3 levels of entities and expect the employee for the credit card company to figure that out. On a business license application, legally, you are not the owner. If you are involved in business with a partner and they own more than 50%, and they own the LLC personally, you may want to recommend they incorporate this strategy; because if they get sued personally and lose, it may disrupt operations, meaning even with the charging order, someone can still subpoena the business records, which can be disruptive.
   
   Here are a couple of layer options that make sense:
   
   • An LLC taxed as a partnership, owned by an LLC taxed as an S corporation or partnership (usually an LLC taxed as an S corporation with earned income and assets like real estate) would be an LLC taxed as a partnership.
   • An LLC taxed as an S corporation owned by a single-member LLC taxed as an S corporation. Why not owned by an LLC taxed as a partnership? There are restrictions on who can be the shareholders of an S corporation, and it cannot be an entity taxed as a limited partnership, foreigner, or a C corporation.
   • A single-member LLC is owned by an LLC taxed as a partnership. It’s common to have several single-member LLCs owning real estate individually, all owned by one LLC taxed as a partnership. That means a single-member LLC isolates each piece of real estate, and the one owner is the LLC taxed as a partnership. That means only one federal tax return, a 1065 for the LLC taxed as a partnership. If you (or your living trust) are the LLC owner taxed as a partnership, you do NOT own the real estate. If someone asks if you own the properties, the correct answer is NO.
   • A regular C corporation is owned by an LLC taxed as a partnership. Remember, any time you own stock in a C corporation in your name personally or in your living trust, and you get sued personally, you can lose control of your ownership. If you own more than 50%, that means you can lose control of your entire company!
   • Advanced: Any of the above with a Nevada Asset Protection Trust as the owner in the end. A Nevada Asset Protection Trust is like an “offshore trust” onshore. You do not have to live in Nevada to benefit from it. Here is a link to a recorded webinar training with Attorney Robert Bolick. He covers details of this powerful tool. After you transfer an asset or ownership into the trust, and two years go by with no legal issues, you are home free from creditors; they can’t touch it! If you have a higher net worth, this tool may be a must for you.
2. Creative and Sly Like a Fox. Here is where we get into the fun strategies, the ones, up until now, we have never published anywhere. We’ve only mentioned them verbally, when needed, over the last 22 years.
   
   • Using DBA (doing business as) names makes it harder for someone to get to first base. A DBA is in a different database than the secretary of state’s database, where most people search for an entity that you may be the owner of. As you know, an entity can form a DBA, and the proper way is to make sure the applicant is the entity, not you personally. If it is you personally, you just created a sole proprietorship.
     
     Here are a couple of examples in practice. You own 10 pieces of real estate. An LLC owns each. Instead of being the manager of each LLC, where your name shows up in state records, you can form a single-member LLC to be the 10 LLCs manager. Form 10 DBA names under the single-member LLC and have each DBA name be the LLC manager that owns each piece of real estate.

It will be complicated to determine a pattern that points to you as the manager of 10 LLCs; there are different DBA names. You may be thinking, “Who is the manager of the single-member LLC?” You are. What about that? Now you show up only on one LLC in state records, with no assets, just as the manager of 10 other LLCs. The owners of those LLCs are another LLC. Starting to see the pattern?

Take that a step further: form a single-member LLC with a DBA in Delaware. Delaware LLCs do NOT even require the manager or member to be listed in the articles, meaning your name does not show up in state records! Now, the DBA (in a county in Delaware) is the manager of the Nevada LLC or your home state LLC). If someone looks for that DBA name in your county (the natural assumption), nothing will show up. Again, very hard to get to first base.

Add one more layer: the DBA name may be creative…. if you live in California, how about Florida Old-Timers as your DBA name? Would you go search in California or Florida for that name? Probably Florida, but the DBA was filed in Delaware. Are we having fun yet?  How about a more creative name, like Florida Homeless Shelter, as the manager of your LLC? Does that evoke the name of an organization you want to go sue? Maybe less likely.

Creating mismatches in databases by design. Most people who work for the government do “try” their best to make things accurate, sometimes to your advantage or disadvantage. When you file the DBA or entity, what if you purposely misspelled the name, hopefully for a diligent government worker to fix it for you later on? How about…Houston Management Group, where you spell Houston, “Houston” and change the “o” for an “I”? The state or county may help you and fix that “obvious” misspelling at some level.

We have done this in the past, and the Secretary of State would call and tell us we misspelled a name, and I would tell them we wanted it misspelled on purpose! Of course, for some reason, when you actually misspell one, they seem to miss those that you needed to be corrected.

What is the benefit here? Your name may be corrected in the database over time, and, basically, when the real entity is typed in, it will NOT show up! Remember that any character on the keyboard can typically be used in an entity name or DBA name. Your DBA name could be “(-&U*@@4o0?/, LLC” what are the odds of that one getting screwed up in a computer database in the future? Probably very likely.

Of course, keep in mind, this may create some challenges when YOU want to find YOUR stuff, and now your information is not on the computer properly…this can work both ways.

Keep in mind. The primary purpose is to form a creative name you like, not to mislead people, just like the primary purpose for some structure should not be for tax saving reasons; it should be for business reasons.

We live in such a litigious society, and the more assets you want to grow and protect, the more complex your planning and structuring will become. Unfortunately, “simple” and “asset protection” are inversely related.

Wealthy real estate investors don’t have all their real estate in one LLC. They will divide their equity into different entities as a percentage of their net worth. Your goal probably should not be to disappear from the radar screen, as so many “privacy geeks” like to do, but to blend into the woodwork as an “average person,” where it appears, on the surface, you have a home in your own name, are loaded with debt (could be a mortgage from your own company), a W-2 salary from a company (yours) and debt on your personal credit cards.

That’s much better than no personal bank account, no home in your own name, and you live a grand lifestyle. That does not sound normal. You can live the grand lifestyle, control but not own everything, and be protected as you accumulate wealth for you and your family.

LLC Terms and Definitions

It is important to understand the basic LLC terms and what they mean. You will notice many sounds like corporate terms but keep in mind they are different. Many times, in business situations, people will use inappropriate terms when referring to an LLC. You will come across as more organized and professional when you know the difference. 

Articles of Organization: The Articles of Organization are filed with the Secretary of State to form the LLC. This document is similar to the Articles of Incorporation for corporations and the Certificate of Limited Partnership for Limited Partnerships. 

Certificate of Formation: Some states, such as Delaware, refer to the Articles of Organization as the Certificate of Formation. Most will use the term, Articles of Organization. 



Economic interest: An economic interest is the right of a member or nonmember to receive an allocable share of income, gain, loss, deductions, and credits in the LLCs. An economic interest does not include the right to vote or participate in management. Hence the benefit of a “charging order.” Normally, a member may transfer an economic interest in an LLC without the other members’ consent unless the organizational documents otherwise provide. However, transfer of the economic interest normally transfers only the member’s right to share distributions and profit and loss allocations. It does not transfer the member’s voting and management rights without the consent of the other members (as specified in the Operating Agreement). 

Managers: Managers are the persons designated by the members to manage the LLC. Most state laws allow members to designate managers. If there are no designated managers, all members normally manage the LLC in accordance with their proportionate interests in the LLC. Managers are similar to the officers and directors in a corporation and the general partners in a Limited Partnership. Managers manage most LLCs because it provides more flexibility than to limit management to all members-only; i.e., to use one or a portion of the members or even non-members as managers. 

Members: Members are the owners of an LLC, just like the stockholders of a corporation. 

Membership interest: A membership interest is all of a member’s ownership rights in an LLC. A membership interest includes the member’s right to vote and participate in the management and the member’s economic interest in the LLC. A membership interest is similar to stock shares in a corporation and the partnership units in a limited partnership. 

Operating Agreement: The Operating Agreement sets forth the rules regarding the LLC’s operation and the rights and obligations of the members. It is similar to the bylaws in a corporation and the partnership agreement in a partnership. This is the most important part of the LLC. Key mistakes are often made in the operating agreement.

Gain or Loss Recognition 

An LLC and its members do not recognize gain or loss when the members contribute property to the LLC in exchange for membership interests unless any of the following apply:

• There is a net decrease in liabilities of a member exceeding that member’s basis in the assets transferred.
• There is a disguised sale.
• The member contributes services to the LLC in exchange for a capital interest or a profit interest that does not meet IRS guidelines. This would come into play if you have one partner putting up capital to start the LLC, and the other would perform services for their interest. This is a taxable event to the person who contributed services.
• No gain or loss is recognized if a member contributes only cash to the LLC in exchange for membership interests. 

Assumption of Liabilities in Excess of Basis 

A member recognizes gain if the LLC assumes the member’s liabilities that exceed the member’s adjusted basis in the contributed property.  It is important to examine the assets you may be contributing to an LLC. 

Member’s Basis in Membership Interest 

A member’s basis in his membership interest equals the amount of money, and the adjusted basis of property contributed to the LLC. A member’s tax basis in his/her membership interest is different from the member’s capital account. 

Upon forming an LLC, the member’s adjusted basis equals the cash, and the adjusted basis of property contributed to the LLC. The capital account is equal to the value of the contributed properties. Taxable gain or loss is based on the tax basis rather than the capital account value. 

Example of the Difference between a Tax Basis in Membership Interest and the Capital Account 

An LLC has two equal members. Member A contributes $10,000 cash to the LLC. Member B contributes property with an adjusted basis of $5,000 and a fair market value of $10,000. The capital accounts of each member after the contribution and their adjusted bases in the membership interests are as follows: 

Key: Tax-loss or gain is measured from a tax basis. In this example, member A would have a higher tax basis.

Personal Use Property 

A member’s contribution of personal-use property to an LLC is nontaxable. The LLC receives a basis in the property equal to the lower of the property’s fair market value at the time of contribution or the contributing member’s adjusted basis. 

Example of Contribution of Property to an LLC 

An LLC has two members who share equally in profits and losses. Member A contributed $12,000 cash to the LLC. Member B contributed property with a tax basis of $4,000 and a fair market value/capital account value of $12,000. 

The property has a remaining depreciation life of 10 years. For book purposes, the LLC takes a depreciation deduction of $1,200 per year (10 percent of the book value). The LLC allocates $600 of book depreciation to each member. The LLC takes a depreciation deduction of $400 per year (10 percent of the $4,000 tax basis). The LLC must allocate $600 of tax depreciation to Member A, which is equal to her book depreciation. However, since the LLC has only $400 of tax depreciation for the year, the LLC may allocate only $400 of tax depreciation to Member A. No depreciation is allocated to Member.

• The LLC must comply with the anti-abuse provisions applicable to contributed property. These anti-abuse provisions are referred to as the “mixing bowl problem.” They apply when one member contributes appreciated or depreciated property to the LLC, and the LLC distributes property to members within a certain period of time thereafter. The IRS understands these accounting “games” people may play and have anticipated most of them.

This is similar to using a C corporation to pay lower tax rates for service orientated businesses and then realizing there is something called the Personal Service Corporations rules that make this undesirable 8.

What are Organization Expenses with an LLC? 

An LLC and its members may not currently deduct start-up expenses, organization expenses, and expenses connected with the sale of membership interests. Code Sections 263 and 709 require the LLC to capitalize on these expenses. 

An LLC may amortize certain organization expenses over a period of not less than 60 months. The amortization period starts with the month that the LLC begins business. The election is irrevocable; the amortization period that the LLC chooses cannot be changed. If the LLC elects to amortize the expenses and is later liquidated before the end of the amortization period, the remaining balance in the account may be deducted as a loss. 

The LLC may make the election to amortize expenses by attaching a statement to the LLC’s return for the tax year in which the LLC begins its business. This is another reason we recommend having your CPA complete the first year tax return for the LLC. The statement must describe the following:

• Each organization expense incurred, whether or not paid.
• The amount of each expense.
• The date each expense was incurred.
• The month the LLC began its business.
• The number of months, not less than 60, over which the expenses will be amortized.

A cash basis LLC must also indicate the amount paid before the end of the year for each expense. 

The LLC may amortize the following expenses:

• Services to form the LLC.
• Accounting fees for services incident to the organization of the LLC.
• Filing fees.

The LLC may not amortize expenses connected with the following:

• Acquiring assets for the LLC or transferring assets to the LLC.
• Admitting or removing members other than at the time the LLC is first organized.
• Making a contract relating to the LLC’s trade or business (even if the contract is between the LLC and one of its members).
• Incurring other costs for starting or operating the LLC’s trade or business.

Taxation of LLC Income 

An LLC classified as a partnership for federal tax purposes (meaning it has two members) is subject to the partnership tax rules under subchapter K of the Internal Revenue Code. The LLC does not pay taxes at the entity level; it is a pass-through entity. Some states do tax LLCs at the state level. If the members are individuals, the income will flow to their personal tax returns. If an entity, the income will flow through to the entity—all income, gain, credit, loss, and deduction pass through to the members. The members report their distributive shares on their personal tax returns, whether the income or other amounts are distributed. This means the member may have to pay taxes on money that the LLC was not evenly distributed. This is a benefit of the charging order that discourages creditors. 

An LLC must compute its taxable income for reporting purposes even though it is not a taxpaying entity. The LLC reports its taxable income on IRS Form 1065, which is an annual information return. It reports each member’s distributive share on Schedule K-1. Schedule K-1 is filed as part of Form 1065 and sent to each member.

Partners do not have payroll obligations. This particular difference is an important part of the end of year procedures because of certain rules that need to be observed concerning distributions. 

Distributions to partners should not result in negative capital accounts. The partner (member) will receive the K-1 once the partnership’s tax return has been prepared for the year. Partnership K-1’s are not due until March 15. 

Distributions of partnership profits may occur periodically throughout the year; however, care needs to be taken to observe the rules above. If distributions are not in accordance with the above rules at the end of the year, they may need to be reclassified as loans that will need to be repaid in the following year. 

To get an automatic three-month extension for filing an LLC return for the previous year, you must file form 8736. An additional extension of no more than three months may be granted upon a showing of reasonable cause by filing Form 8800. 

What Accounting Insights do I need to be aware of? 

The taxable income is computed in the same manner as for an individual, subject to certain exceptions. However, the LLC must present its taxable income in a very different format than for an individual. 

The LLC must separately report or account for the following four types of income, gain, credit, loss, and deduction:

• Items that must be separately stated.
• Nondeductible amounts.
• All other income and expense items are grouped as “ordinary income (loss) from a trade or business activity.” The LLC’s taxable income for reporting purposes is the total of all items of income, gain, loss, and deduction other than the separately stated items or disallowed as deductions.
• Special allocations and each member’s distributive share of income. A member’s distributive share of income, gain, loss, credit, and deduction is determined in accordance with the operating agreement. However, special allocations to members are not respected unless the allocations have a substantial economic effect.

Each member considers her distributive share of taxable income, the separately stated items, and the disallowed amounts. These are the reasons why it is recommended to have a CPA complete your LLC taxes. 

The character of any item of income, gain, loss, deduction, or credit is normally determined at the LLC level rather than at the member level. For example, if the LLC sells a depreciable business asset at a gain, the gain is a Section 1231 gain even though the member is not engaged in a trade or business.

If the LLC has losses, the members may deduct the losses on their individual tax returns, subject to the passive loss rules. The LLC may not carry back or carry forward the losses to other years as a net operating loss. However, the members may use those losses as net operating loss carrybacks and carryovers on their individual returns.

What is tax basis? 

The basis is a tax concept that determines whether any property taxable disposition creates a recognized gain or loss. It can be summarized as the amount of cash or the fair market value of the property a person actually has invested in another piece of property, which may be adjusted by several factors. 

A taxpayer is, absent an exception, generally subject to tax on the sale or exchange of property unless the cash or fair market value of property received exceeds that taxpayer’s tax basis in the property transferred.  

With your LLC taxed as a partnership, the basis is important because you, as a member, can deduct certain losses of an LLC allocated to you to the extent of your tax basis in your LLC interest, subject to some limitations. Your tax basis can never be less than zero. There is a term called “negative basis,” the term actually means a deficit capital account, which can trigger tax (often depreciation recapture) upon sale, foreclosure, gift, or other non-death transfer.

Overall, you want to have a high basis in your membership interest. You will discover that partnership taxation allows you to have more basis with certain transactions than you would with an S corporation (the other main flow-through entity). More basis means the ability to distribute more money tax-free to the members! 

A member’s tax basis in an LLC interest initially is equal to the amount of cash and adjusted tax basis of property contributed by that member to the LLC in exchange for the LLC interest. [IRC § 722] If the member purchased the interest from another member, the purchasing member’s tax basis initially would be equal to the amount of cash or fair market value of the property transferred in exchange for the interest. [IRC §§ 742, 1101].

A member’s interest in an LLC is adjusted from time to time as follows:

• Increased by the member’s distributive share of the LLC’s income and tax-exempt income;
• Increase by the member’s distributive share of the LLC’s deductions for depletion over the basis of the property subject to depletion;
• Increased by the member’s share of the LLC recourse (and in some cases, qualified nonrecourse) liabilities for which no other member is personally liable;
• Decreased by the member’s distributive shares of the LLC’s losses and nondeductible expenses, which are not properly chargeable to capital accounts; and
• Decreased by any distributions to the member.

In summary, make sure you, your partners, banker, accountant, and other critical parties to your business are on the same page with all LLC terms and definitions.

Incorporate Now vs. January

The best strategy is to incorporate in 2023 vs. 2024 for many important reasons. If you’re operating your business as a sole proprietorship, this is a logical time of the year to think about forming an entity going into January 2024. Doing this will make your business official, cut your TAX bill, and lower your risk of an IRS AUDIT. Now is the time if you are outside the U.S. and looking to launch your U.S. e-commerce business. 

Now, there is a new element of compliance in 2024, the Corporate Transparency Act, which may seem simple on the surface to submit your beneficial owner’s information to FinCEN, but keep in mind, for any changes to the beneficial owner’s information, you must update your report within 30 days, or face a possible $500 per day fine. NCP has the best resource to help you comply with the Corporate Transparency Act. 

That’s a SMART MOVE, except for one part – waiting until January.

As you may have heard, incorporating in January gives you a clean cutoff for the year, eliminates the complication of a “short year” tax return, and helps you smoothly transition from a sole proprietorship into a separate legal entity.

Even with all those very real advantages, waiting until January is NOT the best approach.

January is the busiest time of the year for filings and, therefore, the slowest. If you form your new entity at the beginning of January, the entire process could take weeks for you to complete the paperwork, get your EIN, and open a bank account. For U.S. residents, you’ll be stuck filing another Schedule C for the income you receive early in the month, which will likely go to you personally or the DBA (doing business as) name you’ve been using for your sole proprietorship.

Schedule C is the most highly audited IRS form, which puts you back in the IRS audit trap for a whole new tax year.

How can you escape the sole proprietorship, liability, and audit trap without filing a SHORT-YEAR TAX RETURN?

The answer is to have us form the entity for you NOW and set the IRS start date for January 2024. The January start date allows time for your filing and EIN to be processed in December. This puts you in a position to AVOID A SCHEDULE C for your business in 2024. The strategy to incorporate in 2023 is a double win because it eliminates an additional short-year tax return for your new entity in 2023 (now through December 31st).

On top of all these practical reasons, it’s important to know that operating as a sole proprietorship is NOT the fast track to success; it’s the shortest path to joining the 95% of businesses that fail in the first five years.

You probably chose a sole proprietorship for one of three logical reasons: (1) you were looking for the easiest and cheapest way to get started, (2) you wanted to test the waters to see if your idea would make money, or (3) your tax advisor told you to keep it simple and go the sole proprietorship route until you earn more than $40K to $50K in profits.

Unfortunately, even though I don’t believe this is what you’re thinking, here’s the implied message the rest of the business world ASSUMES you have in mind when they see you operating as a sole proprietorship:

 “I don’t believe in myself, my product, or my service, or I don’t expect 
to make $40K in profits.”

Since 1997, we’ve helped over 6,500 entrepreneurs reverse that message, escape the sole proprietorship trap, and make a fast start to profits. Here are just a few of the strategic insights that woke my clients up to the money they were leaving on the table:

1.    Sole proprietors file a schedule C with the 1040 form in April. Schedule C filers are 300% more likely to be audited (the IRS is leaning on small business owners to close a $300-BILLION tax gap!). If your business lost money in 2023, you’re especially at risk if you plan to write those losses off against other income. 

2.    Sole proprietors pay the most in taxes. You will pay 15.3% on the first $160,200 in 2023 of net income and $168,600 in 2024. 

3.    Operating as a sole proprietorship and self-financing your business damage your personal credit score. Sole proprietors frequently turn to self-funding through personal credit cards or cash reserves because their business credit options are limited. The resulting damage to your personal credit score will severely limit your ability to build business credit when you finally get around to forming a separate legal entity. 

4.    A sole proprietorship sends a negative marketing message. Before working with you, the biggest potential customers, suppliers, and marketing partners look at your company’s structure. This way, it broadcasts the message that you don’t expect enough profits to incorporate. Why expose yourself to that kind of opportunity cost, especially at a time when you can least afford it? 

5.    You have unlimited personal liability. A sole proprietorship does not provide you or your family with minimal protection in the all-too-frequent event of a lawsuit or other challenges to the assets you’re working so hard to build. 

6.    There is no reason to build business credit on a sole proprietorship with the business credit bureaus. The goal is to form a separate legal entity and build your financial credibility with the business credit bureaus and on your new EIN. Protect your personal credit score by obtaining a business credit card under the entity and EIN, not your SSN. Putting your business in the best possible position to maximize funding can be the difference between being in or out of business within 12 months. 

You have unlimited personal liability. A sole proprietorship does not provide you or your family with minimal protection in the all-too-frequent event of a lawsuit or other challenges to the assets you’re working so hard to build. 

ESCAPE THE SOLE PROPRIETORSHIP TRAP WITH CONFIDENCE.                                                                                                   

If you are outside the U.S. and looking to expand your e-commerce business to multiple U.S. platforms (Amazon, eBay, Walmart…), you will, in some situations, want a U.S. LLC taxed as a U.S. taxpayer/person, resulting in a W-9 being filed. The key is working with a company like NCP that has expertise in working with the Amazon and Walmart platforms. The time frame for EIN (15 business days), the strategy’s execution, tax treaty details, sales tax compliance, and more?  The good news is that NCP can help you confidently launch your U.S. company. 

There’s a way out of ALL these real-world risks (and others we don’t even have time to discuss here). NCP has hassle-free solutions to handle them quickly and affordably – so you can start 2024 confidently. 

When you form a new entity before 2023, the key is to form a COMPLETE form for your business so you have real protection. If you file articles or get one of those $ 99 tripwire offers to get you in the door, there is ZERO protection with that approach. If you are outside the U.S. and looking to do business in the U.S., see the details below for your best options.

If you are a U.S. resident, visit this page to learn about our LLC and corporate formations. If you are outside the U.S., consider the extra time frame to apply for an EIN and establish a U.S. bank account. Visit this page to learn more.  During the filing process, you will let our team know if you want a start date on the SS4 of 2023 or 2024.

LLC Taxation Case Study

When you form an LLC, you have four options on how it may be taxed, disregarded, S or C corporation, or a partnership. There are a lot of factors to consider which taxation type may be best for your situation. In this case study, we address the key questions you must consider. Here is our hypothetical situation that will help you better evaluate your own situation.

Situation: My partner and I own rights to computer software, and we’re going to market it across the US as a new security program for computer systems.

1. What are you expecting in the way of Gross Sales during your first 12 months? 
2. 900k
3. What will your business expenses and net profit be? 
4. 300k expenses
5. 600k net profit, before paying myself and partner.
6. Do you have a partner for your business? 
7. Yes
8. What is your personal income level (aside from this new business)?
9. We each earn over 150k from a computer-consulting contract.

Here are the key questions to ask next to help determine which entity may be best in this situation:

1. You mentioned you’re selling a product. Will you be providing services as well?
2. 100% product, computer software.
3. Will your business develop a net worth? Meaning, will it develop systems and have a net value over time? Or is it based upon your efforts, so that the day you stop working is the day your company stops generating revenue? 
4. Yes, this product already has a net worth, and, as it becomes known in the marketplace, the value will skyrocket! Yes, this will be a very profitable business, where we only need a couple of employees, and we won’t have a lot of overhead.
5. Will your company hold large inventories or receivables? 
6. No, only some computer equipment. The software is replicated as orders come in.
7. Will your business be purchasing a lot of equipment with debt? (Important if you’re expecting to break even or lose money during the first year.)
8. No
9. Is your goal to sell the business soon? (Important for C-corporation consideration.) 
10. Yes, it might be possible to sell it for several million in a few years to a big software company.
11. Will the entity keep profits as retained earnings for future growth and expansion? (Another important C-corporation consideration.)
12. No, we make too much profit as it is. We don’t need a lot of money for growth and expansion. Because of our background, we already have distribution channels and contacts interested in our product!
13. Are you looking for Investors for your company?
14. Perhaps in the future.
15. Do you have other C-corporations? (We only ask if we think a C-corporation might be the best choice at this time; important for new entity-controlled group issues.) 
16. No
17. Are you a US citizen or a Resident Alien? (An important S-corporation question, as nonresident aliens, cannot own S-corporations.)
18. Yes, I am a citizen, but my partner is from Europe.
19. What states will you be operating in? (Important for state tax consequence consideration.) 
20. I live in Nevada, but my partner is in Europe.

Conclusion: Consider Two Aspects; Tax and Liability Point of View:
Result: You will NOT be a C-corporation because:

• Your 600k in expected net profit is too much to reinvest in a C-corporation. You’d have a retained earnings tax problem, as C-corporations may have only 250k in retained earnings-unless they have a good reason. Excessive retained earnings cause double taxation when you want to take some of the profit from the C-corporation in the future. 
• You are not looking to reinvest the money into the company, nor will you add a lot of employees.
• Since you might sell the company in a few years, a C-corporation would give you double taxation problems. When you sell the business, what happens is the buyer purchases the assets from the existing entity; they’re not buying the corporate stock. When the existing C-corporation sells its assets, it receives a large check payable to the C-corporation, which would then have to pay taxes on all that profit. It would also have to file a final tax return when you dissolve the corporation, and you would pay taxes again, personally. You can avoid this double taxation problem with a flow-through entity.

You will NOT be an S corporation because:

• You have a partner that is a non-resident alien. A non-resident alien can not own the stock in an S-corporation.
• If you bring in an investor down the road, the S-corp limits that investor’s investment options. They can only invest as an individual, an S-corp, or single-member LLC. They cannot be a foreigner. An LLC is taxed as a partnership or a C-corporation.
• S-corporation stock is not as easy to protect as that of a C-corporation or LLC. A single-member LLC could own an S-corporation stock, but the protection is not as clear-cut as that provided by an LLC taxed as a partnership.

You will be an LLC taxed as a partnership because:

• You have a partner.
• Your company has a net worth, and the LLC taxed as a partnership is equipped with the “Charging Order” protection.
• You have too much profit for a C-corporation, so you need a flow-through entity.
• You might sell the company, which works better with a flow-through entity, and, as we discussed, the S-corporation is NOT an option.
• A single-member LLC is not an option either, because you have a partner.

Look at the Liability Point of View:

Example of Liability: The LLC taxed as a partnership gives you built-in protection through the “Charging Order” that applies to all LLCs, but more so to LLCs taxed as partnerships.

When you come together with a partner, the main concern is to find out if your partner has any “baggage” in the closet that will come out when your new business starts to make money. For example, does your partner have existing creditors in other states that you don’t know about? Did you know that judgments in other states can be carried into a new state?

An LLC makes it more difficult for any of this baggage to have direct implications for your company. If you or your partner get sued personally, it’s more difficult for a creditor to control the LLC’s ownership interest. If you owned a C- or S-corporation, the creditor would take over the stock and be the new owner.

Charging Order: When a creditor goes after you personally, and the only major asset to collect against is your membership interest, the court will limit the creditor by what is called a “charging order.” If you’re sued personally, and if you own the stock of an S- or C-corporation, a creditor would take over the stock, or enough of the stock, to satisfy the judgment. On the other hand, a charging order gives your creditor the right to an “economic interest” of the membership interest. All that means is that they get access to profit distributions represented by that membership interest (same as ownership interest).

For example, if both you and your partner owned the LLC 50/50, you’d share the 600k profits and get 300k each. If you had a judgment against you for 400k, the creditor would have access to your 300k in distributions to pay off the 400k in judgments, IF, AND ONLY IF, the LLC ACTUALLY DISTRIBUTES THE PROFITS! If the LLC does not distribute the profits, the tax liability still flows through to you, and you still have to pay the taxes out of your pocket. So far, the creditor has not received any money to pay down the judgment he has against you.

Note that the creditor does NOT get a MANAGEMENT INTEREST, which would allow him VOTING RIGHTS, and therefore CONTROL of 50% of your company. If a creditor has CONTROL, they may sell tangible assets to settle the judgment. This does not happen with a charging order. Your creditor gets an ECONOMIC interest only and must wait patiently for financial distributions.

This concept is so powerful that many states are changing their legislation to say that if an UNREASONABLE AMOUNT OF TIME goes by, and if it APPEARS that the CREDITOR will NOT RECEIVE ANY DISTRIBUTIONS with which to PAY OFF THE JUDGEMENT, the CREDITOR will have the RIGHT to GO BACK to the Court, and ASK FOR FORECLOSURE ON THE MEMBERSHIP INTEREST…which gives the creditor CONTROL of MANAGEMENT INTERESTS AS WELL!!! And if your creditor has management interests, they have assets that they can sell to satisfy their judgment.

Yes, it means more legal fees and more work, but in the creditor’s eyes, it’s at least an option to get something!

Creditors must follow a TWO-STEP APPROACH to get CONTROL of a MEMBERSHIP INTEREST of your LLC, versus the procedure to collect if you own an S- or C-corporation:

Step 1: Obtain a charging order and hope for distributions.
Step 2: If no distributions, go back to the Court and ask to FORECLOSE on the MEMBERSHIP INTEREST-a trend in many states.

Bottom line? The LLC taxed as a partnership gives you more personal protection than just owning a C- or S-corporation stock. If you form a C-corporation, you can form a second entity to own the stock-an LLC taxed as a partnership, ideally. An S-corporation can only have a single-member LLC as an owner with the charging order protection but is not as strong. By the way, the charging order protection came from limited partnerships and carried over to LLCs.

BONUS Strategy: Prevent a Creditor from Disrupting the Operations of Your LLC

If a creditor obtains a charging order against one member, the LLC, based on the manager’s decision, probably WILL NOT distribute any profits that year to frustrate the member’s creditor. Both members then receive a K-1 but no money to pay the taxes, so both must borrow from the LLC to pay their respective taxes. This may cause the other partner to feel very uncomfortable.

SOLUTION: Require that each member (partner) form their own PERSONAL LLC to hold their membership interest in the main operating company.

• The LLC holding company will only own safe assets.
• A charging order will only affect the member’s personal LLC, not the main operating company!

Here’s what it looks like:

Look at the Tax Point of View:

It would help if you Considered These Key Factors:
1. 900k in gross sales
2. 600k in net profits
3. 150k in other earned income
4. Too much profit for a C-corporation; need a flow-through entity

If you’re 50/50 owners, each of you will split the 600k in net profits. The KEY QUESTION is, “ARE THESE PROFITS SUBJECT TO SE TAXES?”
LLC Members’ Exposure to Self-Employment Tax

What are self-employment taxes?

The SE tax is designed to ensure that self-employed individuals pay the Social Security and Medicare taxes (payroll taxes) that an employer would otherwise be withheld. Generally, employers and employees each pay a 6.2% Social Security tax on wages up to a wage base ($142,800 in 2021) and a 1.45% Medicare tax on all wages. Thus, self-employment income is subject to a 12.4% Social Security tax (up to the wage base) and a 2.9% Medicare tax.

You are considered self-employed if you conduct a trade or business as a sole prop, single-member LLC disregarded owned by you, or a member of an LLC taxed as a partnership. Managers of an LLC and general partners of a partnership pay self-employment taxes on all their business income from the partnership, even if it is not distributed.

There is a difference in LLC members of an LLC taxed as a partnership as to their profits being subject to self-employment taxes. They are subject to self-employment taxes on “guaranteed payments,” which are for services to the LLC but exempt from self-employment taxes on their distributive share of partnership income. Here are more details below on LLC partnership taxation.

When it comes to computing the amount of a partner’s self-employment (SE) income, the general rule is that the partner includes his or her pass-through share of the partnership’s income and loss from a trade or business activities as SE income [IRC §1402(a)].

However, limited partners only include guaranteed payments from the partnership for services actually rendered to the partnership in their SE income, as described in IRC § 707(c). [See IRC §1402(a)(13).] Such payments are commonly referred to as “partner salaries.” This is a favorable rule, assuming the partnership’s trade or business activities generate taxable income because it minimizes the limited partner’s SE income and SE tax.

The SE tax rules were developed before an LLC taxed as a partnership existed. The question became: How do LLC members deal with SE tax and, specifically, when can they escape SE tax on the theory that they should be considered limited partners because they aren’t personally liable for LLC debts?

If limited partner status applies to LLC members for SE tax purposes, they apparently can avoid SE tax simply by not receiving any section 707(c) payments for services. Obviously, big dollars could be at stake, particularly for professional service LLCs.

In response to this “alarming” situation, Treasury issued not one but two sets of proposed regulations (in 1994 and 1997) on the subject of SE tax for limited partners (LLC members). Both generated controversy by proposing that LLC members be required to pay SE tax on certain LLC pass-through income, in addition to any Section 707(c) guaranteed payments for services.

Many commentators interpreted the proposed rules as imposing new taxes on LLC members without the benefit of any supporting legislation. Congress agreed. Section 935 of the Taxpayer Relief Act of 1997 includes language prohibiting the release of any temporary or final regulations on the subject before July 1, 1998. Treasury now concedes that the proposed regulations are not valid. As this is being written, there is no indication that the Treasury’s further guidance will be forthcoming until Congress delivers a statutory clarification.

Thus, an aggressive interpretation of current law is that LLC members can completely avoid SE tax on their pass-through shares of LLC income by avoiding any Section 707(c) guaranteed payments for services. However, the IRS may take the position that at least some of the cash distributions received by LLC members are, in fact, “disguised” Section 707(c) guaranteed payments for services.

NOTE: The downside of taking the position that LLC members have little or no SE income is that it may severely restrict their ability to contribute to any tax-deferred retirement plan. Annual contributions to an individual’s self-employed Keogh plan or SEP account are based on the amount of his or her SE earnings for the year [IRC §4O1 (c)(2)]. The same is true for SIMPLE-IRAs [IRC §408(p)(GXA)(ii) ¹.

A less-aggressive approach might be for LLC members to concede that they owe tax on a “reasonable” portion of their cash distributions by voluntarily treating such reasonable amounts as Section 707(c) guaranteed payments for services. The members can then make a strong argument that they owe no further SE tax because they have taken a conservative approach to interpreting a very unclear law.

NOTE: There is no confusion regarding the SE tax for individual owners of single-member LLCs involved in a trade or business activities. The existence of the single-member LLC is ignored for federal tax purposes. Accordingly, the business is treated as a sole proprietorship activity of its owner, with the resulting exposure to the SE tax¹.

We know that you only pay SE taxes up to $142,800 in 2021. Since both already earn 150k personally, they are above that level. BUT, 2.9% of the SE tax is a portion called Medicare taxes. You pay the 2.9% on any income ABOVE $142,800 to an UNLIMITED AMOUNT of EARNED INCOME (passive income, like rents, are NOT subject to SE taxes or the Medicare portion).

HOW DOES SE TAX WORK WITH LLCs TAXED AS PARTNERSHIPS?

Typically, if LLC members are ACTIVELY INVOLVED in running the business, any LLC profits are deemed EARNED INCOME, and therefore subject to SE taxes!

Passive members of an LLC, such as a spouse who is not involved in the business, would receive income that is NOT subject to SE taxes.

Some CPAs are still treating LLCs taxed as partnerships like S-corporations when there is an even balance between salary and distributions; EXCEPT that in LLCs, it’s called GUARANTEED PAYMENTS and DISTRIBUTIONS. Guaranteed payments are subject to SE taxes, BUT distributions are NOT! The key is to take a reasonable salary. In other words, you cannot take a $5,000 salary with $95,000 of distributions to save more in SE taxes. That is not a reasonable salary.

Conclusion: From a tax point of view, the LLC taxed as a partnership, at best, will bring you the same result as the S-corporation. At worst, the members would pay 2.9% for the Medicare portion above $137,700 in 2020. But the LLC still brings benefits for all the other reasons! (Besides, in this example, an S-corporation is not an option because of the foreign partner.)

What Happens Each Month:

Each Partner receives a GUARANTEED PAYMENT each month. In this example, it might be 10k. If you take a distribution, WRITE A SEPARATE CHECK, and notate “DISTRIBUTION” in the memo field, as taxes will not be withheld on this amount. You will personally pay all the taxes at the end of the year, and after the first year, you’ll make quarterly estimated tax payments. At the end of the year, the LLC will issue you a K-1, representing the company’s distributions and guaranteed payments that flowed through to each partner! The money may not all be distributed, but you certainly have to pay taxes on your LLC profits. Keep in mind that guaranteed payments are an expense to the LLC, which lowers net profits.

WARNING: It’s easy to figure out that you can save more of the 2.9% Medicare portion of your SE taxes if you have lower guaranteed payments and higher distributions. In this example, if you received $40,000 in guaranteed payments and $240,000 in distributions-just to save 2.9% on the $240,000, or $6,960 (remember both already earn $150k separately), the IRS will JUMP all OVER YOU! They don’t like people abusing LLCs by taking too LITTLE in guaranteed payments and too HIGH DISTRIBUTIONS.

A Few Other Points:
Tax Return Filed: 1065 for LLC taxed as a partnership.
Due Date: March 16th (2021)
Year-End: Calendar year-end, December 31st.
Some states do have a state-level tax on LLCs.

Following Corporate Formalities

One of the requirements, when you form a corporation or LLC, is to operate the entity as a separate legal entity from yourself. Corporate formalities are the operating rules and guidelines a corporation must follow to be recognized as a separate legal entity. If corporate formalities are not followed, it is one of the areas where the corporate veil may be pierced, and the legal action will now point to the owners of the company.

Corporate formalities are not required for a sole proprietorship, because it is not a separate legal entity from yourself, and therefore, you have unlimited personal liability. When you form a corporation or LLC you have the advantage of a separate legal entity from your personal assets, but you must operate the entity as a such to maintain that layer of protection over time through formalities.

Below is a list of corporate formalities you will want to follow on an annual basis.

Corporate formalities fall into the following general categories:

• Corporate bylaws;
• Shareholder and director meetings (annual and special);
• Signing documents as a corporation;
• Corporate recordkeeping (financial and corporate documents);
• State annual filings (corporate report, franchise tax, federal and state corporate tax);
• Bank accounts (separate corporate bank accounts); and
• Financial statements (income and cash flow).

Creating and maintaining records is a huge part of following proper corporate formalities. The types of records you can be expected to keep for your corporation include the following:

• Accounting and bookkeeping records;
• Bank records;
• Contracts;
• Corporate records;
• Correspondence;
• Employee records;
• Business forms;
• Intellectual property records;
• Marketing and advertising records;
• Permits and licenses;
• Stock records; and
• Tax records.

Here are some of the finer points of the records and procedures that a corporation must follow:

Corporate Bylaws:

The corporation must adopt a set of bylaws which provide a written statement of how the internal affairs of the corporation will be handled. The bylaws set the time and place of regular shareholders and board of directors meetings. Changes to the Bylaws or Articles of Incorporation must be approved by BOTH the Shareholders and Directors. Amendments to the Articles of Incorporation must then be filed with the Secretary of State in the state of incorporation for the amendments to become effective. Some states also require corporations to file a notarized affidavit, which verifies the number of outstanding shares at the time of the vote.

Corporate Minute Book:

The corporate minute book contains a required written record of actions by the shareholders and directors of the corporation is a big part of your corporate formalities requirements. At a minimum, there must be annual minutes reflecting the election of directors by the shareholders. Any significant corporate activities, including corporate borrowings, purchases, and the payment of compensation to officers, should be properly reflected in the minutes of the meetings of the directors and shareholders. As a general rule, all records, resolutions and minutes of your corporation should be kept in the Corporate Minute Book for a period of no less than six years. This is a good idea because sometimes a Shareholder will want to inspect the corporate books and records to ensure the corporation is being run in its best interests. It’s probably wise to retain these records for a longer period, should anyone ever challenge the actions of the Board of Directors. (See section below, ” More On Corporate Minutes,” for further explanation on keeping proper minutes.)

Stock Ledger Book:

The corporation must maintain an accurate stock ledger book. This book shows who has been issued stock certificates and the amounts received by the corporation for the issuance of its stock. The stock ledger book contains an up-to-date record of the names and number of shares owned by each shareholder.

Conducting Business in Corporate Name:

When doing business with third parties, the officers and directors must make it clear that they are acting on behalf of the corporation and not in their individual capacity. Correspondence should be sent out under the proper corporate letterhead, and contracts should be entered into only with the corporation as a signatory. Unless the documents clearly reflect that a transaction is entered into on behalf of the corporation, and all necessary agreements are entered into under the corporation’s name, the corporate entity will not survive a challenge in a lawsuit.

Bank Accounts:

Corporate bank accounts and accounting records must be separate and distinct from the individual. A corporate bank account cannot be treated as if it were the account of an individual officer or director. Corporate income and assets must be separately accounted for on the corporation’s books. One of the biggest mistakes made by clients is that they feel free to move money and property back and forth between themselves and their corporation without properly accounting for such movement in the corporation’s records. This is a fatal mistake and, under these circumstances, the corporate entity will be disregarded by the court.

Corporate Resolutions:

Corporate Resolutions record the major decisions made by the corporation’s Shareholders or Board of Directors during meetings. While not always required, it’s a good idea to record your actions in the form of Corporate Resolutions, because Resolutions show third parties that the actions were taken by and on behalf of the corporation. Some Corporate Resolutions may be passed only by the Shareholders, others only by the Board of Directors, and some must be passed by both groups.

Bankruptcy or Dissolution:

Shareholders must also vote to dissolve the corporation or to file for bankruptcy or reorganization.

Everyday Corporate Operations: 

Resolutions adopted by the Board of Directors that generally do not require Shareholder approval involve everyday operations of the corporation, including leasing, purchases, hiring, banking, borrowing, investing, paying of dividends, salaries, and bonuses, providing benefits for employees and changing the corporate status, such as obtaining “S-Corporation” status.

The Corporate Structure: 

The structure of a corporation is made up of the Corporate Officers, the Board of Directors, and the Shareholders. Each plays a role in following corporate formalities, and, as such, must be aware of the responsibilities and parameters.

Corporate Officers:

Each corporate officer carries its own area of responsibility. Typically, the authority and responsibilities of each officer is described in the corporate bylaws and may be further defined by an employment contract or job description. The main officers are:

• President – Has the overall executive responsibility for the management of the corporation and is directly responsible for carrying out the orders of the Board of Directors. He or she is usually elected by the Board of Directors. The Actual fiscal policy of the corporation may rest with the Board of Directors and be largely controlled by the President on a day-to-day basis.
• Treasurer – The Chief Financial Officer of the corporation and is responsible for controlling and recording its finances and maintaining corporate bank accounts.
• Secretary (or clerk) – Typically responsible for maintaining the corporate records.

Most jurisdictions allow the same person to act in all capacities, provided he or she fulfills all responsibilities of each position. For example, the President is typically responsible for entering into contracts on behalf of the corporation; the Treasurer is responsible for maintaining and accounting for corporate funds, and the Secretary is responsible for observing corporate formalities and maintaining corporate records. These three positions are required in every corporation.

In addition to these required officer positions, a corporation may also have Vice Presidents and/or Assistant Secretaries or Assistant Treasurers.

The Board of Directors: The Board of Directors is essentially the management body for the corporation. The Board is responsible for establishing all business policies and approving major contracts and undertakings. In addition, the Board may also elect the President. Ordinary business practices of the corporation are carried out by the Officers and employees under the directives and supervision of the Board of Directors.

The Directors must act collectively for their votes and decisions to be valid, which is why Directors may only act at a Board of Directors meeting. This, however, requires certain formalities. One such formality is that the Directors must all be notified of a forthcoming meeting in a prescribed manner, although this can be waived or provided for in the corporation’s Articles of Incorporation or Bylaws.

For a Directors’ meeting to be valid, there must also be a “Quorum of Directors” present. A Quorum is usually a majority of the Directors then serving on the Board; however, the Bylaws may specify another minimum number or percentage.

The Board of Directors must meet on a regular basis (monthly or quarterly), but never less than annually. These are the regular Board meetings. The Board may also call special meetings for matters that may arise between regular meetings. In addition, Boards may call special Shareholders’ meetings by adopting a resolution stating where and when the meeting is to be held, and what business is to be transacted.

The first meeting of the Board of Directors is extremely important, because in that meeting the Bylaws, the Corporate Seal, Stock Certificates and Record Books are adopted.

Board members, like Officers, have a fiduciary duty to act in the best interests of the corporation and cannot put their own interests ahead of that of the corporation. The Board must also act prudently and must never negligently manage the affairs of the corporation. Finally, the Board must make certain that it properly exercises its authority in managing the corporation and does not abrogate its responsibilities to others.

This means that the board must be very careful to document that each Board action was reasonable, lawful, and in the best interests of the corporation. This is particularly true with matters involving compensation, dividends and dealings involving Officers, Directors and Stockholders. The record or Corporate Minutes of the meeting must include the arguments or statements to support the Board’s action and must detail why the action was proper.

Shareholders: 

Because Shareholders are the owners of the corporation, the corporation’s Officers and Directors must ultimately serve the interests of the Shareholders. While a Shareholder’s role is not typically managerial, Shareholders are not powerless concerning the affairs of their corporation. The rights of the Shareholders are governed by the Bylaws of the corporation, as well as by prevailing state laws.

Generally, the shareholders vote on the following matters: (NOTE: laws may vary by state) 

1. Appointment of the President; 

2. Election of the Board of Directors; 

3. Major changes in the basic organization of the corporation. 

This last matter, also referred to as “Fundamental Corporate Changes,” may include the following:

• Change of name or address of the corporation;
• Change in the nature of the business;
• Change in bylaws;
• Change in type and number of shares of stock issued;
• Change in size or composition of the Board of Directors;
• Encumbering corporate assets;
• Dissolution or winding down of the corporation;
• Selling, consolidating or merging the corporation.

Shareholders, like Directors, cannot act unilaterally. They must act either at a regular Shareholders’ Meeting (ordinarily held annually after the end of the fiscal year) or at a Special Meeting of the Shareholders (ordinarily called at the request of the Board of Directors).

There must be notice of the meeting and notice of the agenda (items to be discussed and voted upon). Most states require at least 10, but not more than 50- or 60-days’ notice be provided. The Articles of Incorporation can specify a time period. Waivers of notice are allowed if the Board fails to notify Shareholders of the meeting, or an emergency prevents adequate notice.

Shareholders may typically vote in person or “vote by proxy,” that is, have another person vote in the stockholder’s place. It is important to remember that Shareholders vote their shares; i.e., it is the number of shares, not the number of Shareholders, that decide a vote. For example, if Shareholder A holds 500 shares and Shareholder B holds only 100 shares, there will be a total of two Shareholders present with a total of 600 shares represented. Obviously, Shareholder A has much more voting power than does Shareholder B.

As with Directors, there must also be a complete and accurate record (Minutes) of a Shareholders’ Meeting.

Some states allow certain actions (e.g., amending the Articles of Incorporation) to be taken without holding a shareholders’ meeting if 1) the corporation obtains a written consent to the action from ALL the Shareholders, AND 2) the written consent states what action the Shareholders have consented to. (Check with your state to find out how many Shareholders must sign a consent for it to be valid.)

Occasionally, there will be a combined meeting of Shareholders and Directors. This is perfectly permissible; however, Corporate Minutes must still be completed for each of the meetings.

During an audit, the IRS scrutinizes corporate minutes for discrepancies between the corporate resolutions adopted by the Shareholders and Board of Directors, and the actions of the corporation. The corporation can lose tax deductions and benefits if it does not conduct meetings that adopt resolutions supporting the actions taken by the corporation. Most importantly, the corporation’s status as a “separate legal entity” can be discredited.

Without an accurate corporate minute book, the IRS, the courts, and other taxing authorities may allow creditors, plaintiffs, and other entities to sue you personally for debts and actions of the corporation. Corporate Minutes provide a written record of important corporate transactions, including:

• Key legal, tax, and financial decisions
• Approval of bonuses or fringe benefits
• Contributions to retirement plans
• Rent payments
• Reasonable compensation
• Accumulated earnings

The Proper Procedure for Keeping Corporate Minutes:

If procedures are properly followed, the corporation should have no trouble keeping an accurate, easily referenced record of all meetings. These steps are a basic outline for any type of meeting: 

1. Specify the type of meeting (Directors’ Meeting, Stockholders’ Meeting, Special Meeting of the Directors, etc.) 
2. State the time, date, and location of the meeting. 
3. Record the full names and any titles of all those present. 
4. If anyone (or everyone) appears without receiving proper notice and waives notice, a common practice, record this fact. 
5. Identify, by name and title, the person who is conducting the meeting. 
6. State that an agenda was distributed and attach a copy of the agenda to the Minutes. 
7. Record the highpoints of discussion on each agenda item, including any motions, the seconding of any motions, the results of any voting, any dissension or abstentions, and anything else that does not seem trivial. If in doubt, include it in the Minutes. 
8. Attach to the Minutes copies of any resolutions passed, any documents offered as an addition to the Minutes, and any written reports discussed or referred to during the meeting. 
9. When the complete record of the meeting has been made, the secretary must sign the record as being the official Minutes of the meeting.

Forming a corporation or LLC online is more involved than just filing the articles and obtaining an EIN. In order to maintain the ongoing legal protection of your separate legal entity, you must maintain your corporate formalities (and LLC). A failure to do so could lead to piercing the veil of their corporation or LLC, putting your personal savings, equity not protected in your home by a homestead, and other personal assets at risk.

LLC Taxation Options

You have four LLC taxation options; a partnership, disregarded entity, or an S or C corporation. It is important to keep in mind that there is a big difference between an LLC managed by managers or members when you form an LLC. It is possible for an LLC that is managed by managers to have one manager and still be taxed as a partnership. How? It may have one manager and more than one member.

A business entity with only one owner is classified as a corporation or is disregarded; if the entity is disregarded, its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner. A business entity with two or more members may elect to be classified, for federal tax purposes, as either a corporation or a partnership, beginning January 1, 1997. 

What are the LLC taxation options default rules? A newly formed domestic entity will automatically be classified as a partnership for tax purposes if it has two or more members unless an election (form 8832 as a regular corporation or 2553 to be taxed as an S corporation) is filed to classify the entity as an association (and thus taxable as a corporation).

If the entity has a single member, it will not be treated as an entity separate from its owners for federal tax purposes, unless an election is filed to classify that organization as an association. 

Conclusion: if you have two partners, the LLC will be taxed as a partnership. If you have two members and you want the LLC to be taxed as an S corporation, you must file form 2553 to make the Federal S election. If you have a single-member LLC, the default rule is to be taxed as a disregarded entity, like a sole proprietorship. If you want the single-member LLC to be taxed like an S corporation, then you would file form 2553.

It is common for a single owner business to start with an LLC disregarded for tax purposes with all the profits and losses flowing to schedule C, and as the business becomes more profitable, consider filing the 2553 election with the IRS to help save on self-employment taxes on profits.

Foreign entrepreneurs will often form a US single-member LLC disregarded owned by themselves as a foreign individual or a foreign entity. The mistake is assuming no US tax return is required in this situation. Typically, a 1040NR or 1120F protect return along with the IRS form 8833 is required.

Distributions from an LLC

After your LLC is formed and your business is up and running and revenue is flowing in it will come to that important point where you will distribute money to the partners. That may be just you, your spouse or other outside partners. 

Most simply think about writing a check from the LLC to themselves as the owner and really do not consider the tax ramifications of their actions. This is especially important when you have a partner, whether a spouse, outside partner, or separate legal entity. 

Let’s address some basic fundamentals first then get into more details

The first step is to be aware of how your LLC is taxed. Are you a single-member LLC taxed as an S corporation, or disregarded for tax purposes? If you have earned income and a single-member LLC that will flow through to schedule C (basically you are operating as a sole proprietorship, but have the liability protection of an LLC). Test question: Is there any payroll for a single-member LLC? The answer: depends. If the LLC is disregarded for tax purposes there is NO payroll to the owner. Is it possible for a single-member LLC to have employees? Yes. If the single-member LLC is taxed as an S corporation, the active member (owner) would have payroll and distributions. If you have a single-member LLC taxed as an S corporation, of course, the only member is active. If you have a two-member LLC taxed as an S corporation, it is possible that the second member could be passive (this could be a spouse or silent partner). Would the passive member be the manager of an LLC managed by managers? No. By definition, if passive they would not be running day to day operations. Keep that in mind. 

A single-member LLC taxed as a C Corporation; there would be at some point some type of payroll to the owner of the C Corporation. Is it possible that there was only enough revenue in the LLC taxed as a Corporation to pay business expenses only and not enough profits left over for any type of payroll? That is possible. You may take dividends from the LLC taxed as a C Corporation, but keep in mind that dividends are NOT deductible to the LLC taxed as a C Corporation’s profits. 

An LLC taxed as a partnership is a very common structure. The big mistake you want to avoid is doing payroll for partners. There is NO payroll to partners in an LLC taxed as a partnership. There is something called, “guaranteed payments” to the manager of the LLC for their role in the day-to-day operations of the LLC which is subject to employment taxes, but it is not payroll. The members (or partners) of the LLC will receive distributions in profits. If the member or partner is actively involved in operating the business those distributions will be subject to employment taxes. 

Let’s get into more detail about when an LLC can make distributions to members. Absent any agreements with third parties restricting distributions, LLCs generally can distribute cash or property. Here is an important point (a reason to have great accounting records from the beginning); most LLC acts prohibit to members if, following a distribution, the LLC’s liabilities (other than liabilities to members) would exceed the value of the LLC’s assets. Most LLC statutes hold members liable to creditors for wrongful distributions under their fraudulent conveyance statute. 

Is compensation considered a distribution to a member? In some states, the answer is yes. Compensation to a member when the LLC is insolvent may be considered a wrongful distribution that is subject to recovery. Some states see that differently. Most state LLC statutes provide that distributions are shared in proportion to each member’s contribution to the LLC. If you and a partner own an LLC 50/50, typically that is the percentage of profits that are distributed. If you have $5K to distribute, the LLC would distribute $2500 to each member. Some (very few) LLCs have a situation where there is a disproportionate distribution between ownership percentage and profits percentage. It is possible to have a situation where two partners own the LLC 50/50 and the profits are split 80/20. 

It is very important to note that the LLC is not obligated to distribute profits at all. Unless otherwise written into the operating agreement to distribute enough profits to cover the tax bill of each member. That seems to make sense on the surface but there are other issues with having that written into the operating agreement. You may be a member of an LLC, with no profits distributed and you receive a K-1 for $40,000 of profits from the LLC and if you did not receive any distributions you will have to come out of pocket for the amount to pay the taxes due on that $40K. Be careful in that situation. 

Finally, most forget that an LLC has requirements for formalities just as a corporation protecting the entity veil. Don’t just form articles at the state, but have a complete LLC record book with an operating agreement that matches your entity’s number of members and taxation type.

Starting a Business as a Sole Proprietorship; Good or Bad Idea?

A sole proprietorship is the simplest form of business. It’s not a separate entity. Instead, as a sole proprietor, you own the business and are directly responsible for its debts. Remember that whenever you do something the “simplest” way, it’s typical for your results to be directly proportional to the effort required. It is the most common approach, but not necessarily the best. What makes a sole proprietorship a popular choice?

Let’s Address the Components of a Sole Proprietorship? These are the reasons this is a popular choice for first-time entrepreneurs.

Management and Control: As the business owner and sole proprietor, you retain complete management and control over your company. However, the price you pay for total management and control is near the total risk for personal liability incurred through your agents’ or employees’ acts.

No Formalities: Except for complying with applicable licensing requirements, you’ll find no formalities required of a sole proprietorship. However, when you conduct business under a name that does not show your name or implies additional owners’ existence, your state may require that you file a fictitious business name statement and publish notice. If your name is Joe Smith and your business is called “Joe Smith’s Services,” you won’t have to file. If you name your business “Joe’s Services,” “Smith’s Services,” or “Smith and Sons,” chances are good that you will have to file. And, if you want to deduct your expenses, you’ll still have to log them into a diary format on a timely and consistent basis-no matter which entity form you choose. 

Transferability: As the owner of a sole proprietorship, you can sell your business at will. 

Duration: The sole proprietorship remains in existence for as long as you are willing or able to stay in business.

Why be a Sole Proprietor when there are Better Options?

Compare the advantages (and disadvantages) of sole proprietorships to other corporate structures, and you’ll realize that S corporations offer owners more protection against liabilities generated by their businesses. Specifically, S corps can take advantage of pass-through taxation, meaning there are generally no corporate-level federal income taxes to worry about. Instead, all the company’s income, deductions, and tax credit items are “passed through” to the shareholders, which they then report on their Form 1040 and pay the taxes.

In contrast, running your business as a C corporation can result in double taxation, meaning your business income gets taxed once at the corporate level and again when liquidated or when dividends are distributed. Keep in mind this is a simplistic answer. There are also many advantages to a C corporation, and the effects of double taxation can be minimized, as you will soon see.

S corporations have strict qualification rules:

• Only citizens or residents of the US can be shareholders.
• The corporation can only have one class of stock.
• The corporation may only have individuals, estates, or certain trusts as shareholders. Partnerships and corporations cannot be shareholders.
• There must not be more than 100 shareholders.
  
  Looking to form an LLC? 
  Remember, the LLC can be taxed in four different ways. Plus, you MUST have the correct operating agreement to match the number of members. 

It would be best if you also considered these major disadvantages to an S corporation:

1. The stock of an S corporation is tough to protect from a personal lawsuit. In contrast, a C corporation’s stock can be held by a family limited partnership or an LLC taxed as a partnership.
2. S corporations are taxed in some states and must file a state-level tax return.
3. If the S corporation owns appreciated assets, they cannot be distributed to you without triggering an income tax bill. There is no such problem with a sole proprietorship.

Let’s look at the tax benefits of an S corporation over the sole proprietorship.

As the shareholder-employee of a solely owned S corporation, you receive a salary, subject to a 15.3 percent federal payroll tax (for Social Security and Medicare) on the first $147,000 and 2.9 percent on the excess (for 2022). As your employer, the corporation pays half, and the other half gets withheld from your paychecks. The corporation deducts your salary as a business expense on its tax return (Form the 1120S).

Under current law, pass-through income is not subject to SE (Self-Employment) tax. In contrast, all income from a sole proprietorship is subject to SE tax. An LLC taxed as a partnership (if the member is deemed actively involved) is most likely subject to SE taxes.

Strategy: Pay yourself a reasonable salary to avoid federal payroll taxes. Just make sure it’s not too low. Have industry comparisons on hand to show you’re in the ballpark.

Example: The taxable income generated by your S corporation business is $147,000 for 2022 before you pay yourself. You take a $40,000 salary. That amount is then hit with the 15.3 percent federal social security tax and Medicare tax, which amounts to $6,120. You can withdraw the remaining corporate cash flow in the form of distributions to yourself, which will not be subject to SE taxes (this will be added to your personal income. You will pay tax at your current tax bracket).

If you operate the same business as a sole proprietorship, all the profits are subject to SE taxes. You would owe SE tax on your entire $100,000 profit, for a total of $15,300 (15.3 percent up to $142,800). Operating as an S corporation could save you thousands ($15,300-$6,120= $9,180).

Besides, a sole proprietorship that files a schedule C is 300% more likely to be audited. Last year, the IRS did their own audit and determined they were $300-billion short in taxes. Thirty percent of that shortfall was from small business owners, of which 1/3 were schedule C filers. In 2022, the newly supercharged IRS with 87,000 NEW AGENTS will lead to another 1.2 million audits each year. Learn more here. The IRS is on track to receive an additional $45 BILLION in additional funding in 2022. See the IRS’s complete funding proposal.  Even if the new legislation does not pass, the writing is on the wall, so take steps to get off schedule C ASAP for 2022. 

Remember: You must be able to show that a $40,000 salary is reasonable. If the IRS thinks it’s too low, it may try to reclassify all or part of your purported cash distributions as disguised wages.

Benefits of Incorporating Your Business

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There are several benefits of incorporating your business, including separating your business liability from your personal assets, your personal and business credit, and potential tax savings depending upon levels of profits.

Here are additional benefits of incorporating your business that most don’t consider but should to grow your business.

Marketing and Joint Venture Advantage

This is the big one that no accountant will ever take about. This is not a tax advantage but a marketing advantage for your business. Ask yourself, which sounds better: “It’s the CEO of ABC, Inc on Line 1 for you, Bob,” or “It’s the owner/operator (meaning a sole proprietor) on line 1 for you, Bob”?

As a new business owner attempting to get through a gatekeeper, every minor advantage helps! So many miss this door-opening opportunity, even though it could spell the difference between prospering and being out of the game in the first 90 days.

At NCP, we have our own policy regarding Joint Ventures (JV). If a sole proprietorship calls and wants to do a JV, that means one of three things:

•  They have no profits in their business;

•  They don’t believe they will succeed, so they didn’t spend the money to incorporate;

•  They have a “Let’s try it out first to see if it works, then incorporate later.”
mentality.

Our standard answer is, “Thanks for calling, but we’re unable to work with you right now.” Of course, they never hear the “real reason” they were rejected; nor will you, because now you know not to make this mistake in the first place.

Your ability to leverage opportunities is key to your growth. Your goal is to send a strong message to potential partners, vendors, affiliate source… that you are serious about what you are doing vs. “I am hoping things work out, and if they do, I will incorporate soon, but for now, I want to keep things simple and keep my costs down.” The latter does not convey confidence.

Tax Advantages – Deductible Employee Benefits

Incorporating usually provides tax-deductible benefits for you and your employees.

Even if you are the only shareholder and employee of your business, benefits such as health insurance, life insurance, travel, and entertainment expenses may be deductible. There have been several changes since the 2018 tax law changes to what is now deductible and what is not. Best of all, corporations usually provide an increased tax shelter for qualified pensions plans or retirement plans (e.g., 401K’s).

Easier Access to Capital Funding

It’s easy to raise capital for a corporation through the sale of stock. Investors are much harder to attract to sole proprietorships and partnerships because of personal liability. Investors are more likely to purchase shares in a corporation where there is a separation between personal and business assets. (Some banks, as well, prefer to lend money to corporations.) This is not as common at the small business level as it sounds because it can be complicated and require the proper attorneys to make sure you are not violating any security laws. Unfortunately, many small businesses seek investors and never consult with a securities attorney.

An Enduring Structure

A corporation is the most enduring legal business structure. Corporations may continue regardless of what happens to their individual directors, officers, managers, or shareholders.

If a sole proprietor or partner dies, the business may automatically end or become involved in various legal entanglements. Corporations can have unlimited life, extending beyond the illness or death of the owners.

Easier Transfer of Ownership

Ownership of a corporation may be transferred through the sale of stock without substantially disrupting operations or creating the need for complex legal documentation.

Anonymity

Corporations can offer anonymity to their owners. For example, if you want to open an independent small business and don’t want your involvement to be public knowledge, your best choice may be to incorporate. But if you begin as a sole proprietorship, it’s hard to hide the fact that you’re the owner. As a partnership, you’ll probably be required to register your name and your partners’ names with the county officials and state in which…

Centralized Management

With a corporation’s centralized management, all decisions are made by the board of directors. Shareholders cannot unilaterally make binding agreements on behalf of the business simply because of their investment. With partnerships, each general partner may make binding agreements that may result in severe financial difficulty to you or the partnership.

There are many benefits of incorporating your business, beyond if it will save you on taxes. Building a real business and a brand requires a solid foundation, starting with an LLC or corporation built on a complete formation.

Which Entity is Best for Your Business and to Protect Your Assets?

Which Entity is Best for Your Business and to Protect Your Assets?

Many variables come into play when determining which entity is best for your business or future business. Unfortunately, there was no formula for success.

As you may know, if you go to an attorney, you will get one answer (from a legal perspective); an accountant, you will give a different solution (from a tax perspective), and all sorts of solutions from your business networking group, the internet or others.

The big challenge is that there are so many prospectives to consider as to which entity is best for you:

1. 1. Legal

1. 1. Tax

1. 1. Financing

1. 1. Business Credit

1. 1. Marketing

1. 1. Raising Money

1. 1. NCP has an interview

Which Entity is Best Q’s?

• • Business

• • PARTNER (U.S OR NON-U.S RESIDENTS)

• • INDUSTRY

• • INVESTORS

• • GROSS SALES

• • MOVING

• • NET PROFITS GOALS WITH NET PROFITS

• • WHERE DO YOU LIVE

• • TAX RATES

• • OTHER ENTITIES

The typical pattern we have noticed over the years from the accountants and CPAs is;
if you do not expect to net $40,000 annually in net profits, keep it simple and be a sole proprietorship. If the business were to generate $40,000 in net profits forming an S corporation would help save in employment taxes (15.3% of $160,200 in 2023 of earned income).

Guess what happens?

In most situations, the new business owner is not sure of the net profits in the first year and needs to gain business experience.
Therefore, the tax professional will conclude.

“You should keep it simple and be a sole proprietorship, and after the first year, if you make enough in profits, let’s consider forming an S corporation.” The tax professional will continue to say, “If you have liability, you should consider liability insurance.”

Do you think this makes sense? Is this the best approach?

(By the way, in our research, this is the main reason that over 67% of all small business in the U.S. operates as sole proprietorships (that includes all the people in the MLM or direct sales industry).
In our opinion and research, the answer is a big NO. Why?
The tax professional is correct from a tax perspective, one perspective only. But that was the WRONG answer from a legal, asset protection, audit rate, marketing, financing, and business credit perspective. In other words, you would have been 1 out of 7, not a good batting average for success.

Let’s cover one in detail.

Why is the sole proprietorship the wrong entity from a business credit and financing perspective?

When you operate as a sole proprietorship in the U.S., you will self-finance the business if you need credit. That means using your personal credit cards. Using your personal credit cards will jack up your revolving debt, which will drive down your credit score. There are other types of financing, but this is the most common. Now, a year goes by, your business is taking off (hopefully), and you visit with your accountant again and find out that it is recommended that you now form an S corporation because, in year two, your profits may be over that $40,000 per year level.

A critical step with the new entity is to apply for a business credit card in the name of the entity under the EIN. Remember that most banks may not issue one with a new business, some will wait until the entity is 1-2 years old, but some banks will apply with a brand new entity. They do that because evaluating whether or not your business will qualify for a business credit card depends upon personal factors, credit score, and personal revolving debt levels. Do you have any major deragatories (like bankruptcy or foreclosure)? Why is so much personal information required? Because with a new S corporation, there is no business history, and the approval is based upon your personal credit.

Does that mean a business credit card is useless?

No. A business credit card in the entity’s name under the EIN, even though it will be personally guaranteed, the debt will NOT show up in your credit bureaus. That is huge! That helps to protect your personal credit moving forward. You would have been better off forming an S corporation from Day 1 and stopping using your personal credit cards to finance your business. You will not get this equation since your accountant or CPA does not specialize in business credit.

This is why forming an entity online is like a crapshoot.

Oddly, you have only one or two criteria to determine the best entity for you. You might guess right, but why guess? The accountant will not tell you about an LLC taxed as an S corporation because that involves a different perspective.

Does that mean your accountant needs to be better? Of course not. It just means that it is only one perspective.

Additional Key Questions to Determine Which Entity may be Best for Your Business

The first important question you should ask yourself is, “Do I need or want a flow-through entity?” This entity is where all the profits and losses flow to your personal return instead of retaining company profits in an entity such as a C corporation

Step 1: Flow-Through Entity versus C-Corporation.

A regular C corporation is primarily used to reinvest profits to grow the business. Typically, more equipment and labor are needed to grow the business for long-term results. If your new business will grow with employees and overhead, and you want to grow an asset over time, a C corporation may be best for you.

Unfortunately, our industry has a lot of information suggesting that a C corporation is appropriate for most people. In many situations, the 21% C-corp tax bracket is lower than your overall personal rate, and therefore everyone should use a C corporation to pay lower taxes. That does work in year one — but unfortunately, any profit left in the corporation will be part of retained earnings and may be subject to double taxation in years to come.

If your home-based business goals are to have high profits and low overhead, you want to have your profits flow through, pay tax once, and invest the money into other assets to grow. That may be real estate, investments, or other businesses. That typically will be held in a separate entity from your operating business. Again, your goals are critical of what you plan to do with your business’s profits after years 1, 2, and so on (assuming there are profits).

Example: A consultant (with a different tax problem) or a plumber who provides services and has no other employees forms a C corporation. Their goal is not to add employees in the future but to be as efficient with their business as possible, control overhead, and increase their profit margin. For most businesses like these, a C corporation is the wrong entity. (Granted, a C corporation does have important fringe benefits, but you want to avoid obtaining a few fringe benefits in exchange for paying double taxation.)

The bottom line is; that if a C corporation is not best for your business model over the next 3-5 years, there may be better entities for you. (Bear in mind that there are exceptions like anything else.) If your new business fits into something other than this category, the next step is evaluating flow-through entities.

Step 2: A Flow-Through Entity Is Your Best Choice.

If you have determined that a C corporation is not best for you, the next step is determining your options. They may include:

• – S Corporation
• – Single Member LLC
• – Single Member LLC taxed as an S corporation.
• – LLC taxed as an S Corporation
• – LLC taxed as a Limited Partnership

Sole proprietorships are not considered here as an option for two main reasons: from a marketing point of view, there is no value in being the owner/operator; and of course, from a liability point of view, even with insurance, you may find yourself financially paralyzed.

Additional criterion:

1. Do you have a business partner? If not, an LLC taxed as a partnership is not an option unless you have an existing S- or C corporation that will act as a partner.
2. Do you want S corporation taxation (filing Form 1120S)? Note that we did not say, “Be an S corporation,” Rather, do you want your entity taxed as an S corporation? This includes an S corporation and an LLC taxed as an S corporation.
   If you have foreign shareholders, C corporations, an LLC taxed as a partnership, or a limited partnership, none may be a shareholder of your entity taxed as an S corporation. This is especially important if you plan to have investors down the road.

Comparison 1:

S Corporation Versus LLC Taxed As An S Corporation:

• If you have a business that will develop a net worth, the LLC taxed as an S corporation offers more protection because of the charging order.
• If you provide services and do not have a lot of net worth within the company, then an S corporation may be OK. (Remember the shareholder rules for an S corporation taxation.)

Comparison 2:

S Corporation Versus An LLC Taxed As A Disregarded Entity:

• The Self-employment tax level for 2023 is $160,200.
• If you are already maxed out with SE taxes, will the S taxation save you enough in the Medicare portion (2.9% on the amount earned above the SE limits)? You also must consider the 7.65% that would be paid by the entity for payroll to you as the owner.
• As a disregarded entity, the default rule is for the income to appear on the owner’s tax return. If that is you and you have an active business, the income will show up on your Schedule C. Any income on Schedule C will be subject to SE taxes (if you are not already maxed out). The benefit of Schedule C is that payroll is not required for the owner.

Comparison 3:

S Corporation Versus LLC Taxed As A Partnership:

• First, you must address the SE tax savings issue if the client can save on SE taxes (15.3% of $147,000 in 2022).
• If you are a member of an LLC taxed as a partnership, your income will more than likely be subjected to SE taxes if earned income (unless you are a passive member and work under 500 hours).
• The LLC members taxed as a partnership are not considered employees, and payroll would not be required. If officers/directors, the S corporation owners will have payroll as part of their compensation.

Remember these tips as you form more entities to protect your hard-earned assets. Remember how your state handles different entities would be best. An LLC must pay an upfront $800 franchise tax fee in California, but the S or C corporation is not. (It may still have to pay the fee based on first-year profits.) Does that mean you never want to be an LLC in California? Of course not, but it does come into play.

We’ve raised many interesting issues, and no doubt, you’ve got questions or thoughts regarding your situation. If you need support with forming a new entity

Reach out to our team at

support@launchwithconfidence.com

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Which State is Best to Incorporate Your Business?

Whether you are located and operating from inside the U.S. and especially if you are running a business from outside the U.S., have all the information on which state is best for your business to incorporate is critical. If living in the U.S., the simple approach may very well be to incorporate in your home state, but that may not always be the best answer for everyone.

Oh, yes, like any other subject, there are many opinions, and like any subject, there are exceptions to the rule. There is no room to cover every angle in this report, but let’s cover the vital fundamental points on the top four options.

NCP forms LLCs and corporations in all 50 states. If you have a higher tolerance for risk, you may want to consider incorporating it in your home state. Either way, NCP can help you form your company and protect your assets.

The Four Most Common and Best Options:

• Incorporate in Nevada – Nevada Secretary of State continues with their plans to amplify Nevada’s place in the incorporating marketplace with many changes. Nevada is still the #1 state for liability protection, even with the increase in state fees. If your business generates over $4 million in gross sales the new franchise tax fees may make Wyoming a better choice for non-U.S. residents.

• Incorporate in Delaware – The long-time standby and the most popular, especially for the large East Coast law firms. Going public? Forming a Delaware corporation may be your best option (although do not count Nevada corporations out).

• Incorporate in Wyoming – This is a popular state with lower state filing fees which may appeal to the budget conscious non-resident entrepreneur looking to form a U.S. company.

• Incorporate in Your Home State – simple, easy, least thought-involved choice — the biggest default selection.

Taking a Closer Look at Each Option…

See our in-depth descriptions of Nevada’s business advantages.

What’s My Best Choice: Nevada LLC or
Delaware LLC?

The primary rights in Delaware corporate law benefit shareholders of public corporations. This attracts large public companies that trade on various exchanges across the country to provide their shareholders’ best protection. Delaware’s corporate law about corporate takeovers is the strongest in the U.S. However, for everyone else, the following chart illustrates several benefits of Nevada over Delaware:

Nevada vs. Delaware
It’s No Secret: Nevada Beats Delaware

Nevada’s liberal incorporation laws offer more privacy and less disclosure than the once-popular Delaware, making it the most advantageous state to incorporate. Here are some of the specific differences:

	Nevada	Delaware
State Corporate Tax	No*	8.7%**
Disclosure of principal business location outside Delaware	No	Yes
Report the actual number and value of stock listed	No	Yes
Freely exchanges information with other states and the IRS.	No***	Yes

* Effective July 1, 2016 Nevada now has a new “commerce tax” applicable to each “business entity” engaged in business in Nevada with Nevada-sitused gross revenue exceeding $4,000,000 in a taxable year.

**To verify this information, call the state corporate tax department of Delaware at (302) 577-3300

***Even though this type of information sharing has not been the practice of Nevada in the past, in today’s world the IRS is realistically able to get its hands on any information they deem necessary to further the cause of “fair and reasonable taxation.”

In short, Delaware’s state corporate tax amounts to 8.7%. Delaware also requires disclosure of the principal place of doing business outside the state, requires the corporation to report its stock’s actual number and value, and freely exchanges information with the IRS.

Also, Nevada’s corporate legislature has recently surpassed Delaware’s in its efforts to ensure that small corporations’ rights are protected. For example, Delaware adopted a statute that allows the corporation to limit the liability of a director for monetary damages. However, it has far to go compared to similar laws adopted by Nevada. For example, the following are acts for which officers and directors would be protected under Nevada law but exposed under Delaware Statutes:

• Acts or omissions not in good faith.
• Acts by officers are not exempt from monetary damages under Delaware law.
• Breach of a director’s duty of loyalty.
• Transactions involving undisclosed personal benefit to the officer or director.
• Acts or omissions that occurred prior to the date that the statute, which provides for indemnification of directors, was passed and approved.

Delaware requires that an officer reasonably believe that he/she is performing his/her duties in a manner that is in the corporation’s best interests. This is not a requirement in Nevada.

“The New Kid on the Block” – Wyoming LLCs & Corporations

Wyoming LLCs and corporations add a few benefits to home-state incorporation, including privacy, lower fees…This is a common choice for foreign Amazon FBA sellers. A Wyoming LLC will not reveal the manager’s identity in state records. Wyoming may be an excellent choice for your U.S. company, but is it the best choice? It depends on the priority of factors and which is most important to your business. Our packages include a complete analysis of both Wyoming and Nevada (the most popular choices). The best part is we can form either one for you and our video training will help you make the best decision for your e-commerce business.

Like Nevada corporations, Wyoming does not impose a state corporate income tax or other taxes. And like Nevada, the key is you must have nexus in the state of Wyoming to qualify for the tax savings; otherwise, your Wyoming Corporation or LLC will need to register (or qualify) to do business in the state where you live and operate your business. This will negate any tax savings that Wyoming may have to offer. Even an Internet business must determine where nexus is created in the operation of its business. If you are based in the U.S., you can domicile your LLC in either Nevada or Wyoming. If you are an Amazon FBA seller, some states may require the entity to foreign qualify or register in the FBA states.

“The state of Wyoming does not levy a personal or corporate income tax. Wyoming does not impose a tax on intangible assets such as bank accounts, stocks, or bonds, either. In addition, Wyoming does not assess any tax on retirement income earned and received from another state. Further, there is no legislative plan to implement any of these types of taxes.”

*Nevada LLC filing fees are $425 vs $100 for Wyoming which is a difference of $325 (a Nevada corporation is $725 vs $425 in fees which includes the $75 state filing fee). The question becomes when would it make sense to invest $325 more to form in Nevada vs Wyoming and when is that not necessary? That is what we cover in our videos included in our packages.

Fewer State Fees

Wyoming Corporation’s initial state fees are less than Nevada’s. Wyoming does not require an initial list of officers or managers, saving you $325*, although Wyoming requires a state business license of $100. However, the key is to evaluate the benefit of Wyoming as the “pivot point” for your business and financial future, not the fees involved.

One of the biggest daily mistakes is using the main criteria for business decisions, “What do you charge?” Price can be the worst way to evaluate the quality and results of a product or service. True, it’s a factor… but there are many more important ones. Saving $200-$325 on incorporating fees when investing (and must protect) tens of thousands in your business is not wise.

Over $4 Million in Gross Revenue

On June 10, 2016, Governor Sandoval signed Bill 1, thus enacting a new “commerce tax” (effective July 1, 2016) applicable to each “business entity” engaged in business in Nevada with Nevada-situated gross revenue exceeding $4,000,000 in a taxable year. If a business entity’s Nevada gross revenue exceeds $4,000,000, the excess is subject to tax at various rates depending on the industry in which the business entity is “primarily engaged.” If you are a non-resident looking to form a U.S. company and your gross sales are estimated to be above $4 million, Wyoming may be an excellent choice.

Asset Protection

Many companies conclude that since LLCs started in Wyoming in 1977, Wyoming must offer the best protection. Let’s be clear: the oldest does not mean the best. Many more cases have gone through the Nevada and Delaware court systems and found stronger levels of protection. Specifically, Nevada vigorously protects officers, directors, and the entity veil.

Privacy

Wyoming corporations allow Nominee Officers and Lifetime Proxies. Attorneys and accountants are often asked to provide their clients an anonymous “company cover” for added privacy. To do this, you need to appoint nominee officers and directors for the company. NCP recommends avoiding this strategy because privacy is very different from asset protection.

The critical question is: How did your assets get into the corporation or LLC? Typically, transferring assets into an entity is done in exchange for ownership. Therefore, you exchange one asset (your cash or real estate) for another (most commonly, ownership interest in the LLC.) Money wired from your personal account to the newly-formed LLC also leaves a trail.

Unfortunately, privacy as a benefit is, in many cases, oversold by slipshod corporation formation services. (Frankly, if you need to hide, there probably is a good reason for that, and NCP would NOT be interested in your business in that situation.)

The “Safe” and “Simple” Choice…Your Home State

This may be the best choice for some, primarily if you’re operating with a low budget and are still equivocating: “I’m not even sure if my business will work.” Your absolute worst option is to operate as a sole proprietorship, so at the very least, you should establish a separate legal entity.

Remember that “simple” and “asset protection” are inversely related. If you want more protection for your current and future net worth, keeping it simple (meaning using your home state because it costs less) and not having separate entities for separate assets are recipes for disaster and much more expensive than doing it correctly from the start! The more financial success you enjoy, the more complex your structure should be to protect it. The key here is to outsource these services to a company that can make it easy for you.

But Wait….Are you planning to Move Out of Your State in the Next Few Years?

Then, your best “pivot point” in Nevada. Here’s why:

Imagine you live in and have incorporated your business in California. An unexpected opportunity arises, and you move to Florida a year later. California has an annual franchise tax fee ($800 at a minimum.) Florida does not. Do you want California to be your state of domicile and now have to foreign register into Florida?

In this case, there’s no advantage to being linked to California. So, do you dissolve the California corporation and form a new one in Florida? That strategy means you’d lose 1-2 years of track record, which is very important when establishing business lines of credit. You can redomesticate in another state, which involves many steps from one state to another; in some states, it is easier, and in others, it involves a merger.

If you anticipate a possible change of circumstances in the next 2-3 years, the best approach is to incorporate or form your LLC in a state like Nevada and foreign register from the start.

Whether you are located and operating from inside the U.S. or running a business from outside the U.S., having all the information on which state is best for your business to incorporate is critical. If living in the U.S., the simple approach may very well be to incorporate in your home state, but that may not always be the best answer for everyone.

Oh, yes, like any other subject, there are many opinions, and like any subject, there are exceptions to the rule. There is no room to cover every angle in this report, but let’s cover the vital fundamental points on the top four options.

Keep in mind that NCP forms LLCs and corps in all 50 states. We only start with complete formations to protect you after day one. If you have a higher tolerance for risk, you may want to consider incorporating it in your home state. Either way, NCP can help you form your company and protect your assets.

The Four Most Common and Best Options:

• • Incorporate in Nevada

Nevada Secretary of State continues with their plans to amplify Nevada’s place in the incorporating marketplace with many changes. Nevada is still the #1 state for liability protection, even with the increase in state fee

• • Incorporate in Delaware

The long-time standby and the most popular, especially for the large East Coast law firms. Going public? Forming a Delaware corporation may be your best option (although do not count Nevada corporations out).

• • Incorporate in Wyoming

This popular state with lower state filing fees may appeal to the budget-conscious non-resident entrepreneur looking to form a U.S. company.

• • Incorporate in Your Home State

a simple, easy, least thought-involved choice — the biggest default selection.

Taking a Closer Look at Each Option…

See our in-depth descriptions of Nevada’s business advantages.

What’s My Best Choice: Nevada LLC or Delaware LLC?

The primary rights in Delaware corporate law benefit shareholders of public corporations. This attracts large public companies that trade on various exchanges across the country to provide their shareholders’ best protection. Delaware’s corporate law about corporate takeovers is the strongest in the U.S. However, for everyone else, the following chart illustrates several benefits of Nevada over Delaware:

Nevada vs. Delaware
It’s No Secret: Nevada Beats Delaware

	Nevada	Delaware
State Corporate Tax	No*	8.7%**
Disclosure of principal business location outside Delaware	No	Yes
Report the actual number and value of stock listed	No	Yes
Freely exchanges information with other states and the IRS.	No***	Yes

* Effective July 1, 2016, Nevada now has a new “commerce tax” applicable to each “business entity” engaged in Nevada, with Nevada-situated gross revenue exceeding $4,000,000 in a taxable year.

**To verify this information, call the state corporate tax department of Delaware at (302) 577-3300

***Even though this type of information sharing has not been Nevada’s practice in the past, in today’s world, the IRS can realistically get its hands on any information necessary to further the cause of “fair and reasonable taxation.”

Delaware is a popular state to incorporate.

In short, Delaware’s state corporate tax amounts to 8.7%. Delaware also requires disclosure of the principal place of doing business outside the state, requires the corporation to report its stock’s actual number and value, and freely exchanges information with the IRS.

Also, Nevada’s corporate legislature has recently surpassed Delaware’s in its efforts to ensure that small corporations’ rights are protected. For example, Delaware adopted a statute that allows the corporation to limit the liability of a director for monetary damages. However, it has far to go compared to similar laws adopted by Nevada.

Let’s cover one in detail.

Acts under Nevada law

For example, the following are acts for which officers and directors would be protected under Nevada law but exposed under Delaware Statutes:

• Acts or omissions not in good faith.
• Acts by officers are not exempt from monetary damages under Delaware law.
• Breach of a director’s duty of loyalty.
• Transactions involving undisclosed personal benefit to the officer or director.
• Acts or omissions that occurred before the date that the statute, which provides for indemnification of directors, was passed and approved.

Delaware requires that an officer reasonably believe that he/she is performing his/her duties in a manner that is in the corporation’s best interests. This is not a requirement in Nevada.

“The New Kid on the Block” – Wyoming LLCs & Corporations

Wyoming LLCs and corporations add a few benefits to home-state incorporation, including privacy, lower fees…This is a common choice for foreign Amazon FBA sellers. A Wyoming LLC will not reveal the manager’s identity in state records. Wyoming may be an excellent choice for your U.S. company, but is it the best choice? It depends on the priority of factors and which is most important to your business. Our packages include a complete analysis of Wyoming and Nevada (the most popular choices). The best part is we can form either one for you and our video training will help you make the best decision for your e-commerce business.

Like Nevada corporations, Wyoming does not impose a state corporate income tax or other taxes. And like Nevada, the key is you must have nexus in the state of Wyoming to qualify for the tax savings; otherwise, your Wyoming Corporation or LLC will need to register (or qualify) to do business in the state where you live and operate your business.

This will negate any tax savings that Wyoming may have to offer. Even an Internet business must determine where nexus is created in the operation of its business. If you are based in the U.S., you can domicile your LLC in either Nevada or Wyoming. If you are an Amazon FBA seller, some states may require the entity to foreign qualify or register in the FBA states.

This is why forming an entity online is like a crap shoot.

Odds are you have only one or two criteria to determine what entity is best for you. You might guess right, but why guess? By the way, the accountant will not tell you about an LLC taxed as an S corporation because that involves a different perspective.

Does that mean your accountant is bad? Of course not. It just means that it is only one perspective.

Additional Key Questions to Determine Which Entity may be Best for Your Business

The first important question you should ask yourself is, “Do I need or want a flow-through entity?” This entity is where all the profits and losses flow to your personal return instead of retaining company profits in an entity such as a C corporation

Step 1: Flow-Through Entity versus C-Corporation.

A regular C corporation is primarily used to reinvest profits to grow the business. Typically, more equipment and labor is needed to grow the business for long-term results. If your new business will grow with employees and overhead, and you want to grow an asset over time, a C corporation may be best for you.

Unfortunately, our industry has a lot of information suggesting that a C corporation is appropriate for most people. In many situations, the 21% C-corp tax bracket is lower than your overall personal rate; therefore, everyone should use a C corporation to pay lower taxes. That does work in year one — but unfortunately, any profit left in the corporation will be part of retained earnings and may be subject to double taxation in years to come.

If your home-based business goals are to have high profits and low overhead, you probably want to have your profits flow through; pay tax once and invest the money into other assets to grow. That may be real estate, investments, or other businesses. That typically will be held in a separate entity from your operating business. Again, your goals are critical of what you plan to do with your business’s profits after years 1, 2, and so on (assuming there are profits).

Example: A consultant (with a different tax problem) or a plumber who provides services and has no other employees forms a C corporation. Their goal is not to add employees in the future but to be as efficient with their business as possible, control overhead, and increase their profit margin. For most businesses like these, a C corporation is the wrong entity. (Granted, a C corporation does have important fringe benefits, but you do not want to obtain a few fringe benefits in exchange for paying double taxation.)

If a C corporation is not best for your business model over the next 3-5 years, it is probably not the best entity for you. (Bear in mind that there are exceptions like anything else in life.) If your new business does not fit into this category, the next step is evaluating flow-through entities.

Step 2: A Flow-Through Entity Is Your Best Choice.

If you have determined that a C corporation is not best for you, the next step is determining your options. They may include:

• – S Corporation
• – Single Member LLC
• – Single Member LLC taxed as an S corporation.
• – LLC taxed as an S Corporation
• – LLC taxed as a Limited Partnership

Sole proprietorships are not considered here as an option for two main reasons: from a marketing point of view, there is no value in being the owner/operator, and of course, from a liability point of view, even with insurance, you may find yourself financially paralyzed.

Additional criterion:

1. Do you have a business partner? If not, an LLC taxed as a partnership is not an option unless you have an existing S- or C corporation that will act as a partner.
2. Do you want S corporation taxation (filing Form 1120S)? Note that we did not say, “Be an S corporation,” rather, do you want your entity taxed as an S corporation? This includes an S corporation and an LLC taxed as an S corporation.
   Keep in mind if you have foreign shareholders, C corporations, or an LLC taxed as a partnership or a limited partnership, none may be a shareholder of your entity taxed as an S corporation. This is especially important if you plan to have investors down the road.

Comparison 1:

S Corporation Versus LLC Taxed As An S Corporation:

• If you have a business that will develop a net worth, the LLC taxed as an S corporation offers more protection because of the charging order.
• If you provide services and do not have a lot of net worth within the company, then an S corporation may be fine. (Remember the shareholder rules for an S corporation taxation.)

Comparison 2:

S Corporation Versus An LLC Taxed As A Disregarded Entity:

• The Self-employment tax level for 2024 is $168,600.
• If you are already maxed out with SE taxes, will the S taxation save you enough in the Medicare portion (2.9% on the amount earned above the SE limits)? You also must take into consideration the 7.65% that would be paid by the entity for payroll to you as the owner.
• As a disregarded entity, the default rule is for the income to appear on the owner’s tax return. If that is you and you have an active business, the income will show up on your Schedule C. Any income on Schedule C will be subject to SE taxes (if you are not already maxed out). The benefit of Schedule C is that the owner does not require payroll.

Comparison 3:

S Corporation Versus LLC Taxed As A Partnership:

• First, you must address the SE tax savings issue if the client can save on SE taxes (15.3% of $168,600 in 2024).
• If you are a member of an LLC taxed as a partnership, your income will more than likely be subjected to SE taxes if earned income (unless you are a passive member and work under 500 hours).
• The LLC members taxed as a partnership are not considered employees, and payroll would not be required. The S corporation owners, if officers/directors, will have payroll as part of their compensation.

Remember these tips as you form more entities to protect your hard-earned assets. It would be best to remember how your state handles different entities. An LLC must pay California’s $800 franchise tax fee, but the S or C corporation does not. (It may still have to pay the fee based on first-year profits.) Does that mean you never want to be an LLC in California? Of course not, but it does come into play.

We’ve raised many interesting issues; no doubt, you’ve got questions or thoughts regarding your situation. If you need support with forming a new entity

How to Start a Company in the U.S.

Asset Protection for the Cannabis Industry

If there is any industry where you want to make sure you have extra layers of protection for your business and personal assets, it’s the cannabis (CBD oil) industry.

The U.S. is the land of opportunity and also the land of lawsuits. We have more lawsuits than any other country in the world. Selling products have an inherently higher risk of liability.

Anytime you are involved in a fast-growing industry with new regulations, it’s a recipe for a huge spike in litigation. This is the case with the fast-growing Cannabis industry, which was worth $8-billion in 2018 and is expected to grow by 5 times, to $41-Billion by 2025! (see

Several aspects of the cannabis industry lead to huge opportunities, and several aspects that will lead to a massive litigation increase.

Areas of Cannabis Litigation:

• Legal agreements with partners and investors
• Product liability class action lawsuits
• Patent or trademark infringement
• Deceptive trade practices
• The actual amount in at least one of those products was far less than stated, which lead to litigation.
• False claims and FDA issues (including all-natural and health benefits)
• The FDA warned that the product did not meet the definition of a dietary supplement and said the company could face its supply seizure.
• State liens and seizures because of past due sales tax or licensing issues.

There are several keys when it comes to protecting your current and future assets as you enter the cannabis business, even as an investor. With investment capital ranging from $500k to $1.5-million at a minimum, this is not an area to set up a $99 LLC online; you must start with a complete formation.

Basic and Advanced Asset Protection Steps for the Cannabis Industry:

1. Use a separate, clean entity for your cannabis business. Do not use an entity from the past, especially one with past partners. You do not want mistakes from the past to come back to haunt you in the future.
2. Work with a securities attorney for investors. It’s essential to have the proper security agreements in place. There are specific rules about investors living in the states that have legalized marijuana.
3. Ownership Structure. As the owner or an investor, you will need to determine how you want to maintain your relationship with the operating cannabis company. Is that going to be you, as an individual or another separate legal entity, holding the safe asset or investment in the operating company? How does it impact your licensing requirements when the owner is not an individual? If you bring an investor on later, membership in an LLC or stock ownership in a corporation will need to be updated. Will you create a taxable event upon capitalization for the non-investor partner? This is where a CPA firm is required.
4. Protect your Trade Secrets. Get a non-disclosure/non-compete/non-circumvention agreement (NNN Agreement) in place before you reveal too much to a potential investor.
5. Proper 280E Analysis. Ensure your investors understand the IRC 280E analysis from an accounting point of view, which prevents a cannabis business from claiming business deductions (payment, rent, marketing… other than the cost of goods sold. Removing business deductions will increase profits and also increase the amount of taxes to be paid. The states may take a different position than the federal government, so proper planning is required. Here is a video overview from a top cannabis CPA firm on this subject. We recommend an expert familiar with the cannabis industry if you are looking to increase your cost of goods sold related directly to your cannabis product. You cannot deduct your payroll, office, supplies, or anything not directly related to the product’s product or cost. You may be exposing your cannabis to an IRS audit (which they are 10X more likely to be audited than a regular business).
6. Protect Intellectual Property. It is essential you trademark your business and product names properly. You will want to make sure your name and packaging are not infringing upon any existing trademarks. You don’t want to be on the wrong side of a class-action lawsuit. A qualified trademark and patent attorney with experience are recommended. We can recommend one as needed when you work with NCP.
7. Proper licensing. It’s especially critical that you have all the licenses for your cannabis business in place, including sales tax registrations. If you are selling to other states where it is legal, you will want to track your sales and transactions to determine if you have created economic nexus and are required to collect and remit taxes in that state. Sales tax laws have changed dramatically since the 2018 U.S. Supreme Court Case, Wayfair vs. South Dakota. If you sell on a marketplace facilitator, such as Amazon, they will be responsible for collecting and remitting sales tax in most states (currently 34 of them).
8. Banking Control Over Funds. If it is just you in your cannabis business, you have 100% control over your funds. If you have a partner involved in day-to-day operations, you will want to require both signatures for checks or money wired out of the bank account, if over a certain amount. That may be $5K + or whatever number you feel comfortable with. You will also need to consider investor control over your money for distributions or expenditures if they exist.
9. Insurance. The basics include adequate fire insurance for a cultivation facility and business liability insurance for your business operation.

Advanced Asset Protection for the Cannabis Industry:

1. Establish a Complete Formation with Your Operating LLC or Corporation. Most will go online and only file articles, get a registered agent and obtain an EIN, which provides ZERO liability protection. You must have the correct operating agreement, which matches an LLCs taxation type and number of members if a corporation is bylaws, minutes & meetings, and resolutions for a corporation AND LLC (based upon court cases of piercing the entity veil). You must properly issue membership interests or stock and avoid commingling of funds. You have liability protection the day you form an LLC or Corporation, but beyond that, you must operate it as a separate legal entity. If you are forming an S or C corporation form an LLC, you must file the proper tax forms with the IRS promptly, form 2553 or 8832.
2. Set up a Nevada Asset Protection Trust (NAPT) for your cannabis business operating entity’s ownership interest. This same trust maybe your other entities’ owner, which may own your intellectual property or cash investments (safe assets). The benefit is after the ownership is transferred to the NAPT, and two years go by, no creditors may touch your ownership within the trust. You do not want to put a risk asset, like real estate, within the trust because that will bring risk to your cannabis ownership. Learn more from an interview on this important advanced strategy with attorney Robert L Bolick. https://vimeo.com/314354874. You will want to watch until the end of the Q & A section, which is most important, and the option to schedule a free consultation with Rob.
3. Establish Business Credit with Dun & Bradstreet. Capital is important to any cannabis business, and making sure your business does not look financially naked to investors or vendors is important.  This process does not happen automatically, and you must work with a company that knows how to help you develop an 80+ business credit score with D & B.

Proper policy and procedures for your entire cannabis operation (especially for checking proper ID for individual sales), HR, and payroll support are critical to reducing your liability. If you have personal assets, such as real estate (outside of your primary residence), you want to get those out of your own name and into separate LLCs. There are multiple steps involved, including a possible increase in property taxes, insurance issues, and transfer tax…but as you clarify these points, you will be much better protected if your cannabis business creates an unforeseen liability to your personal wealth.

If you need support with asset protection for the cannabis industry, reach out to our team at support@launchwithconfidence.com, and we will follow up with our current strategy session rates.

Asset Protection Infographic

You need to protect your assets, especially during difficult times such of when the country was shut down during the pandemic due to COVID-19 or now with rising interest rates and higher inflation. The fragile economic conditions are a strong signal to protect your assets now before it is too late.

Many businesses had to close down and lay off employees even with government SBA support. During these uncertain times, people and companies may take to extreme measures 6 months to a year from now to protect themselves financially.

After this period, when the financial dust settles, that is when lawsuits may dramatically increase, don’t expect insurance companies to write a big check to help quickly. The time is now to protect your assets now.

The key is to avoid fraudulent conveyance transfers in an attempt to protect your assets. It is likely too late if you have any hint of litigation coming. Forming an LLC or corporation after the fact will likely result in the judge undoing your planning because the intent was to defraud creditors.

The good news is that all the recommendations below are protected steps you should take to protect your financial future, but now it is more important than ever. When the market and economy rebound and rebuild over time, you will at least be protected when you implement the recommended steps below.

The current financial conditions going into 2023 may compare or even exceed the 2008 financial crisis’s financial impact on the U.S. economy

The goal is to know that as the economy tightens up and sales are down for most, cash flow is tight, usually litigation, and the risk increases dramatically. That is why this is the best time to protect your assets and financial outlook with the support your business will need to survive this economic downturn.

There are several essential questions you must ask yourself when protecting your current and future net worth, especially during times of financial uncertainty, and rising interest rates and inflation have undoubtedly created one.

1. Are you protected if your business is sued at the operating level? Do you have all your “business financial eggs” in one entity basket?
2. Do you have “safe assets” unrelated to your at-risk assets? If so, are they protected?
3. What would happen if you were sued at the personal level, unrelated to your operating business? Would you lose control of your company (this is a big one)?
4. Even if you are an LLC and your partner is sued, would that disrupt the operating company?
5. Does your living trust hold valuable assets that would be in jeopardy if you were sued personally?
6. Do you have adequate insurance?
7. Is real estate (not your residence) out of your name personally?
8. Does your residence have a lot of equity? If so, is it protected?
9. If you have a partner, do you have a buy/sell agreement?
10. Do you have legal agreements with your independent contractors, employees, and joint venture partners?

Your Asset Protection Plan: Let’s address some key points about each group, so you can take the necessary steps to protect your assets in 2023 and beyond!

Are You Protected if Your Business was Sued at the Operating Level?

Are you running two or more profitable businesses out of one entity? If one gets sued, will you lose all your business assets? I would not quickly assume your business insurance policy (if you even have one) will kick in 100% to protect you. Make sure you understand the loopholes in the insurance policy. If you are operating two or more businesses that aren’t making it, that is a different subject. One entity may be fine.  But if you have successful e-commerce, cannabis, technology, information product, or speaking business…., you may need three separate entities to protect all three individual companies. That way, if one comes under attack, it won’t bring down the other two.

Are your domain names worth protecting? Remember, when you register a domain name, it is free and clear. You put “cash” upfront for the name. Many of you may have thousands of visitors coming to your domain daily, which may be a precious asset for your business. Is your “virtual real estate,” your domain name, worth $100,000 + collectively? If it is, should it be owned by either you or your main operating company? Probably not. You may want to consider a separate legal entity to hold your domain names and then lease them back to your operating entity. Typically, an LLC taxed as a partnership, or single-member LLC will work for that situation.  If you are new to your business and your domains have very little traffic or value, it may not be necessary to form a separate legal entity at this point.

Did you remember to connect your DBA names to your new entity? If you had a DBA (doing business as) with you as a sole proprietorship applicant, which means unlimited liability. You must refile the DBA name with your new entity as the applicant, not you personally!

Do You have “Safe Assets” Unrelated to Your at-Risk Assets? If so, Are They Protected?

Make sure you separate your safe from at-risk assets. A safe asset will not directly cause someone liability, like investments outside your retirement account, cryptocurrency, or cash in your personal checking account (above $50K). An at-risk asset, like real estate or operating a business, can cause direct liability. Do not put those two items in the same entity bucket out of convenience. If you have valuable, safe assets, typically an LLC taxed as a partnership or single-member LLC disregarded will make sense. Some states, like Florida and Colorado, do not recognize the charging order protection from a single-member LLC, so proper planning is required.

What would happen if you were Sued at the Personal Level, Unrelated to Your Operating Business? Would you Lose Control of Your Company?

If your operating entity is an S or C corporation, this may be a big concern for you that you were unaware of until now. This means if you get sued for something unrelated to your operating business, like a car accident, a contract currently in your name, another entity where the entity veil was pierced, and your insurance company does not pick up the entire tab. You may lose your most valuable personal asset, the stock of your S or C Corporation. Even if your living trust owns it, you may lose 100% control of the ownership of your company!

If the S or C corporation has no value (meaning the day you stop working, there is no value), it may not be that big of a concern if you lose control of your company. This is not a concern with consultants because no more revenue comes in the day they stop working, so there is very little value of your S corp stock to someone else. Many entrepreneurs and business owners know the dangers they face with these entities.

If you have a valuable C Corporation, the solution is that an LLC can hold the stock, either taxed as a partnership or a single-member LLC disregarded for tax purposes. Remember, with an S corporation, and there are restrictions on who can be the shareholder. Only a single-member LLC disregarded can own an S corporation’s stock. It cannot be an LLC taxed as a partnership. Why the LLC? Now instead of owning the stock of the S or C Corporation, you will own the membership interest in the LLC. When you own the LLC membership interest, that means if you get sued personally, the plaintiff may get a “charging order” against you, which means they get access to distributions of profits vs. a controlling interest in the stock of the S or C Corporation.

There is some discussion about the value of single-member LLC vs. multimember LLC regarding the charging order protection. Some argue that there is no protection with a single-member LLC because the charging order protection originally came from partnership law, which means at least two partners. Well, a single-member LLC only has one partner. Although most state statutes do not distinguish between how many members, it has come up as maybe a reason to have a multimember LLC vs. a single member.

Would Your Partner being Sued Disrupt the Operating Company?

The charging order is very powerful and will help protect the operating LLC’s ownership, but it can still be disruptive. Suppose your partner in the LLC is personally sued for something unrelated to the operating company before one gets a charging order. In that case, they may subpoena the LLC’s operating agreement, bank accounts, and account records. This can all be very disruptive to the operating business. Suppose you have an LLC with an outside partner (not your spouse or significant other). In that case, you may want to strongly consider EACH member having their own separate LLC ONLY to hold safe assets, which then become the owners of the operating business. Now, if you or your partner is sued personally, it will only affect the membership interest of your PERSONAL LLC, not the OPERATING LLC! This avoids any disruption to the operating business!

Does your Living Trust Holding Valuable Assets Protect You if You Were Sued Personally?

The living trust is essential for probate and estate planning to help you pass on your asset to your appropriate heirs. A living trust is revocable (99% of the time). A revocable trust means you can move assets in and out of the trust, which also means a creditor can access the assets inside your living trust (there are some exceptions, like retirement plan money). So many falsely believe that living trusts protect assets because they hear from their estate planners that a living trust protects your assets. Still, they do not understand “FROM WHAT” – not from liability, only from probate and estate taxes. That means that your assets titled to your living trust may be at significant risk in a lawsuit. That is a good move if your LLC membership interest is titled to your living trust!

Do you have Adequate insurance?

I am not a big fan of relying on insurance to protect you, but it is vital to reduce risk. Remember that insurance companies can go out of business, just like any other business. Plus, you need to be aware of the loopholes in your insurance policy that may cause you to be unprotected.

The rubber meets the road question for your insurance provider on your new million-dollar policy is… “Tell me, over the last three years, how many times any of your clients who have this policy were sued for anywhere between $800,000 and $1,000,000? And, of those times, how many times did you not pay out the claim? And when you did not pay out the claim, can you tell me the loopholes that caused your clients NOT to be covered, so I can anticipate similar areas where I would also NOT be covered by the policy you are attempting to sell me?” That is an important question!

You may need an umbrella insurance policy; personally, that may be $3 million- to $4 million of coverage, plus other business liability insurance for proper protection.

Is real estate (not your residence) out of your name personally?

Owning real estate in your name is like having your financial statement taped to your forehead, shouting, “I have assets, so sue me!” Even if the real estate you own has no equity, it makes sense not to own it in your name. It shouts to the world that you must have money to be in the position to own a home and other real estate.  The big question that comes up is how much protection is necessary.

If you have three rental properties, do you need three separate LLCs? That depends on the amount of equity in each property and the overall percentage of your net worth it represents. For example, if you have three rentals, each with $300,000 of equity, and that $900,000 of equity represents 90% of your net worth, three separate LLCs (one for each rental) would make sense. If you get sued at the property level (entity level), you would only lose 33% of your equity, vs. 100% if owned by one entity. Issues that come up with real estate are transfer tax, due-on-sale clauses, and insurance issues.

Typically, there is no transfer tax if you own the real estate before and transfer it to an LLC. You will need to ask your local county clerk’s office for the rules and exceptions on the transfer tax. A due-on-sale clause means if you have a mortgage on the property and transfer it to a separate legal owner, like an LLC, which may trigger a due-on-sale, which means you record the new title in the name of the LLC, it appears there has been a sale. The banks may be able to call the note and say, “Since you sold it, you have to pay off the mortgage.” The fact is you did not sell it; you transferred the title. No bank will tell you they will waive the due-on-sale clause.

From the bank’s perspective, the key is whether they will get a monthly check to pay down the mortgage; 95% of the time, a due-on-sale does not come into play. The strategy is to form an LLC, either taxed as a partnership or single-member LLC, and quitclaim or warranty deed the property in the LLC name. Now, if you are sued personally, you do not personally own the real estate. You own a membership interest in the LLC that controls the real estate. That is a huge difference!

Does Your Residence have a lot of Equity? If so, is Your Equity Protected?

Your residence, on the other hand, is handled very differently. You do not want to transfer your principal residence into an LLC. Why? Several reasons. First, you would lose your $250,000 capital gain exclusion when you sell it. Second, your insurance company would have an issue when transferring the title to an LLC. This is when safe and at-risk assets need to be separated. The next step is to file for homestead protection to protect the equity in your house. Each state has different protection levels, ranging from unlimited in Texas and Florida to only $5,000 of equity in some states. The first step is to file for that protection.

If you have a lot of equity in your home, you may want to consider a personal residence trust for protection. This does not have the downside that a separate legal entity would have. We recommend you speak to an attorney in your area to explain the options that the personal resident rust may provide!

If You Have a Partner, Do You Have a Buy/Sell Agreement?

An essential part of your coronavirus asset protection plan to protect any businesses with partners. Do you have an outside partner as an owner in one of your entities? If so, you must have a buy/sell agreement. The buy/sell agreement will provide a smooth transition if one of the partners can no longer continue with the business.

The everyday events that may arise are death, divorce, or desire to sell to a third party. Not having this agreement in place typically results in unexpected situations and, many times, lawsuits (especially over the company’s value as one partner wants to sell out) or the destruction of the actual business.

Typically, life insurance is purchased for each owner to pay off the estate in case of death. One crucial clause that will come into play is an agreement on the accounting formula to determine your company’s value, so there are no arguments when determining the value. It s vital to have an attorney draft your buy/sell agreement, separate from the operating agreement in an LLC.

Do you have Legal Agreements with your Independent Contractors, Employees, or Joint Venture Partners?

One of the fastest ways to go out of business and get stuck in many lawsuits is not having agreements for several situations. If you use independent contractors to do work for you, make sure they sign an independent contractor agreement that tells the independent contractor that the work they do on your behalf is owned 100% by you, that they are responsible for their taxes—other vital provisions to establish the nature of the relationship.

Remember that just because they sign an independent contractor agreement does NOT mean they qualify as an independent contractor, according to the IRS. Could you make sure they are not an employee? Nothing is worse than firing an independent contractor, and they file for unemployment, thinking they were an employee, and now you have the labor division after you!

In conclusion, your coronavirus asset protection plan is critical to take the steps now before the coronavirus gets so far out of hand. You don’t have the cash to protect yourself and your family correctly. You will sleep better knowing your loved ones are safe. Please don’t wait until you are sued because it may be too late to protect yourself. You will sleep a lot better at night when everything is in order.

Corporate Transparency Act Disclosure of Beneficial Ownership Information Impact on Non-U.S. Residents

The Corporate Transparency Act (CTA) is a new federal law requiring most domestic and foreign business entities formed or registered to do business in the United States to disclose information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN).

Update April 19: You can now officially use your registered agent’s or virtual address as your company’s address on the BOI report. Ensure you get permission first from your registered agent or use their virtual address for FinCEN. Check out the updated FAQ F.12 on FinCEN’s website at this link. 

Update March 7: Here is a win for NSBA members; they won a lawsuit against the CTA, and now their members do not need to file a BOI report! See details here: https://www.nsba.biz/post/press-judge-rules-in-favor-of-nsba-in-lawsuit-over-corporate-transparency-act. Will this ruling last? Not likely. Once the case enters the appeal process, it will likely be escalated to the Supreme Court, where the lower court’s decision may be reversed. Therefore, this may only serve as a temporary setback to filing a BOI report unless, by some chance, the Supreme Court deems the CTA unconstitutional.

Update March 1: A new challenge for non-residents with a U.S. company is how to fill out the BOI report for the U.S. business address. For most U.S. entities formed by non-residents, the single-member LLC disregarded is the most popular; either use a registered agent address on the filed articles and with the IRS or a virtual address for both. Unfortunately, on the BOI report, they will not accept either address. The BOI report says the reporting company address: the reporting address, which is the address where the company does “business,” should be a physical US address; registered agent, virtual office, and PO box are not accepted. This has changed in April. See the updated FAQ at this link. 

See more details about the business address here:  As noted in the proposed rule, the requirement to report a business’s street address is not satisfied by reporting a P.O. box or the address of a company formation agent or other third party.” You’ll find it in this article: https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-information-reporting-requirements. Section B. COMPANY ADDRESS.

The street address should be the principal place of business. Otherwise, it should be the primary location in the United States or U.S. Territory where the reporting company conducts business. See items 11-15 at https://boiefiling.fincen.gov/resources/BOIR_Filing_Instructions.pdf. 

In summary, the rule says to report the address of the principal place of business in the United States or, if the reporting company’s principal place of business is not in the United States, the primary location in the United States where the company conducts business.

Remember, the BOI report information is shared with the IRS, so plan and consult with a professional to determine which U.S. address you will use as your principal place of conducting business in the U.S. 

Update: The BOI report is open and available to complete for all entities filed before 2024 and for new filings in 2024 (Jan. 2024). Go to this link to file. For new entities filed in 2024, you will need the company applicant’s FinCEN identifier. 

Update: Alert: FinCEN has been notified of recent fraudulent attempts to solicit information from individuals and entities who may be subject to reporting requirements under the Corporate Transparency Act (Nov. 2023). The fraudulent correspondence may be titled “Important Compliance Notice” and asks the recipient to click on a URL or to scan a QR code. Those e-mails or letters are fraudulent. FinCEN does not send unsolicited requests. Please do not respond to these fraudulent messages, click on any links, or scan any QR codes within them.

You may receive notifications from companies or firms that will provide a service to file your beneficial owner’s information (BOI) report on your behalf for a fee. That is acceptable and very different from a company that uses marketing to appear as a government-type agency, even though they may have a disclaimer in fine print at the bottom.

These companies are not affiliated with the government and may charge excessive service fees. If you decide to use a third-party service to file your BOI report, it is important to be aware of these differences and choose a reputable company.

It’s important to note that while the initial filing of beneficial ownership information with FinCEN under the Corporate Transparency Act is a one-time requirement in 2024, the real significance lies in the obligation to update this information whenever changes occur. Failing to update this information could lead to fines.

Think about how often you’ve moved or established new businesses. If you have any role in managing or controlling these entities and haven’t kept track of these changes, you could be subject to compliance penalties. It’s essential to thoroughly understand these regulations and ensure that all entities under your control comply with 2024 onwards.

Here is what you need to know.

The CTA is now in effect as of January 1, 2024. The guidelines for filling out your beneficial owner’s statement are now available online at this link. 

How will this impact U.S. and non-U.S. resident e-commerce sellers and other agencies selling through a U.S. LLC?

Before we get to that, let’s address what happened with disclosing ownership before this change:

Before the Corporate Transparency Act (CTA), U.S. residents were not required to disclose their ownership of 25% or more of a U.S. entity to any government agency. However, several other laws and regulations may require U.S. residents to disclose their ownership of U.S. entities, such as:

What is a beneficial owner?

A beneficial owner is an individual who exercises substantial control over an entity, either directly or indirectly, or who owns or controls 25% or more of the entity’s equity interests.

According to FinCEN’s BOI Small Compliance Guide – see at this link, your company can identify beneficial owners by taking the following steps:

Step 1: Identify individuals who exercise substantial control over the company.
Examples are provided below to help you identify those individuals.

Step 2: Identify the types of ownership interests in your company and the individuals that hold
those ownership interests. Examples are provided below to help with identification.

Step 3: Calculate the percentage of ownership interests held directly or indirectly by individuals
to identify individuals who own or control, directly or indirectly, at least 25 percent of the
ownership interests of the company.

How do you determine who has substantial control over a company? Here are the questions to ask provided by FinCEN’s BOI Small Compliance Guide (see page 26).

1. Does your company have a president, chief financial officer, general counsel, chief executive officer, or chief operating officer?

2. Does your company have any other officers that perform functions similar to those of a President, chief financial officer, general counsel, chief executive officer, or chief operating officer?
Note: One individual may perform one or more functions for a company, or a company may not have an individual who performs any of these functions. These are senior officers in your company.

3. Does your company have a board of directors or similar body, AND does any individual have the ability to appoint or remove a majority of that board or body?

4. Does any individual have the ability to appoint or remove a senior officer of your company?  Questions 3 and 4 are individuals with appointment or removal authority over your company.

5. Does any individual direct, determine, or have substantial influence over important decisions made by your company, including decisions regarding your company’s business, finances,
or structure? These are important decision-makers in your company.

Note: Certain employees who might fit this description are exempt from the beneficial owner definition. See section 2.4 of the guide for more information.

6. Are there other individuals who have substantial control over your company in ways other than those identified in 1-5 above? These are individuals to whom the catch-all would apply.

What entities are covered by the Corporate Transparency Act? Which are Exempt? 

The CTA covers most domestic and foreign business entities formed or registered to do business in the United States, including corporations, limited liability companies (LLCs), partnerships, and trusts. Exemptions are provided for certain entities, such as publicly traded companies, banks, and investment funds. “Large operating companies” are also exempt, which are entities that (i) have more than 20 full-time U.S. employees (not counting employees of affiliated entities), (ii) reported more than $5 million of revenue from U.S. sources on a consolidated basis to the IRS for the previous year and (iii) have an operating presence at a physical location in the United States. 

Overall, there are 23 exempt categories, and your first step is to determine if you have a reporting requirement. 

The big category is #23, called “Inactive entity.” What does that mean?

Here is what FinCEN says about an inactive entity qualification: 

An entity qualifies for the inactive entity exemption if all six of the following criteria apply:

FinCEN’s Small Entity Compliance Guide includes checklists for this exemption (see exemption #23) and for the additional exemptions to the reporting requirements (see Chapter 1.2, “Is my company exempt from the reporting requirements?”).

Is the reporting requirement applicable to foreign companies registered for business operations in the U.S.?

It is important to note that the Corporate Transparency Act applies to domestic and foreign companies registered to do business in a U.S. state. While foreign registration was previously required in some states to obtain a sales tax permit, this requirement has been eliminated in most cases.

However, the Corporate Transparency Act now requires all companies registered to do business in a U.S. state to disclose their beneficial ownership information, regardless of their origin.

Additionally, in the past, some states, such as Florida, required foreign entities to register with the secretary of state before opening a U.S. bank account.

What information must be disclosed?

Entities covered by the CTA must disclose the following information about their beneficial owners to FinCEN:

• Full name
• Date of birth
• Address
• Social Security number or taxpayer identification number

If you don’t want to give your SSN as the owner, don’t be the owner. What if another entity is the owner?

Does that mean you provide the EIN? Probably, but what about the second entity, who is the owner? What if you own that entity? Doesn’t that mean you would provide your SSN (assuming you have one) for the second entity? Yes.

Does that help at all? It might depend upon the nature of the company, and keep in mind the 23 exemptions, of which one is whether you have 20 or more employees or report over $5 million in revenues.

What about non-residents who do not have an SSN or a TIN (taxpayer identification number)?

The ITIN is the most common for non-residents. What does that trigger regarding your U.S. filing responsibilities, and how do you even obtain an ITIN if you don’t have a U.S. filing requirement?

At NCP, our CEO, Scott Letourneau, is a certified tax advisor, consults often on these and other subjects, and works with a mastermind group of tax attorneys and other legal professionals for support. Learn more at this link.

How will the CTA impact new entity formations?

The CTA will add a new step to the new entity formation process. Entities formed or registered to do business in the United States on or after January 1, 2024, must file a report with FinCEN disclosing information about their beneficial owners within 30 days of formation or registration. If you have active entities with the secretary of state but are not active for any business or holding assets, it would be best to clean them up and dissolve them before January 1st, 2024.

But on Sept. 28, 2023, FinCEN proposed extending this deadline to 90 days for entities formed in 2024.

After the initial report, there is no annual or quarterly filing requirement. However, reporting companies must file an amendment within 30 days after any change to their reported information.

Entities already formed or registered to do business in the United States on January 1, 2024, will have until January 1, 2025, to file a report with FinCEN disclosing information about their beneficial owners.

New Entity Strategy: If you are starting a new business entity in January 2024, it is best to file the entity formation documents before January 1st, and when applying for the EIN (Employer Identification Number) through Form SS-4, use a start date of January 1st, 2024. This will give you the full 12 months to file your beneficial owner form instead of only 90 days in 2024.

What are the consequences of failing to comply with the CTA?

Entities that fail to comply with the CTA’s reporting requirements may be subject to civil penalties of up to $500 per day. Individuals who knowingly and willfully fail to comply with the CTA’s reporting requirements may be subject to criminal penalties of up to five years in prison and a fine of up to $250,000.

What should businesses do to prepare for the CTA?

Businesses should start preparing for the CTA by identifying their beneficial owners and gathering the required information about them. Businesses should also develop a plan for complying with the CTA’s reporting requirements.

The public will not have direct access to the beneficial ownership information reported due to the Corporate Transparency Act (CTA).

The CTA requires FinCEN to maintain the information in a secure, nonpublic database. However, FinCEN may disclose the information to law enforcement and other government agencies for authorized purposes.

FinCEN has not yet announced any plans to make beneficial ownership information available publicly. However, some experts believe that it is likely that FinCEN will eventually make the information publicly available, at least in a limited way. Even if no information is public, it goes to the IRS. We foresee where FinCEN will scrape the list of all entities that apply who are registered with the secretary of state and compare that to the list of companies that file with FinCEN by the end of 2024, and cross-reference with the IRS to go after companies in 2025, that are not in compliance. Your address will be important because it may have changed since you formed the LLC and obtained the EIN. So, you may never see the fine mailed directly to you due to an address change.

Non-residents need to be aware of a complete U.S. LLC formation strategy and the best address service that is detailed and reliable so they can stay in compliance with FinCEN. Remember, if you make any changes to your ownership of your LLC, the manager, the responsible party, or the owner’s home address…, you must update your account with FinCEN or face a potential civil penalty of up to $500 for each day that the violation continues, or criminal penalties, including imprisonment for up to two years and/or a fine of up to $10,000.

Will your Amazon brand competitors finally discover the “true owner” of the Amazon account? 

Remember, on your Amazon account, your “brand name,” which is the same as your “display name,” will rarely have your LLC name. Your “sold by name,” also known as your “storefront name,” is separate. In the big picture, if your LLC name is not your “brand name,” it will be only the legal entity on your account and not show up on your Amazon page with your products.

Anyone can search the USPTO database to determine who owns a trademark. This includes trademarks owned by Amazon businesses, but the CTA is not expected to make beneficial ownership information public now.

Your privacy from other competitors should be safe. At the end of the day, most competitors don’t need to know who the owner is to compete; they need to know their competition. In litigation, privacy and asset discovery are much more important when looking for leverage to fast-track a case.

What about the IRS as a non-resident individual or company owning a U.S. LLC operating a U.S. business on Amazon? 

That could be a real issue for many sellers who have taken a strong stance that they are not engaged in a U.S. trade or business and do not have any effectively connected income with that U.S. trade or business. Determining whether a seller is engaged in a U.S. trade or business is a complex process that requires carefully analyzing all relevant facts and circumstances.

Did you or your foreign company file a protective return? If not, perhaps now is the time before the IRS has all the ownership information. 

Tax Form 5472 requires reporting corporations to disclose information about their 25% or more foreign shareholders to the IRS, and now the Corporate Transparency Act (CTA) will also require reporting companies to disclose information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). FinCEN may then share this information with the IRS and other law enforcement agencies. The key for non-residents becomes what U.S. tax returns the owners file, if any. Remember, you may not have had any responsibility to file a return by the owner.

What sellers can do

Non-resident sellers who form a U.S. single-member LLC as a non-resident individual or a foreign corporation may want to consider filing a protective U.S. tax return.

There are a few benefits for U.S. LLCs owned by foreign companies to file a protective US tax return:

• Preserve the right to deduct expenses. If a U.S. LLC owned by a foreign company does not file a tax return, it will lose the right to deduct any expenses incurred, even if those expenses are related to business activities that generate income in the United States. Filing a protective tax return preserves the right to deduct these expenses, even if no income is reported.
• Establish a tax filing history. Filing a protective tax return for a U.S. LLC owned by a foreign company can help establish a tax filing history for the entity. This can be beneficial if the company later starts reporting income in the United States. A good tax filing history can make obtaining a U.S. tax identification number easier and opening bank accounts and other financial accounts in the United States.
• Avoid penalties and interest. If a U.S. LLC owned by a foreign company fails to file a tax return, even if it has no income to report, it may be subject to penalties and interest. Filing a protective tax return can help to avoid these penalties and interest.

It is important to note that filing a protective tax return does not mean the U.S. LLC owned by a foreign company must pay taxes in the United States. The company will only be required to pay taxes if it has income effectively connected with a U.S. trade or business.

Here are some specific examples of how filing a protective tax return can benefit a U.S. LLC owned by a foreign company:

• A U.S. LLC owned by a foreign company is engaged in limited business activities in the United States, such as maintaining a bank account and attending trade shows. The company does not earn income from these activities. However, it wants to preserve the right to deduct any expenses incurred with these activities. To do so, the company can file a protective tax return.
• A U.S. LLC owned by a foreign company is starting a new business there. The company does not expect any income in the first year of operation. However, it wants to establish a tax filing history and avoid penalties and interest. To achieve these goals, the company can file a protective tax return.
• A U.S. LLC owned by a foreign company has been inactive for several years. The company now wants to start reporting income in the United States. The company can file a protective tax return to re-establish its tax filing history and avoid penalties and interest.

If you are considering filing a protective tax return for a U.S. LLC owned by a foreign company, you should consult a tax advisor to ensure you comply with all US tax laws.

Are all the owners disclosed? 

The Corporate Transparency Act (CTA) requires reporting companies to identify all beneficial owners, regardless of ownership percentage. A beneficial owner is an individual who exercises substantial control over an entity, either directly or indirectly, or who owns or controls 25% or more of the entity’s equity interests.

This means that reporting companies must identify all individuals who meet any of the following criteria:

• They are a senior officer of the entity.
• They have authority over the entity’s management or finances.
• They have the ability to make important decisions about the entity’s business.
• They have a significant financial interest in the entity.

Reporting companies must also identify any individual who controls one or more intermediary entities that control the reporting company.

The CTA does not provide a specific definition of “substantial control.” However, FinCEN has issued guidance that provides some examples of activities that may constitute substantial control. These activities include:

• Appointing or removing senior officers of the entity.
• Approving major transactions or investments.
• Setting the entity’s budget or financial goals.
• Approving the entity’s strategic plan.
• Having the ability to veto important decisions made by the entity.

Reporting companies must file a report with FinCEN identifying their beneficial owners within 30 days of formation or registration (but 90 days for those entities formed in 2024). The report must include the following information for each beneficial owner:

• Full name
• Date of birth
• Address
• Social Security number or taxpayer identification number (TIN). Don’t want to disclose your SSN as a U.S. resident? What about a non-resident entity registered to do business in the U.S.? Here is what FinCEN advises: If a foreign reporting company has not been issued a TIN, report a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction.

If the beneficial owner is a foreign individual, the reporting company must also provide the beneficial owner’s passport number and country of citizenship.

The CTA is a significant new law requiring reporting companies to disclose more information about their beneficial owners. FinCEN and other law enforcement agencies will use this information to investigate and prevent financial crimes.

Are there other areas where U.S. residents must disclose their ownership in a U.S. entity formation?

Schedule G of Form 1120 requires corporations to disclose ownership details of any individual or entity that owns, directly or indirectly, 20% or more of the corporation’s voting stock. The IRS uses this information to identify and track large shareholders of corporations.

Schedule G requires corporations to report the following information about their large shareholders:

• Name
• Taxpayer identification number (TIN)
• Country of citizenship
• Percentage of voting stock owned

Corporations must also report any changes in ownership of 20% or more of their voting stock to the IRS within 30 days of the change.

The ownership disclosure requirements on Schedule G are different from the CTA’s reporting requirements in a few key ways:

• Schedule G only applies to large shareholders who own 20% or more of a corporation’s voting stock, while the CTA applies to all beneficial owners of domestic reporting companies.
• Schedule G only applies to U.S. corporations, while the CTA applies to both U.S. and foreign reporting companies.
• Schedule G is filed with the IRS, while the CTA report is filed with FinCEN.

Despite these differences, Schedule G and the CTA are important tools for the IRS and FinCEN to combat money laundering, terrorist financing, and other financial crimes.

If you file Form 2553 to make the S election, you must disclose each shareholder’s ownership percentage. This information is reported in Part I of Form 2553.

In addition to disclosing each shareholder’s ownership percentage, you must also obtain the consent of all shareholders who own stock on the date the election is filed. This consent is obtained by having each shareholder sign the Shareholder’s Consent Statement in Part I of Form 2553.

The ownership disclosure requirements on Form 2553 are similar to those on Schedule G of Form 1120. However, there are a few key differences:

• Form 2553 requires disclosure of the ownership percentage of all shareholders, regardless of whether they own 20% or more of the corporation’s stock.
• Form 2553 requires the consent of all shareholders who own stock on the date the election is filed.
• Form 2553 is filed with the IRS while you file your corporation’s federal income tax return.

The ownership disclosure requirements on Form 2553 are important for the IRS to administer the S corporation election. The IRS uses this information to ensure that all shareholders know and consent to the election.

Conclusion

The Corporate Transparency Act is a significant new law that will significantly impact new entity formations for U.S. and non-U.S. residents. Businesses should start preparing for the CTA by identifying their beneficial owners and gathering the required information about them. Businesses should also develop a plan for complying with the CTA’s reporting requirements.

Remember, existing entities required to report have until the end of 2024 to submit their filings. It’s important to note that any updates or clarifications to the instructions or guidelines will likely occur within the first 30-60 days of the new year. Therefore, delaying your report submissions for a few months can be strategic.

U.S. Bank Compliance with LLC Formations: An Essential Guide

Decoding the W-8BEN: Does It Really Shield You from U.S. Taxes?

Shopify Payments U.S. for Non-Resident Sellers: A Step-by-Step Guide

As an existing non-resident Shopify seller, you likely started your Shopify store with Shopify payments linked to your region. 

However, if you’d like to set up a Shopify Payments account for a region different from your location, such as the U.S., you can submit your case to the Shopify Support Team and follow the steps below. 

Not Everyone Will Qualify for Shopify Payments  (Even If You Meet All the Steps)

However, having the requested documents does not guarantee that you’ll be approved for Shopify Payments. Shopify’s internal specialist teams will ultimately make the call regarding supportability.

What is Required to Qualify for Shopify Payments?

A business must have physical operations on US soil to use Shopify Payments US. A USD checking account is also needed, opened with a US banking institution and located on US soil. Virtual banks and currency services will not work for this, as it has to be an actual US bank.

Items you will need to be ELIGIBLE for Shopify Payments U.S.

• US Tax ID: To get a Shopify Payments US account, you’ll need a US tax identification number (TIN). If you’re a business like an LLC or Corporation, you need an Employer Identification Number (EIN). You’ll need a Social Security Number (SSN) if you’re a Sole Proprietor.
• Physical Operations in the US: A US tax ID isn’t enough. Your business needs to have a physical presence in the United States. This means having a real operation there. A lease agreement is required (which we do provide) as part of our virtual address service with our U.S. entities.

  Specifically, here is what Shopify says about this part to qualify for Shopify Payments: In order to be eligible for Shopify payments in a particular region, you must EITHER (a) be PHYSICALLY present within that region (not 99% of you as non-residents), OR (b), have an OPERATIONAL presence with that region.

  To establish PHYSICAL PRESENCE, they will require a document in your name (personal name) such as a utility bill (e.g., water, electricity, or gas bill from the past three months (not cell phone), PERSONAL LEASE AGREEMENT (dated) OR property insurance (dated).

  By the way, this is the same evaluation in 2024 for local banks in the U.S. for a personal bank account (which has changed in the last two years); they want you to lease an apartment in your own name and have one major utility bill in your own name with that address.

  If you are NOT physically present within the region selected, we would INSTEAD need to establish an OPERATIONAL PRESENCE. This can be done, for example, by showing you have RENTED or OWNED warehouse space or retail space in the U.S. For example, see warehouse space for sale in Las Vegas at this link. Here is warehouse space for rent in Las Vegas at this link.

  Please note (from Shopify) that registering a company within a region is NOT sufficient to establish an operational presence. Translation: a cheap online LLC with an EIN and address will not qualify you for Shopify payments in the U.S.

• Government-Issued Photo ID: You’ll need a government-issued ID with your photo on it (like a driver’s license or passport) for verification. Sometimes, they might accept non-US IDs, but it’s best to check with Shopify.
• Business Registration Document: Ensure your business is officially registered in the US. This proves that your business is legitimate. The key is, are you creating a U.S. person? And you need to be clear on the U.S. tax responsibilities that it creates. 
• Proof of US Operation: You must show evidence that your business operates from the US. A bank statement or forwarding service won’t work as proof. It would be best if you had something more reliable. A utility bill and lease agreement is recommended. 
• USD Checking Account: You’ll need a real US bank account in US dollars to handle transactions. Virtual banks or currency services won’t be accepted.

SSN or ITIN Verification 

U.S. merchants enjoy the convenience of Shopify Payments, but there are specific requirements they must meet to use the U.S. version of this payment gateway. Let’s explore the obligations of U.S. merchants:

U.S. merchants setting up a Shopify Payments US account must provide all nine digits of their Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) for verification purposes. This is a mandatory step, even if the merchant already has an Employer Identification Number (EIN) for their business.

This rule still applies even if you have an EIN for your business. Shopify needs to bypass this step on sign-up.  To learn more about this, refer to the US Shopify Payment Terms of Service: Section B-3.

Meeting this requirement helps Shopify ensure the merchant is a legitimate entity operating in the U.S. and adheres to relevant regulations and tax laws.

Processing Time for ITIN

In situations where obtaining an ITIN is necessary, it’s important to consider the potential impact on your LLC’s setup in the short and long term. Processing an ITIN application can take time, typically extending to 3-4 months. Therefore, planning accordingly and anticipating delays during this process is essential.

Possible Exemptions for ITIN

In some cases, Shopify may waive the requirement for an ITIN based on the account holder’s unique circumstances. Each case is reviewed individually, and exemptions are considered on a case-by-case basis. If Shopify determines that the account holder’s circumstances warrant an exemption, they may proceed without an ITIN.

Considerations for Setting up the LLC

When setting up your LLC, it’s essential to consider the potential need for an ITIN, especially if you plan to use Shopify Payments as your payment gateway. This consideration becomes even more critical if you use your LLC as the legal entity for insurance purposes on platforms like Amazon.

An LLC in the U.S. can be taxed in four different ways, and only three apply to most non-residents: an LLC disregarded for tax purposes, an LLC taxed as a corporation, or an LLC taxed as a partnership. The only option to obtain an ITIN with the LLC is an LLC that is disregarded for tax purposes, and an ITIN is usually only available when personal U.S. taxes are due on a 1040NR tax return. When you form an LLC, how it is managed and a complete formation with formalities to protect your U.S. business is key. Completing a W-9 means you are creating a U.S. person for tax purposes. 

Another key is understanding your full U.S. tax responsibilities when you form a single-member LLC that is disregarded to determine if the LLC or owner is engaged in a U.S. trade or business and has effectively connected income. 

Separately, it is the responsibility of sales tax compliance. Only turn on sales tax settings in all states by knowing the tax rules and being licensed in each state where you have crossed nexus thresholds or have physical nexus. 

How to Update Your Shopify Store to Qualify for Shopify Payments U.S.

You can change your address to a US location. Access your dashboard and click the “Settings” option to get started. If you go to “Payments, “you will see the option to activate the Shopify payment gateway.

Step 1

1. Form an LLC US Company (Consult with NCP first). 
2. Apply For an EIN Number
3. Get a US Phone Number
4. Get a US Address
5. Get a US Bank Account
6. Obtain an ITIN

Step 2

Once you’ve successfully established your US company, whether a US citizen or a non-US citizen, the next step is to activate your Shopify payment gateway using the information obtained during your LLC formation.

Before activating, update your store address to the US address in your LLC documents. This US address can be utilized for your business or online applications.

During the Shopify payments activation process, you may encounter a field requesting your SSN’s last four (4) digits. In this case, you can replace it with the last four (4) digits of your ITIN.

Complete the remaining personal details as required, submit the information, and the Shopify review team soon notify you to determine if your application has been approved or if additional information is required. 

———————–

Shopify’s verification takes place by activating the Shopify Payments account.

The instruction says to change or update the store address to a US address but doesn’t ask for any verification.

The next step is to activate Shopify Payments. You would only need to provide entity documents to activate Shopify Payments.

If applicable, you can enter your Business Number or Tax Identification Number depending on which country your business is located in.
They will ask the following:

• Business Type
• • Individual/Sole Proprietorship – need SSN/ITIN or SIN – Social Insurance Number (for Canada)
  • Corporation
  • Nonprofit
  • Partnership
• Business Number/TIN
• Business Address
• Personal Details
• First and Last Name
• DOB
• Product Details
• Customer Billing Statement
• Banking Information

If your store is in Europe, you must provide a VAT number or indicate that you don’t have one.

If you set up your Shopify Payments account as a Corporation or LLC, you will still need to provide the name and date of birth of someone associated with the business. This is a requirement for verification purposes.

All businesses must submit a tax ID and are responsible for collecting and remitting tax on their sales.

You may also need to submit details about you and your business. This information is used to help identify merchants using Shopify Payments and is a requirement to comply with the terms of service.

What is required may differ from country to country. Typically, this includes:

• documentation about the business associated with the Shopify Payments account
• owner of the business
• or an individual with signing authority for the business.

If Shopify is unable to verify your identity using the information above, you may be asked to submit additional documentation that could include the following:

• Proof of identity
• Proof of home address
• or, Proof of business verification

If your business can’t be verified using the information you provided at the time of Shopify Payments sign-up, additional documentation might be requested. Just so you know, the documents that you provide must include the business name, business address, and company registration number or VAT number.

For business verification, upload your official federal business registration document, including your federal tax registration number, if available.

Business documents require the following:

• Documents must be clear and large enough to read.
• Documents must be valid and representative of up-to-date registration.
• Complete documents must be uploaded. A complete document contains the following:
• The full business name, business address, and either VAT number OR company registration number are clearly stated and legible.
• All pages of a multiple-page document. Upload a PDF containing all the relevant pages.
• Documents can be uploaded in .png, .jpg, or .pdf format.

To help the verification process, when providing documents as evidence, ensure that your documentation:

• is clear and large enough to read
• is correct, valid, and up-to-date
• is complete with all details visible
• is free of any errors or typos
• matches the information provided

Your identity, home address, and proof of entity documents must be reviewed and matched successfully to the information on your Shopify Payments account before your business can be fully verified.

Reviews of your Shopify Payments account can take up to 3 business days to complete.

Important: You must complete your Shopify Payments account setup, including all your business details and banking information, within 21 days of your first sale. If your account isn’t set up within 21 days, then payments might be automatically refunded to the customer.

For merchants in the European Union and Hong Kong, you need to complete the setup of your Shopify Payments account before you can accept payments from customers.

The first step is to schedule a strategy call to determine the U.S. LLC structure, ownership, and U.S. taxation for your situation. Learn more at this link. 

Understanding Amazon’s Tax Interview: Key Mistakes Non-Residents Should Avoid with LLCs

Navigating Amazon’s tax interview for non-residents with U.S. LLC can be complicated, particularly regarding tax compliance. Many non-residents choose to operate as individuals or entities from their home country and will complete the W-8BEN or W-8BEN-E form during the Amazon tax interview.

Forming a U.S. single-member LLC often becomes necessary, especially in dropshipping scenarios where U.S. suppliers require dealing with U.S. companies (tip: don’t form your LLC in Wyoming when dropshipping). It might also be essential for securing U.S. insurance coverage when options are scarce in the non-resident’s country since many insurers do not provide services for non-residents in most countries. The necessity for insurance compliance increased after September 2021, particularly for sellers recording over $10,000 a month in sales.

It’s crucial to understand that U.S. suppliers may be indifferent about your Amazon sales, the proper completion of your Amazon tax interview, or even whether you’ve mistakenly committed tax fraud. However, insurance underwriters need to be more indifferent regarding claim filing.

Imagine this: Your insurance adjuster denies your claim because your U.S. LLC wasn’t genuinely managing your Amazon business or due to an ‘inadvertent trick’ played on the Amazon tax interview. Depending on the size of your claim, the repercussions can range from mildly inconvenient to severe. A $5K claim on a $1M policy might not raise eyebrows, but a claim worth $800K is likely to trigger intensive scrutiny from insurance company attorneys.

Suppose you’re an Amazon seller ticking the insurance box to get verified and are not concerned about coverage because you’re selling low-risk items like rubber kitchen spatulas. In that case, the above doesn’t apply. However, the looming risk of an Amazon suspension should pique your interest, so please keep reading.

Establishing a compliant U.S. LLC and meticulously navigating the Amazon tax interview are not just administrative formalities. An Amazon account will often not be verified, and you will be asked to provide additional verification in the form of a business utility bill linked to your U.S. address. That makes your verification process 10X more difficult. It is best to work with NCP and utilize our Amazon New Account 32-page Guide, or if you have already formed an LLC, book a consult with our CEO, Scott Letourneau, to review what you need to amend on your filing and changes to your Amazon account to help get your account verified.

Amazon Tax Interview Questions

Amazon’s Reverification Under the INFORM Consumer Act

Wyoming LLC Requirements for a U.S. Dropshipping Business

Are you looking to form a Wyoming LLC to establish a dropshipping business in the U.S.?

If so, there are many factors to consider, including the legal structure of your business. One popular option for entrepreneurs is forming a limited liability company (LLC) in Wyoming. In this post, we’ll explore the benefits of a Wyoming LLC for your dropshipping business and guide you through the steps to establish a U.S. bank account and obtain a resale certificate.

Benefits of a Wyoming LLC for Your Dropshipping Business

Asset Protection

As a dropshipper, you’re responsible for delivering products to your customers without physically handling inventory. However, you’re still vulnerable to legal issues and liabilities arising from customer complaints, copyright infringements, etc. Forming a Wyoming LLC can provide asset protection by separating your personal assets from those of the business.

When it comes to forming a Wyoming LLC, it’s crucial to remember that more than simply filing articles of organization is needed to provide legal protection for your business. A shocking 90% of LLCs formed in Wyoming have zero protection because the owners needed to complete formalities beyond the operating agreement.

Just to remind you, an LLC only has protection on the day it’s formed. Afterward, you must operate it as a separate legal entity and avoid commingling funds to ensure continued protection. Adequate capitalization is also critical to maintaining legal protection for your business.

If you don’t take these steps seriously, you could have a personal judgment against you in the U.S., creating severe problems for your business. Even if you can form a new entity, working with suppliers and using A.I. tools for search can still be challenging if your business has a tainted history.

As legal issues arise, proper LLC protection and maintenance is crucial for drop shippers. To help you avoid getting sued, we recommend checking out this informative article from Dodropshipping.com. It covers valuable tips on minimizing the risk of legal issues when dropshipping, including avoiding trademark infringement, using high-quality product images, and providing accurate product descriptions. By following these tips and establishing a solid legal and financial foundation for your dropshipping business, you can reduce your legal risk and focus on confidently growing your business.

2. Tax Advantages

Wyoming is one of the most business-friendly states in the U.S., with no state income tax, franchise tax, or personal property tax.

While Wyoming may have a sales tax, obtaining a resale certificate can help you save money when working with most U.S. suppliers.

One of the significant benefits of forming a Wyoming LLC is that you’ll only need to file the 5472 and proforma 1120 tax forms, assuming that it’s a single-member LLC disregarded. However, additional or different tax forms may be required if a single-member LLC is taxed as a corporation or a multiple-member LLC is taxed as a partnership.

U.S. taxation can be a complex issue, and it’s essential to understand the requirements to ensure compliance. At this link, you will see the factors involved to evaluate to determine your U.S. tax responsibilities and help you understand your obligations as a business owner. For more information on U.S. taxation requirements, please visit the link on our website.

Forming a single-member LLC in Wyoming is a cost-effective option for non-residents. If they formed a Wyoming LLC, U.S. residents would need to foreign qualify into their home state.

3. Privacy

Wyoming LLCs offer privacy protection by not requiring owners to disclose their names on public records. Your personal information, including your name and address, will be confidential. The critical question to ask, if privacy is important, is when do I lose my privacy after my LLC formation?

Steps to Establish a U.S. Bank Account and Obtain a Resale CertificateChoose a Business Name and Register Your Wyoming LLC

The first step to establishing your dropshipping business is to choose a business name and register your Wyoming LLC.

If you’re considering forming a Wyoming LLC, you should start with a comprehensive strategy. Don’t make the mistake of simply filing your articles without considering the management structure of your LLC, foreign ownership, and your U.S. tax responsibilities at both the state and federal levels.

To ensure that your business is set up for success, we recommend you conduct a federal trademark search, at a minimum, using the trademark office database. However, for the best results, a comprehensive search is highly recommended. This step can help you avoid costly legal issues and protect your business’s intellectual property.

2. Apply for an EIN

An EIN (Employer Identification Number) is a unique identifier your business will use when filing taxes and opening a bank account. The key is to complete the SS4 property, which will let the IRS know which U.S. tax returns you plan to file. The SS4 can NOT be amended, so complete it carefully. The SS4 must be faxed to the IRS for non-residents, which may take up to 30 business days. The time frame is also essential for U.S. banking, as they will need the IRS letter with the EIN.

3. Open a U.S. Bank Account

Once you have your EIN, you can open a U.S. bank account for your Wyoming LLC. You’ll need to provide your EIN, articles of organization, and other identifying information to the bank.

Choosing the right bank is critical when establishing a U.S. bank account for your non-U.S. dropshipping business. Finding a bank familiar with working with non-U.S. residents is essential to ensure a smooth and efficient process.

However, be prepared to provide a personal utility bill in your name that matches your personal address. Most banks typically require this documentation, even if you plan to travel to the U.S. after the pandemic.
Unfortunately, establishing a U.S. bank account for a legal entity (not the individual) can be nearly impossible for non-residents.

Many banks require a personal utility bill in the U.S. linked to your personal address, separate from the documentation required for the LLC formation. If you plan to travel to the U.S., you will likely need help establishing a U.S. bank account.

Be sure to choose a bank familiar with working with non-US residents. Most banks will also want a utility bill in your personal name that matches the same address as your personal address. Even if you plan to travel to the U.S. after the pandemic, establishing a U.S. bank account for a legal entity (not the individual) is almost impossible for non-residents.

Why?

The banks request a personal utility bill in the U.S. linked to your personal address, separate from what they require for the LLC formed.

4. Obtain a Resale Certificate

A resale certificate lets your business purchase products from suppliers without paying sales tax. To obtain a resale certificate, you must register with your state’s tax authority and provide your EIN and other business information.

A Wyoming resale certificate will suffice in many cases, allowing you to avoid paying sales tax on your purchases. However, it’s important to note that suppliers may require a resale certificate from that specific state in some states, such as nine.

In addition to registering your Wyoming LLC, obtaining a U.S. bank account, and obtaining a resale certificate, there are a few other steps to establish a solid legal and financial foundation for your dropshipping business.

• Set Up a U.S. Business Address and Phone Number 

You must establish a U.S. business address and phone number to build trust with your suppliers and customers. Without this, you may struggle to communicate effectively and establish credibility in the marketplace.
You can work with a reliable mail forwarding service or virtual office provider to obtain a virtual business address and phone number.

However, it’s essential to ensure that your virtual address is fully compliant and that you have a lease agreement to avoid legal issues.

Also, you should be able to partner with a team that understands the critical items that will be mailed to your virtual address, including verification codes, bank requirements, sales tax permits, and IRS notices.

• Set Up a Payment Gateway Account

You must set up a payment gateway account, such as Stripe or PayPal, to accept customer payments. A VPN is a consideration for non-residents regarding these accounts. These gateways allow you to securely process credit card transactions and manage your customers’ payment information. Please choose a payment gateway compatible with your dropshipping platform that offers competitive rates. The key is knowing the entire process, including what happens when an SSN is unavailable.

• BE-13 Government Filing

According to a Form BE-13 filing (Survey of New Foreign Direct Investment in the United States), foreign investors in certain U.S. businesses must report their investments. U.S. companies with more than 10% foreign ownership must file a Form BE-13 with the U.S. Bureau of Economic Analysis (BEA), a U.S. Department of Commerce division.

The BE-13 is a complex form due within 45 days of filing your entity.
Failure to comply may result in fines of up to $25K, and the BEA may seek injunctive relief. Furthermore, willful violations may result in criminal penalties of up to $10K and imprisonment of up to one year.

Please note that the BE-13 is NOT the same as the 5472 and Proforma 1120, which are federal tax returns related to an SM LLC DE.

For your convenience, we’ve included a link to the BE-13 FAQ page: https://www.bea.gov/help/faq (note that there are 40 tabs of FAQs).

Schedule Your Discovery Call Today

At Nvinc.com, we understand the importance of proper LLC formalities and can help guide you through the process to ensure your business is fully protected. Schedule a discovery call with us today to learn how we can help you establish a solid legal and financial foundation for your dropshipping business. Don’t leave your business vulnerable to legal issues – take action now to protect your future success.

Forming a Wyoming LLC can be an intelligent choice for your dropshipping business, providing asset protection, tax advantages, and privacy. If you’re ready to get started, our team can help guide you through the process.

Schedule your discovery call today at our calendar at this link to learn more about how we can help you launch your U.S. dropshipping business.

Silicon Valley Bank Alternative for Non-U.S. Residents

You will need this Silicon Valley & First Republic Bank alternative as a non-resident business owner. We have important news if you’ve formed a Delaware corporation or U.S. company with Silicon Valley Bank as your only banking partner.

Due to recent regulatory actions by California authorities, Silicon Valley Bank has been closed. On March 10th, Silicon Valley Bank’s assets were seized by FDIC in the most significant bank failure since 2008. Just before noon on the East Coast, the Federal Deposit Insurance Corporation said it was closing the bank. On May 1st, JP Morgan Chase takes over First Republic Bank. 

In business, the number one can be your worst enemy. Depending on a single joint venture partner, relying on a solitary source for leads, or working with only one supplier or vendor can leave you vulnerable to a single point of failure.
But perhaps the most crucial area where you should avoid being a “one” is banking. Having just ONE BANK ACCOUNT can be a recipe for disaster.

If that account is closed, frozen, or otherwise inaccessible, your business could be brought to its knees. That’s why it’s crucial to diversify your banking relationships and work with multiple partners. Doing so will ensure your funds are protected, and your business can continue operating even if one bank account is compromised. So, if you rely on just one bank account, it’s time to diversify. Don’t let the worst number in business bring you down – instead, take control of your financial future by working with multiple banking partners.

You must find an alternative U.S. bank account to continue operating your business. Fortunately, our team is here to help. We specialize in assisting non-resident business owners like you to set up an alternative banking solution quickly and efficiently.

If you still need a U.S. company formation, first gain clarity on your best U.S. banking options BEFORE forming a U.S. entity. You want to avoid what so many do: to find a low-priced option only to form the LLC and realize either during the process or after opening a U.S. bank account (even without travel) is impossible.

At NCP, our experience since 1997, with thousands of companies formed and working with dozens of banks, brokerage accounts, and online banking platforms.

We have the experience to help you fit all the puzzle pieces in the correct sequence to help you accomplish this task. As we can’t control the banks and their policy changes, we can control how best to form your U.S. company to lead to your best option to establish the bank account. This may involve how the LLC is formed and managed, to a lease agreement without an expensive lease, to match documents and state records to streamline the experience.

Most important is our relationships with our bankers and that we do things right and attract successful entrepreneurs that the banks prefer to work with over time. Let us share our current U.S. banking options and recommendations for 2023.

If you or someone you know needs support, we can help set up your U.S. entity correctly and have all the resources from sales tax to tax returns.

Here is our link to our U.S. LLC formation packages, with details and what’s included.

Before we get to the banking details, you must know this ONLY works on a U.S. entity, not a foreign entity.

As you know, we do a lot of work in the e-commerce space, and there are “banking” accounts, such as Payoneer and others.

The challenge is that moving money from one currency to another is great, but they must be fully functioning bank accounts. They do not allow for an ACH pull, which is required to automate the payment of sales taxes.

NCP’s U.S. Banking Checklist

We have a  relationship with a trustworthy company with a banking platform that works with a bank (not in California) that will work for non-U.S. residents, and you do NOT need to go to the bank in person.

Do you have these questions on your mind?  

Is there a monthly bank fee?

We’ve been getting some questions about our banking partner and wanted to clarify some things. First, we want to assure you that our partner does not charge a fee for setting up your account. While we have a fee for the process and introduction, it’s not an extra fee you’ll be charged – it’s simply our fee for facilitating the process.

It’s also important to note that no requirements above and beyond the norm would make it impossible to open an account.

However, some U.S. banks have specific requirements that can cause issues for non-residents. For example, some banks may require a personal utility bill from a U.S. residential address, not a P.O. box, even if you visit the bank in person. Other banks may want to do an official site inspection and see your employees working.

But don’t worry – we’ve got you covered! We’ve compiled a complete checklist for our banking relationship that includes all the information you need to know to ensure a smooth account opening process. You can find it at the bottom of this page.

What is required to open this NEW U.S. Bank Account without Travel:

• It is required to have a U.S. entity with an EIN.
• You must have a letter from the IRS with your EIN. Our U.S. entity packages include our virtual address service so that the IRS mail will come to our office, and we will scan your IRS letter to your secure folder and your other documents to establish your U.S. bank account. Caution: Avoid banking alternatives that avoid this important compliance step. More compliance is coming, don’t impact your business with shortcuts. 
• Verify your phone number (from your home country if foreign clients)
• ID and selfie verification- a link will be sent to the signer’s phone number to access a page to upload ID and take a selfie verification.
• I am setting up multi-factor authentication for logging in to the account.

Required documents below per entity type:

LLC Documents

• EIN Verification Letter
• Articles of Organization
• Operating Agreement
• Government-issued photo I.D. (Passport in color)
• U.S. address (our virtual address, which is included in our U.S. packages, qualifies)
• Ownership structure

Corporation

• EIN Verification Letter
• Articles of Incorporation/Certificate of Formation/Certificate of Incorporation
• Company By-Laws
• Government-issued photo I.D. (Passport in color)
• U.S. address (our virtual address, which is included in our U.S. packages, qualifies)
• Ownership structure

Are you a company owner with a stake in a U.S. entity? If that entity is owned by a company with over 25% ownership, we’ll need the personal information and passports of the beneficial owners who have 25% or more ownership in that company. It’s essential to provide this information to ensure a smooth process.

Don’t stress; we’ve got you covered. We’ve created a comprehensive Silicon Valley Bank alternative checklist to answer all your questions and provide an alternative to Silicon Valley Bank. Our checklist ensures you cover all the bases and get the best service possible. So why wait? Get your hands on our checklist now at this link.

5472 and Proforma 1120 for a U.S. Single-Member LLC Disregarded Owned by a Non-Resident

As a non-U.S. resident with a U.S. single-member LLC, staying compliant with tax laws is crucial. Whether for Amazon Insurance, Shopify payments, or bulk purchases from a U.S. manufacturer, IRS forms 5472 and proforma 1120 for your U.S. single-member LLC disregarded likely must be filed annually. 

LLC may require filing Form 5472 and proforma 1120 annually. These forms will come into play the following year after you form your U.S. single-member LLC and obtain an EIN through the IRS. It is important to note how your SS4 was completed, especially for line 9a. 

Form 5472 is an information return of a 25% foreign-owned U.S. corporation or a foreign corporation engaged in a U.S. trade or business under sections 6038A and 6038C of the internal revenue code.

It’s important to note that the taxation of a U.S. LLC can vary based on its structure, with single-member LLCs taxed as C corporations requiring both Forms 5472 and 1120. On the other hand, non-resident members of an LLC taxed as a partnership must file IRS Forms 1065, 8804, and 8805.

A failure to timely file a Form 5472 is subject to a $25,000 penalty per information return, plus an additional $25,000 for each month the failure continues, beginning 90 days after the IRS notifies the taxpayer of the failure, with no maximum penalty.

What is new on the instructions for 5472 in 2023?

Part VII lines 41a through 41d. On Form 5472, these lines have been reworded to reflect the final regulations under section 250 (T.D. 9901, 85 FR 43042, July 15, 2020, as amended by 85 FR 68249, Oct. 28, 2020; T.D. 9956, 86 FR 52971, Sept. 24, 2021).

Part VIII lines 48b and 48c. These instructions require a new attachment for Part VIII, lines 48b and 48c. Specifically, if the taxpayer made the election described in Regulations section 1.482-7(d)(3)(iii)(B) or Notice 2005-99, the taxpayer is required to attach the statement described in the instructions for Part VIII, lines 48b and 48c, later.

You would use form 5472 when reportable transactions occur during the tax year of a reporting corporation with a foreign or domestic related party.

What is a Reporting Corporation? A reporting corporation is either:

• A 25% foreign-owned U.S. corporation (including a foreign-owned U.S. disregarded entity (DE), or
• A foreign corporation engaged in a trade or business within the United States. 

Reportable transaction. A reportable transaction includes:

• Any transaction listed in Part IV (for example, sales, rents, etc.) for which monetary consideration (including U.S. and foreign currency) was the sole consideration paid or received during the reporting corporation’s tax year;
• Any transaction listed in Part V; or
• Any transaction or group of transactions listed in Part VI.

However, transactions with a U.S.-related party are not required to be identified explicitly in Parts IV, V, and VI.

Exceptions from filing. A reporting corporation must not file Form 5472 if any of the following apply.

1. It had no reportable transactions of the types listed in Parts IV and VI of the form and, in the case of a reporting corporation that is a foreign-owned U.S. DE, also had no reportable transactions of the type listed in Part V of the form.
2. A U.S. person that controls the foreign-related corporation files Form 5471 for the tax year to report information under section 6038. To qualify for this exception, the U.S. person must complete Schedule M (Form 5471) showing all reportable transactions between the reporting corporation and the related party for the tax year. This exception does not apply to foreign-owned U.S. D.E.s.
3. The related corporation qualifies as a foreign sales corporation for the tax year and files Form 1120-FSC. This exception does not apply to foreign-owned U.S. DEs.
4. It is a foreign corporation that does not have a permanent establishment in the United States under an applicable income tax treaty and timely files Form 8833.
5. It is a foreign corporation whose gross income is exempt from taxation under section 883, and it timely and fully complies with the reporting requirements of sections 883 and 887.
6. Both the reporting corporation and the related party are not U.S. persons, as defined in section 7701(a)(30), and the transactions will not generate in any tax year*:

• Gross income from sources within the United States or income effectively connected, or treated as effectively connected, with the conduct of a trade or business within the United States; or
• Any expense, loss, or other deduction that is allocable or apportionable to such income.

Note. *Exception 6 does not apply to foreign-owned U.S. DEs.

Foreign-owned U.S. DEs. While a foreign-owned U.S. DE has no income tax return filing requirement, as a result of final regulations under section 6038A, it will now be required to file a pro forma Form 1120 with Form 5472 attached by the due date (including extensions) of that Form 1120.

The foreign-owned U.S. DE has the same tax year used by its owner for U.S. tax filing requirements.  If a foreign corporation owns the U.S. LLC DE, that structure triggers different tax returns.

They have a dedicated mailing address. Foreign-owned U.S. DEs are required to use the following dedicated mailing address. These filers do not use the mailing address provided in the Instructions for Form 1120.

Extension of time to file.  A foreign-owned U.S. DE required to file Form 5472 can request an extension of time to file by filing Form 7004. The DE must file Form 7004 by the regular due date of the return because of Form 5472 of a DE. Must be attached to a pro forma Form 1120; the code for Form 1120 should be entered on Form 7004, Part I, line 1. “Foreign-owned U.S. DE” should be written across the top of Form 7004.

The DE must fax or mail Form 7004 to the fax number or mailing address identified earlier by the return’s due date (excluding extensions). For these entities, do not use the regular filing address listed in the Instructions for Form 7004.

Depending upon multiple factors, you may have additional U.S. tax forms, including whether your LLC is engaged in a U.S. trade or business and has effectively connected income. If so, filing forms 1040NR and W-7 may be required. 

Essential additional tax forms and terms that may impact your U.S. tax responsibilities. 

• 1040NR and W-7 (ITIN): If you are deemed engaged in a U.S. trade or business, filing the protective returns, 1040NR, W-7, 8833 (assuming from a treaty country). You could lose deductions if you don’t file the protective returns and are audited.
• Conduct of a U.S. trade or business (USTB): If you are engaged in U.S. trade or business, you need to file a U.S. return. But if NO US-sourced income= title is transferred outside the U.S.  If, outside the U.S., there is no US-sourced income and no effectively connective return. BUT no tax due, foreign source income if Title transfers outside the U.S. What determines if it is US-sourced income? Where Title has transferred. See IRS PDF for more details on USTB.
• Effectively Connected Income (ECI): Effectively connected income is income that is effectively connected with the conduct of a U.S. trade or business. When determining whether income constitutes effectively connected income, the IRS employs two tests: (i) the asset-use test; and (ii) the business-activities test. The asset-use test looks to whether the income or gain is derived from assets used in, or held for use in, the conduct of the trade or business in the United States. The business-activities test looks to whether the activities of the trade or business were conducted in the United States and were a material factor in realizing the income or gain at issue.
• Fixed, Determinable, Annual, Periodic Income (FDAP): Tax at a 30% (or lower treaty) rate applies to FDAP income or gains from U.S. sources, but only if they are not effectively connected with your U.S. trade or business.
• Foreign Bank Account Annual Report (FBAR): The FBAR (Foreign Bank Account Report) is important if you’re a U.S. citizen with $10,000 or more non-U.S. accounts. Does this apply to non-residents? 

If a person is a non-resident (non-U.S. citizen and non-legal permanent resident), then they are considered a non-resident and would generally not be required to file the FBAR. Here is a link to FBAR mistakes to avoid.

• Form 1042-S – Every US person, business, or institution providing income to non-citizen individuals must file a Form 1042-S, even if ultimately the payments they made were exempt from taxation because of a treaty or taxation exception. 

The form applies to all payments made to non-resident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts subject to tax withholding. 

• Hybrid Entities – From a U.S. tax perspective, a hybrid entity is an entity that is “fiscally transparent” for U.S. tax purposes but not fiscally transparent for foreign tax purposes. Learn more about hybrid entities at this link; a sharp U.S. tax attorney with great U.S. tax charts for your review.
• Branch Profits Tax – U.S. tax law imposes a 30% branch profits tax on a foreign corporation’s U.S. branch earnings and profits for the year that are effectively connected with a U.S. business to the extent that they are not reinvested in branch assets. 

Branch Profits tax ONLY comes into play with a foreign corporation with a permanent establishment (PE) in the U.S. A U.S. corporation owned by a foreign corporation is not subject to branch profits but a dividend withholding tax, which the treaty can reduce. 

• State Sales Tax: If you sell on a non-marketplace such as Shopify and crossed economic nexus thresholds, you must register for sales tax and collect and remit if your product is subject to sales tax. 

Remember that some products, such as supplements, digital products, software, and food items, are not taxable in every state. These sales tax rules apply to non-U.S.-based entities doing business in the U.S. 

This content is an overview of several complex tax subjects, and we recommend you work with a qualified tax professional of which we work with several that we can recommend. 

Why a Simple LLC Provides ZERO Protection

If you form a “simple” LLC online with an EIN and a basic operating agreement. With the first legal issue, you may be “financially paralyzed” even if you win the lawsuit! You will not be able to get any loans or financing, which is paramount in today’s economy.

What is a “simple” LLC? That is an LLC filed through the Secretary of State with a registered agent, an EIN obtained through the IRS, and nothing else. It is the “starter” low-end package sold online with most incorporating companies. There is no operating agreement, membership certificates, or formalities.

The big issue is if your business operating through the LLC or LLC holding the assets gets sued. You might think I have never been sued, nor am I the “type” to create issues. The current economic conditions are a perfect storm for more lawsuits in the future (and opportunity).

If you lose the lawsuit, it gets worse.

Most attorneys warn against the $99 online LLC packages. Why? Because they will slice through those in 15 minutes in court and go after the individual every time. That piece of paper provides NO protection (even with insurance). 

What do they mean by “slicing through those in 15 minutes”? That is called piercing the corporate veil, where the owner is PERSONALLY liable. Once you are personally liable, you cannot obtain any personal funding because every financial application wants to know if you are currently in a lawsuit. When you answer yes, you will not be funded. You would not even be able to get a HELOC (home equity line of credit) from your residence. 

This is what we mean by being “financially paralyzed,” so you should not operate a business as a sole proprietorship.

The better approach is to form a COMPLETE LLC with the correct operating agreement and formalities to protect you and your assets, whether you are building your brand or looking to protect your safe assets.

NCP will help you before, during, and after formation to protect your entity veil, properly update any marketplace accounts to avoid suspension, and properly transfer your assets to the new entity so they are protected. Finally, you provide support and structure to protect your entity veil and personal assets.

How To Obtain a Sales Tax Exemption Certificate

Suppliers often require an exemption certificate when they ship products from the US. In addition, some B2B marketplaces have created Sales Tax Exemption Programs, such as Amazon (ATEP) and Alibaba (ASTEP), that can quickly help buyers identify as eligible tax-exempt for US sales tax purposes. You may enroll in their program to acknowledge and ensure that you are qualified for sales tax-free towards purchases on Amazon or Alibaba Business.

Enrolling in the program will require completing the form or uploading the certificate. You’ll need to make all information you have entered correctly, and the details must match the business information. You must complete the information required by the program to be accepted.

What is a Sales Tax Exemption Certificate?

A sales tax exemption certificate is a tax form you can present to your supplier or dropshipper to make sales tax-free. It is an official or proper document that prohibits someone from paying sales tax on your goods or services.

When do you need a sales tax exemption certificate?

1. If one of your supplier or drop shippers wants you to provide a resale certificate. 
2. Suppose you have nexus with a state resulting from physical presence or a remote sales tax law. In that case, you must collect an exemption certificate whenever you don’t charge a customer sales tax on a taxable transaction. No exceptions.

You need a sales tax exemption certificate to avoid getting an EIN. What are your options?

It depends on the state you are getting an exemption certificate. You may be limited if the supplier requires an exemption certificate from the home state. In all situations except for the ten states listed below, you can get an exemption certificate from any regular state. You have more flexibility to be in a position, if it is not one of these ten states listed, to obtain an exemption certificate without an EIN US number. It is beneficial for the non-resident seller because if you get an EIN in many cases, you may want to file a protective return even if you have a tax treaty with your country. If you are a U.S. resident, you already have a Tax ID and an entity most likely for your business, so in many cases, you might get an exemption certificate from your home state. 

Do you know if sales tax returns are due?

For the states requiring sales tax registration, you must file a tax return based on your sales tax filing frequency (monthly, quarterly, annual). If you are not required to register for sales tax but have EIN for the business, you must file income tax returns with the IRS for the EIN.  For VAT ID, you must file tax returns in your home country.

Note: You have no US tax return obligations if a state accepts your VAT number for the exemption since you will not be registering for FEIN or a sales tax license in a state.

SST (Streamlined Sales Tax), the MTC (MultiState Tax Commission), or go directly to the state? Which is best? 

MTC and SST forms are important alternative documents, and most states will accept them. There are states not covered by these two forms, e.g., Washington D.C. and Louisiana. Well, you have to visit their website and get the form.

*SST has 24 state members and has created the Streamlined Sales Tax Exemption Certificate, which anyone can use for all their member states. If one of your suppliers or dropshipper wants you to provide an exemption certificate to one of these 24 states, you can give them this SST form. You don’t need to be registered in these states to use this form. This form will accept your FEIN, driver’s license, and state-issued business ID number. For foreigners, it will accept your VAT issued by your country. If you don’t have a VAT number, you need to get a FEIN.

*MTC has 37 state members and has created the Uniform Sales & Use Tax Exemption Certificate, which can use for some of their member states.  Please consult the link for a complete list of the states that accept the Uniform Sales & Use Tax Exemption Certificate, subject to notes on pages 2-4 of that document. If one of your suppliers or dropshipper wants you to provide an exemption certificate, you can give them this MTC form. Remember that some states still require a reseller to be registered to collect sales tax in the state where the reseller makes the purchase. 

MTC form is very similar to the SST form but has a lot of restrictions, and you must read the footnotes for seven pages. Also, please remember that some of the MTC member states are also members of SST. However, the form requirement will still be based on the program’s requirements (SST, MTC, or a state exemption form). 

We suggest you check first the state who will accept the SST form before you get into the MTC form because the SST form is easy and has not required much hesitation. If you don’t have a sales tax ID in the state, you only need to provide the other tax ID number mentioned above.

SST Member States:
Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, North Carolina, North Dakota, Nebraska, New Jersey, Nevada, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin, and Wyoming.

MTC Member States:
Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Washington, and Wisconsin.

Who is responsible for getting a sales tax exemption certificate?

Reseller or purchaser. Whoever brings the responsibility should know enough about when to get an exemption certificate. Whoever needs an exemption certificate must know what forms and types of exemptions use.

Why is a sales tax exemption certificate necessary?

The auditor will require you to submit all exemption certificate documents for sales-tax-free claims on your filing returns. If the supplier or reseller missed some certificates, it could be a massive evaluation, including penalties and interest. This is also one of the common causes of sales tax audit problems.

Do you need to register for a sales tax account to obtain a sales tax exemption certificate?

Not all states must register for sales tax account numbers, but more than ten states require sales tax registration before getting an exemption certificate.

Will those ten states requiring sales tax registration accept sales tax exemption certificates from other states?

No, they do not accept out-of-state resale certificates. These states are very stringent in terms of accepting exemption certificates.

Does the sales tax exemption certificate expire?

It depends on the state because some exemptions certificate needs to renew specifically if not used within twelve months.

What are my options to obtain a sales tax exemption certificate?

1. A Basic state requirement for non-resident sellers is VAT ID or other country-issued tax ID. If a VAT ID should suffice the basic requirement for a state exemption, the non-resident seller will not need to register for FEIN or a state tax ID number and will only complete the exemption certificate directly.
2. Options are based on the state requirements. If a state does not accept VAT ID, the non-resident seller should apply among the following:
3. EIN only (specify the states)
4. EIN + state-issued tax ID number (specify the states)
5. State-issued tax ID number only. No FEIN is required.

How to Handle an Amazon Suspension for Insurance Non-Compliance

Keeping your Amazon Seller Central account active is vital to your seller ranking and overall Amazon business. Ignoring repeated Amazon notices to comply with insurance is not a good idea. Amazon will force compliance and take action for non-compliant people, but the unknown is when.

If you have received several emails from Amazon about compliance with their updated insurance policy, the clock is ticking for compliance.

Amazon sends reminder notices every few weeks for you to get into compliance after you cross the $10K in monthly sales threshold. It is rumored that by September 2023, Amazon will suspend sellers who need to be compliant. This is the second anniversary of the program’s start, and many sellers who comply are unhappy with those who are not. Plus, there is pressure from insurance companies for Amazon to stand behind their compliance requirements. 

We know the supply chain issues need to be fixed, don’t suspend your seller central account or access to your funds by not complying.

What happens if your Amazon Seller Central account is suspended?

You will need to take the proper steps to get out of suspension. First, it involves complying with the insurance policies and uploading your certificate of insurance to Amazon to get it approved.

Ideally, this will solve your suspension issue, but how fast it is still being determined.

If you continue to have issues, we have a recommended resource with Chris McCabe, an expert helping Amazon sellers with suspended accounts or ACINs. See our video at this link from the previous Prosper Show, where Chris shares valuable tips on responding to Amazon appropriately when handling an Amazon suspension issue. 

Why risk paying high fees to a company to help you get out of suspension and risk-taking your selling ranking in the meantime?

First, check with Marsh.com to see if they can offer you insurance in your home country.

If they cannot help, schedule a call with our team at this link, and we will explain your options with U.S. insurance and a U.S. company to protect your account, business, and income for you and your family.

Crypto Taxation

Determining your crypto taxation starts with knowing if your crypto transactions are taxable or not. Below are the most common crypto activities that you do need to report on your tax form:

• Selling your crypto for cash or converting to a stable coin.
• Trading one cryptocurrency for another digital currency (such as Ethereum).
• Using cryptocurrency at a merchant as payment, including paying with a crypto debit card.

You may also receive income from crypto. Here are some examples:

• Receiving airdropped tokens resulting from a hard fork. An airdrop is a transfer of free cryptocurrency from a crypto project into users’ wallets.
• Staking or mining cryptocurrency
• Getting paid in crypto
• Interest income from lending

Most crypto investors have only bought and sold crypto on a crypto exchange or wallet, creating short and long-term capital gains or losses.

You will create ordinary income if you have earned crypto from a job, mining, staking, or earning interest.

If you earn ordinary income in your names by default, you are operating as a sole proprietorship which will show up on schedule C, subject to state and federal income taxes.

Like any ordinary income you have earned, if high enough, you may want to structure an S corporation or LLC taxed as an S corporation to save on self-employment taxes which is 15.3%.  Plus, an LLC taxed as an S corporation will keep the income off schedule C, which is much more likely to be audited by the IRS.

Five steps to file your cryptocurrency taxes:

1. Calculate your crypto gains and losses. We recommend you use crypto tax software. There are many crypto tax software on the market. If you are outside the U.S., you will use Cointracking.info to organize your transactions to determine a gain or loss so you can file a return with a tax professional in your own country. Another alternative tax software for U.S. residents is Taxbit.com. Their software at the free level works well with traders and investors.
2. Complete IRS Form 8949
3. Include your totals from 8949 on Form Schedule D
4. Include any crypto income on Schedule 1 (or Schedule C if you are engaging in crypto taxes as self-employed-a mining operation is an example). For example, if you earn staking reward income that goes on other income on Schedule 1, line 8z, added to your personal 1040 tax return.
5. Complete the rest of your personal tax return. If you set up your exchange in the name of a business entity, and that entity has a return, such as an LLC taxed as an S corporation, that return would also be filed. A single-member LLC disregarded for tax purposes where the owner is the individual does not file a U.S. return for the LLC unless it is owned by a non-resident and would file form 5472 and pro forma 1120.

NCP can help you with your digital LLC for U.S. and non-U.S. residents. We work with a U.S. exchange’s VIP team that will help speed up the time to set up your U.S. crypto account (minimum capitalization is $10K). Go here to learn more about our digital LLCs.

See the video below from the recent Miami Bitcoin event with Scott Letourneau and our sister brand, cryptowealthprotection.com, and how Taxbit.com can help you simplify your crypto taxation.

In most cases, crypto income should be reported in personal income or self-employment income. Any time you are filing a Schedule C, you may be entitled to business expenses, and any loss on your Schedule C may be used to offset earned income. The key is to make sure you operate a mining business, not a hobby. If you are deemed to be operating a hobby, you may only offset your losses that equal your income.

If you earned staking income or interest rewards from lending out your crypto, this income is generally reported on Schedule B.

The key with crypto tax software is to fix any missing or duplicate transactions after using the API feature or CSV to import your data from your exchanges and wallets. Cleaning up your missing and duplicate transactions will lead to filing a more accurate 8949 form with your personal tax return.

Single-Member LLC vs. Multi-Member LLC Charging Order

LLCs are more popular than corporations for a few reasons, including flexibility in the management structure, taxation options, and the bonus of the “charging” order protection in most states.

When you operate a business, you must consider what happens if your business is sued directly. Will your business liability insurance policy protect your business assets, will the plaintiff attempt to pierce the LLC veil and go after your personal assets? Most don’t consider the big question: What happens when you are sued personally for something non-related to your operating business? Will you lose control of your personal assets, including the ownership in your LLC?

The LLC has this built-in “charging order” protection, making it more challenging to take over the LLC’s ownership and control its assets.

What is a “charging order,” and why is it important?

A charging order is an order which places a lien on your membership interest in the LLC. It is a request to the manager of the LLC to pay the creditor all of the profits and income that would have otherwise gone to you. It is usually limited to the dollar amount of the judgment and is similar to a garnishment of wages or income.

In about two-thirds of the states, the charging order is the exclusive (only) legal remedy personal creditors of LLC members have. However, in most states, creditors with a charging order only obtain the owner-debtor’s financial rights and cannot participate in the management of the LLC. Thus, the creditor cannot order the LLC to make a distribution subject to its charging order.

The design of the charging order is to protect the non-debtor members against this forced and involuntary partnership with a creditor.

The significant issues come from the history of the charging order, which comes from partnership law, and some states do not recognize the benefit of the charging order with a single-member LLC.

The first case was in Colorado in April of 2003, and another one in Florida in 2010.

The result is that some believe you should always have a two-member LLC to have full advantage of the charging order.

What happens when you don’t have a partner? Some will suggest finding someone to be a 1% or 2% partner to solve this issue. But it is not that simple.

What do the courts look at when you add a partner, and what will the courts look to decide if the “charging order” should hold up for LLCs? There is a difference between a passive investment partner to make a two-member LLC vs. a partner who has a say in management. If you add a partner that is only passive as a member (assuming an LLC that is managed by managers), and that partner is 2% and has no say in the management or voting rights, if a creditor takes that partner’s interest, that will NOT interfere with the operations of the LLC.

Ultimately, the judge may allow the creditor to levy against the 2% partner’s interest and sell it off. At the end of the day, if there were no adverse impact on the non-debtor member, the charging order would likely not protect that member’s interest.

Notable cases involving the single-member LLC and the charging order: 

• Colorado In re Albright, 291 B.R. 538 (Bankr. D. Colo. 2003). A 2003 Colorado bankruptcy case, In re Ashley Albright, allowed a bankruptcy trustee to take control of a one-member LLC.
• Florida is based on a 2010 case. In Florida, the Supreme Court held that a judgment creditor with a charging order against a single-member LLC might take full membership rights in the LLC in single-member LLCs. Not long after the Florida Supreme Court’s decision, however, the Florida legislature amended the applicable law to limit the rights of a judgment creditor to a charging order or foreclosure. Sec. 608.433, Fla. Stat.
• Lousiana in a case in 2020. First, The District Court held that the Louisiana charging order statute did not apply in the context of a single-member LLC owned by the debtor since there is no non-debtor member with interests to protect from the creditor. On appeal, the Louisiana Court of Appeals reversed, essentially saying that Louisiana charging order statute limits the rights of a judgment creditor to “only the rights of an assignee of the membership interest,” i.e., what is known as an “involuntary assignee.” Because there has been no reverse piercing of the veil in this matter, we find that a plain reading of Louisiana’s charging provision for LLCs provides the exclusive remedy of a judgment creditor.

Bankruptcy courts are more open to allowing creditors or trustees to exercise control over debtor membership interests. Bankruptcy courts look to Section 541 of the Bankruptcy Code and applicable state LLC Law on this question.

Some states say the single-member LLC will provide the charging order protection as an exclusive remedy. 

• Alaska
• South Dakota
• Nevada
• Wyoming

Some states allow the charging order to LLC and foreclosure as an option for creditors: 

• California
• Colorado
• Hawaii
• Montana
• Utah

After years of speculation and the lack of solid case law, the issue of whether single-member LLCs are afforded the protections of the charging order was finally addressed by a U.S. bankruptcy court in Albright, No. 01-11367 (Colo. Bkrpt. April 4, 2003). The
judge in Albright held that charging order protection does not exist for a single-member LLC because there are no non-debtor members to protect. The court granted full economic and noneconomic rights to the trustee, allowing the bankruptcy trustee to manage the debtor’s
LLC. The trustee subsequently sold the LLC’s property and distributed the net proceeds to the bankruptcy estate to satisfy creditors’ claims.

The Colorado Act provides that where the LLC has no members (such as in the case where the single-member loses her membership interest through foreclosure or as a result of a conveyance to a bankruptcy trustee upon filing a petition in bankruptcy), the non-member assignees “of the last remaining member” may, by the unanimous consent of the assignees, “be admitted as a member or members.” This would include a bankruptcy trustee, a creditor foreclosing on the single-member membership interest, or an heir upon the death of the single-member.

Does this mean a single-member LLC is worthless in these states where the charging order does not protect the member from a lawsuit unrelated to the operating business? No.

The single-member LLC is still a valuable tool against internal liability once that is against the operating company directly.

For example, if you own real estate and a single-member LLC owns it, and a tenant sues the LLC,  if the single-member LLC is adequately capitalized, is not the alter ego of the sole member, and is not used to perpetuate a fraud, the tenant may not assert liability against the member. Often, we will structure multiple single-member LLCs owned by one LLC taxed as a partnership to get the best of both worlds.

Shopify Sales Tax Requirements

If you are selling through Shopify or your own website, you may have crossed the economic thresholds in several states, which means you have a responsibility to register for a sales tax permit, update your Shopify tax settings (or shopping cart), and collect and remit sales taxes.

Even as a non-resident selling in the U.S., it is essential to protect your brand and profits by knowing when to register so your customer pays the sales tax, not you.

Note for Non-Residents: You may have been told the only way to register for U.S. sales tax is through a U.S. company. That is not true.

NCP can set up a U.S. company for Walmart or U.S. insurance, but it is NOT required to register for sales tax.

It takes longer as many states do not allow us to register online; we need to mail the application to the states. And we do partner with Avalara, Taxjar, and others, but most can not file your sales tax returns unless you can do an ACH pull through a U.S. bank account requiring a U.S. entity. We work with a provider that can file your sales tax returns without a U.S. bank account on your foreign entity.

BUT… we have another option with a partner firm that can do all your sales tax registrations and wire the sales tax due.

What are the economic thresholds?

If you make over $100K in sales in a state or have over 200 separate transitions in the current or prior calendar year, you may have economic nexus and be required to get a sales tax permit. Some states, like California and Texas, only have thresholds of $500K in sales.