A Facebook user posed a question in a group called “Tax Business and CPA Firm Owners” about forming a new business entity in Florida, Delaware or Wyoming. This is a hot topic of discussion in business lately, but one that appears to be badly misunderstood and, too often, treads dangerously on issues of legality and implications of potential fraud.
First, we should emphasize that a non-attorney should not be giving advice on a legal issue. That should be forefront in any discussion. However, a restraint on offering advice does not interfere with our ability to have a planning discussion either online or with a client, particularly related to planning business operations, licenses, and taxes.
The original question posed was:
“I have a tax strategy question.
I gave a client that has a business entity registered in Florida. He has two other business partners that he wants to form an investment company with. One business partner also has a business entity registered in Florida and the other has a business entity registered in Delaware. The three of them would like to form a company in either Delaware or Wyoming with each of their current entities (Florida (2) & Delaware) owning a third of the new formed company.
Wanted to get thoughts on which state would provide them with the best protection and best for tax purposes. I’m thinking Wyoming would make more sense for them.
Would the current registrations in Florida and Delaware need to be changed to foreign LLCs?
Thank you for your time and insight!”
My comments are:
Regarding ‘taxes’: There is nothing in this post so far related to taxes. It seems like you are asking how the registration location of a state entity would affect taxes of a business which of course tax advisers know is not the case since taxes are primarily driven by the location of operation. (Perhaps we could learn more of the business plan to actually discuss taxes).
Regarding ‘protection’: State laws vary is a few ways among the three states you mention but, as a starting point, the differences are not so substantial as to rise to the level of a driving force in planning a business. Remember that business and liability law is primarily driven by where a business operates, not where it is registered.
Regarding ‘privacy’: you did not raise this in your question but I am raising the issue because it would appear to be the biggest distinction and the primary driver of users who form entities in these states (DE, FL, and WY), particularly nested entities. But as a tax and business adviser, we need to be careful in mixing a discussion of ‘privacy’ with a discussion of ‘taxes’ and ‘protection’. If a reader misinterprets a social media post to think that we are suggesting that by not revealing your identity, this protects you from legal liability or from paying taxes, then we can be held as an accessory to fraud. Ensuring privacy is a perfectly legitimate planning goal but not when the purpose is linked to protecting the owner by avoiding business liability or tax liability.
A frequent theme on my business advising soapbox lately is that professionals need to be more careful of the comments they post on social media. I have compiled court case examples of how casual Facebook comments were used to initiate professional licensing complaints as well as court cases where Facebook posts were used as evidence in state prosecutions of professionals for another business’ violations of state business law.