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Formed C-Corp in DE. but no physical business activities in NJ other than I live here

Asked by: Peter  — 18 September, 2012

I established a C-Corp in DE for a mobile software company that I founded. I live in NJ, and currently I am the sole stakeholder, and based on reading materials and also some feedback from my accountant, it was what made sense.

We are developing a mobile app that will soon launch, and I have outsourced the development work to India. So essentially I do not have any physical business activities in NJ. Even after the app is launched, all business activities will be online.

Why DE? Well hopefully our exit strategy, which is to be bought out by a bigger player, happens. If so, we hopefully get to leverage the tax benefits of using DE.

The question is about operating the business. Like I need to pay for some patent attorneys in NJ who are working on our patents. I would like to open a business checking account to do so, but will there be any issues with opening it in NJ? Someone mentioned to me that a business account in NJ will make us a foreign entity doing business in NJ, thereby we would then have tax implications in NJ, which would then defeat the whole purpose of incorporating in DE. Is that true?

Also, if I brought in another person to do work on the project but give him stocks (options) instead of a salary, will that also be “doing business in NJ” if that person is physically located in NJ? What if the person is in another state, or even out of the country?

Thanks!

Answered by: admin  — 18 September, 2012

Peter,

The question of establishing nexus in the state of owners’ residence is a very important one, and there is no simple answer, as it would depend very much on the state of residence and individual circumstances.

When you have a web-based business, generally speak you can registering the company in a state outside of your personal residence, and opening the company bank account in a different state than the company’s domicile by itself would not create nexus. The bank might request a letter from a company CPA or attorney, stating that the company does not do business in NJ, but thats about all.

If you plan on writing off your business expenses, related to your business operation in your home state, then that would create a nexus for your business, and you would have to eventually file a foreign entity in that state (in your case New Jersey).

Corporations are allowed to have stockholders pretty much anywhere in the world, so in principle that by itself should not present an issue to you. It would definitely be a good idea to discuss that plan of paying those working partners in stock-options with your accountant or attorney (or maybe both) to make sure such person would not be considered an employee, or have any other ramifications that would require you to register in New Jersey.

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