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How to structure online travel business

Asked by: N - 2 February, 2013
My family lives in CA and we've started a small online travel business (accommodations only) in the past 18 months. The business is currently a dba of my father's S corp, which currently has about $100,000 in carry forward losses. He is the lone registrant of the corp. We have one 1099 outside sales rep living in CA, and expect to add more in 2013. We're projecting $400,000 gross sales in 2013, of which we'll net about 1/4 after expenses.

My father-in-law's health is bad, so we're rapidly trying to make adjustments so the company can continue in the future. This involves adding family members to the company to ensure its perpetuity. But we're also concerned about CA business climate, and given our status as an online business, we're curious what opportunity we may have to incorporate elsewhere.

My questions are:

1. Can our online business incorporate outside of CA if our family continues to reside/work from CA?

2. Do you suggest we incorporate elsewhere? If yes, where? (We prefer to keep company registrants names private. I know that's true in NV. Is it true in WY, SD, etc?)

3. Is the $100,000 in carry forward losses reason enough to remain incorporated in CA until the losses are eliminated?

Thank you so much!
Answered by: Wray Rives - 4 February, 2013
Neil,

1) You can certainly incorporate outside of CA, but as long as you continue to operate the business from CA, you will be subject to CA taxes and regulations. You will likely not accomplish what you want by incorporating outside of the state where you operate your business, but instead only subject the business to taxation in an additional state.

2) Wyoming does not require you to disclose shareholders only the name of one officer of the corporation. South Dakota requires the name of all the officers and at least one director.

3) S Corp losses are generally not carried forward at the corporate level, but instead flow through to the shareholder. In this case the sole shareholder, who may have suspended tax losses if he did not have basis in his S Corp stock. Any suspended losses would only be available to the sole shareholder on his personal tax return and would require future earnings or contribution of additional capital in the S Corp for them to be utilized. That is a general rule and S Corp accounting has a number of nuances, so I would suggest you discuss the specific situation with your CPA or professional tax preparer.

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