In our eighteenth installment of “Ask a Lawyer” we featured questions from Ian Alden.
Read it here
QUESTION: I read your last article about Anonymous LLCs and have what I hope is a real simple question. I run a small online business, selling homemade goods out of my home. I don’t have any employees or warehouses or anything like that. I want to have an LLC to protect me. Can I make my LLC anywhere, or does it have to be in New Mexico?
ANSWER:Thank you for that question! There’s a lot of confusion about where you need to form your LLC, and it’s always best to do things right from the start to avoid any unpleasant surprises down the road. I should start by saying that I’m a New Mexico licensed attorney and that I can’t speak for the laws of every state, but a quick web search will tell you that every state has some variation of this requirement: you need to register your business in the state you’re “transacting business” in. What the phrase “transacting business” means is different in every state, but it usually boils down to physical presence. If you’ve got a warehouse, employees, a physical headquarters, or on-the-ground sales operations in a state, that typically qualifies as “transacting business” – meaning you need to register your business there. This usually also means you’re going to have to collect and pay sales tax there. This used to be very cut-and-dry before the internet age, but now online businesses like yours are left asking if what they do counts as “transacting business”. While there isn’t always a clear-cut answer, more and more states are saying ‘yes’ based on where you live. This determination often relies on the argument that you personally are providing the business services that create the physical connection, or “nexus”, between you and the state you’re living in.
In short, you might be required to register your online business in the state you’re living in – especially if there’s no other state your business has closer ties to.
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QUESTION: Hi Ian. I run an online business that prints and sells customized t-shirts and other apparel. I run my business in New Mexico and have a New Mexico LLC, but sales are really picking up in California. I heard that the Wayfair decision means I might have to collect and pay sales tax in every state. Do I have to pay California sales tax?
ANSWER: Hello and thank you for that question! Unfortunately, I can’t answer it completely – I’m not a California-licensed attorney or accountant and couldn’t speak to whether you owe sales tax anyway without knowing more information about your sales. What I can do is explain the Wayfair decision and what that means for your sales tax obligations across the different states. Maybe that will help clarify things?
In the case of South Dakota v. Wayfair, Inc., the Supreme Court of the United States allowed the State of South Dakota, under a law it had passed, to require Wayfair (a popular online sales company) to collect and pay South Dakota sales tax even though Wayfair had no “economic nexus” to the state of South Dakota. The South Dakota law at issue required any company to collect and pay sales tax if it had more than $100,000 of sales or more than 200 different sales transactions shipped to addresses in South Dakota in any given year. For a company as large as Wayfair, it easily exceeded the threshold sales amounts, but Wayfair challenged the law because, under the old tests that required some sort of physical presence to establish “economic nexus”, Wayfair had no connection to the State of South Dakota that would’ve let it impose such a tax requirement. The Supreme Court held that the South Dakota law was a reasonable expansion of the “nexus” concept in the internet age and upheld it. In the year since the Wayfair decision came down, most states have rushed to pass similar laws. Each state’s laws are slightly different, but most have similar $100,000 (some have $200,000) or 200+ transaction thresholds.
What does this mean for you? It means you need to research the sales tax laws of every state you do business in, and it means you might need to collect and pay sales tax in states you have no physical connection to if your sales volume is high enough. I cannot recommend enough that you work with a good accountant or CPA if you’re engaged in sales across state lines. They’ll be able to research those states’ tax laws and help you prepare tax returns as needed.
You can learn more about Business Taxes by visiting:
QUESTION: Hello Ian. I have a follow-up question to your last article about Anonymous LLCs. I need to get my company licensed with the New Mexico Department of Health and don’t want to have my name out there on the license application because of some prior convictions. Since I have an Anonymous LLC, can I have an employee fill out and sign the application using their information? They’re asking for ownership information.
ANSWER: Thank you as always for the questions! The short answer is a firm “no”, and the long answer is just a more complicated way of saying “no”.
Like most licensure applications, yours is probably asking for the names and contact information of anyone with an ownership interest in the business venture and anyone who will be providing services on its behalf – especially if those individuals themselves require licensure for the services they’re providing. The Department of Health doesn’t care about Anonymous LLCs – they want to know who they’re really dealing with.
An Anonymous LLC is simply an LLC formed in a state that chooses not to list the owners’ information in their public Secretary of State database. New Mexico is one such state that allows Anonymous LLCs if the LLC is set up a certain way. This lack of disclosure in the Secretary of State database is where anonymity both begins and ends for Anonymous LLCs – they do not afford the owner any rights to anonymity beyond that.
When filling out a licensure application, an applicant business is legally required to provide the information requested on the form. If the form asks for information about the applicant business’ owners (which most licensure forms do), that information must be provided. If the applicant business answers falsely, there could be civil or even criminal penalties involved. Moreover, the licensure, if awarded, would probably be revoked if the licensing department ever found out. So, in short, the only advice I can give you is to fill out any forms completely and truthfully and let the process play out. You might also want to consult with an attorney before submitting the application so they can go over the process with you and help you navigate it.
I hope this answers your question!
You can learn more about Anonymous LLCs by visiting:
Who is Ian Alden?
Since his admission to the State Bar of NM in 2015, he has represented individuals and small business clients in a wide variety of matters ranging from personal injury and civil rights litigation to business formations and tax disputes. As a law student at the University of New Mexico working in its Business & Tax Clinic, he got his start helping clients create new businesses or resolve old tax debts with the Internal Revenue Service and the State of New Mexico’s Taxation and Revenue Department. He gained a passion for using the law as a way to lift people up and help them realize their potential. Taking that passion forward, his current practice with L4SB focuses on issues that matter to small businesses at every stage of their development, from startup to liquidation – and everything in between. With an LL.M. in Taxation from Boston University, Mr. Alden specializes in tax law and enjoys helping clients to maximize their tax efficiency through proper choice of entity (or entities) and strategically planned transactions. Mr. Alden was selected as a 2019 New Mexico Rising Star Award Recipient, a distinction which recognizes no more than 2.5% of attorneys in each state.
In his free time, Mr. Alden enjoys acting and volunteering in the Albuquerque theatre community.
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