What are the tax implications of starting a Delaware C-Corp for a completely online business when all founders live in different states?

One thing to keep in mind is where your corporation will primarily do business. You stated that the founders live in Pennsylvania, New York City, and California. Will the business operate in one, two, or all three of the locations? You stated that there would be no income to founders so I’m going to go with that scenario.

If your corporation is doing business in any of those three states, then it is likely that you will need to register the business as a foreign corporation in each state. Keep in mind that one reason people choose to incorporate in Delaware is because it costs less (at least in theory). If you have to register as a foreign corporation in any of those states (and, again, it is likely that you will), you’re going to pay a fee to do that.

Then, depending on how the business is structured, even if your founders aren’t drawing an income, the business may have to pay taxes in each state. Also, keep in mind that when a C-corp makes a profit and distributes dividends to shareholders, the corporation will essentially be taxed twice. All C-corps must file Form 1120 with the IRS and the dividends are also taxable. C-corps are a separate tax paying entity. So, if you’re looking to cut down on the taxes (and other expenses), a C-corp (even in Delaware) may not be your best option.

The first thing you should do is look at the laws in each state as they relate to foreign corporations. Are any of the business entities (such as an LLC or an LLP, for instance) treated more favorably? Then, consider the tax liabilities associated with each one. Remember that it isn’t just the income that the founders get – the actual business entity could be taxed as well depending on how it is formed (and state law).

After you’ve done that, you should talk with a small business attorney about your options. Getting legal and tax advice before you incorporate is one of the best things you can do to protect the founders and the income (or dividends) produced by the business. To learn more about your options, visit the LawTrades marketplace. We have affordable small business attorneys that can talk you through your options to make sure that you choose the best one for your multi-state circumstances!