I've had a number of questions from subscribers about whether multi-state corporations combined with a Nevada corporation can be used to avoid state income taxes and/or to also provide greater asset protection. With respect to having offshore corporations and U.S. corporations, the question is whether such an arrangement can result in some U.S. tax savings by shifting income to the offshore corporation. 

From an asset protection perspective, it seems to me that having more than one corporation affords far more protection than just having one. If one corporation is sued and loses, the assets of the other corporation are not exposed unless the second corporation is directly owned by the first. Thus, two corporations provide greater asset protection when assets owned by a non-operating corporation are leased to an operating corporation.

For federal income tax purposes, multiple domestic corporations will not help to save corporate taxes.

In a very few instances where a foreign corporation can generate profits from business operations that are unrelated to the domestic business, it may be possible to defer some taxes on the profits of the foreign corporation. However, there are a number of very complex tax rules that must be followed with care.

As for the state income tax benefits of "upstreaming" corporate profits to a Nevada corporation (where there is no state income tax) I have heard that California and some other high tax states have challenged this arrangement with some succcess. "Upstreaming" is a concept where a Nevada corporation provides administrative services to an affiliated corporation in another state and charges fees to the non Nevada corporation to effectively transfer most of the profits from the non Nevada corporation into the Nevada corporation. This concept only works with respect to state income taxes on corporate profits. It is not useful with respect to federal income taxes on the corporation.

NOTICE: This Information is intended only for educational purposes and may be regarded as controversial by some legal experts. Readers should consult with a qualified  professional who is familiar with their specific financial and tax circumstances before adopting any ideas that are discussed in this article.

About the author:

Vernon Jacobs is a CPA who works as a tax author and consultant.   He can be reached by phone at (913) 362-9667.