Hi Everyone,

I am hoping someone might be able to provide some guidance on this matter. My friend and I are thinking of starting our own online business. The problem is, we both live across the states from each other, Oregon and Illinois.

The problem we are having is how do we even begin to set this up?

Do we need a business name? If so, which state or both.

State and Federal Taxes - we can't seem to get a straight anwer from these agencies. We each get different information from the other.

UUGGHH!! Frustration

The state where you should setup your business SHOULD be the state where you plan to have your Principal Office located in.  In your particular, I think it really comes down to which state is more business friendly and gives you better tax savings, etc. 

You should get a business name.  This business can be a partnership, in which case, you don't really need to register with any federal entity.  You can just go register for a Fictitious Name (DBA) at your local county registrar.  However, I do advise setting up a LLC or Corporation (either C Corp or S Corp) to help limit your personal liabilities.  

Once you have a business or business name, you should get a EIN for tax purposes.  This EIN is obtained from IRS on irs.gov.  Your principal office will dictate which state you belong to.  

I think what the confusion comes from is whether you should register your business in both states.  This applies to LLCs and Corporations.  For example, you establish a corporation in Oregon and your office is located there.  One day, you decide to open a new store location in Illinois.  When you establish physical presence OR hire employees in a particular state, you must then register your corporation as a "foreign corporation" doing business in the state of Illinois.  This means you need to pay annual corporation tax fees in both states.

The IRS and state is very specific in determining whether you need to file yourself as a foreign company doing business in that state.  To apply this to your situation, let's say that the Oregon corporation pays your partner in Illinois a salary.  That effectively means that you are employing your partner and now must also register your corp as a foreign corp in Illinois.  

Now, let's say that your corp never paid any money or salary to either of you since you're just starting out.  Then, in this case, I would say that you do not need to file your corp in both states.  You would then need to decide where the principal office will be located.  That state will then be the state you need to register your business in.

Granted, your corp can also hire your partner as a consultant and pay him as a contractor.  In this case, you also only need to register only in  one state.  However, this gets fairly hairy and you need to really satisfy IRS' definition of what a contractor is and its difference from an employee.  Make sure you consult a tax advisor regarding this to understand the legal and financial implications.  

I hope this answers your questions.  You can technically go on to either state's secretary of state web site and look for the foreign corporation business filing forms.  They should give you some information about what situations would require you to file in two states.

Also, I believe that dividend sharing or LLC/S-Corp tax pass-throughs will not require that you file as a foreign business entity in the state that the investor is located in.  Imagine a investment company LLC with 500 investors from all over the world and the country.  The LLC only does business from one single location and should only need to register in that state only.  It does not need to register in every state that the investor is in.  Again, I would check with a tax advisor on this.

Cheers!

Thank you so much for your responses. I am sure I will be back with a few more questions. But for now you have given me a direction

Independent Business Consultant
Cogency.us

Steven Roll

Thanks everyone for your thorough replies.

Sweetestmiracle, we're glad you found helpful advice and please keep us posted on your progress.  Best of luck to you!

Me and my partner met 7 years ago, and this was when each of us were right out of college.  We started our software development firm the next year right when software was on the edge of its rapid takeoff.  One thing i definitely learned about Joint ventures is long distance isn't always a terrible thing.  With something like the internet you can make long distance communication easy

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