Key Takeaways:

  • Business Location Matters: Forming an LLC in Nevada does not exempt businesses operating in California from its taxes and regulations.
  • Tax Implications: While Nevada has no corporate income tax, California-based businesses still owe California taxes, including franchise tax.
  • Legal Protections: Incorporating in Nevada does not shield California-based businesses from legal responsibilities in California.
  • Operational Costs: Running a business in two states can increase costs due to compliance with both jurisdictions.
  • Privacy Considerations: Nevada offers greater business privacy, but this does not eliminate California’s legal disclosure requirements for businesses operating there.
  • Annual Fees and Compliance: California LLCs pay an $800 minimum annual franchise tax, while Nevada LLCs pay lower state fees but may still owe California taxes if operating there.
  • Asset Protection: Nevada provides strong asset protection laws, but this does not necessarily apply to businesses actively operating in California.

If you're considering California vs Nevada LLC, the main factor to consider is where you're planning to conduct the majority of your business. In most cases, you won't be able to save as much money as you might think by incorporating your California-based business in the state of Nevada.

Should You Incorporate Your California Business in Nevada?

California has some pretty heavy tax requirements, and a lot of businesspeople are looking for ways to avoid them. California has one of the most powerful economies in the United States, but it can be quite expensive to start a business in this state. In fact, the Corporate Income Tax in California is one of the highest in the country, coming in at a startling 8.84 percent. The state of California ranks 40th in corporate tax rankings, according to the Tax Foundation. Interestingly, the neighboring state of Nevada is ranked number one.

A common belief among business owners in California is that they can save a lot of money on taxes if they incorporate in the state of Nevada. Unfortunately, incorporating a California-based business in another state typically won’t save business owners money on taxes. In reality, it will likely cost you more when you consider the need to comply with corporate requirements in multiple states.

A common misconception is that Nevada corporations aren't required to pay income tax in the state of California. In reality, however, California imposes an income tax on any entity that produces an income within state borders, regardless of whether or not the company was incorporated or is qualified to conduct business in the state. Another common misunderstanding is that foreign entities aren't required to adhere to California's corporate regulations.

Indeed, companies incorporated in Nevada are not required to pay state income taxes because the state has no income tax. However, companies based in California normally do little to no business in the state of Nevada. Business owners in the state of California will normally operate their companies in California, requiring them to qualify with the state to conduct their business and pay, at the very least, a franchise tax in California, even if they are incorporated in Nevada.

The main factor to consider here isn't the jurisdiction in which a company has been organized, but the jurisdiction in which it is conducting its business.

Tax and Fee Comparisons Between California and Nevada LLCs

When choosing between a Nevada LLC vs California LLC, understanding the tax obligations and ongoing fees is crucial. Here’s a breakdown:

  • California LLC Taxes and Fees:
    • Franchise Tax: A minimum of $800 annually, even for inactive businesses.
    • Gross Receipts Tax: Businesses earning over $250,000 pay an additional fee ranging from $900 to $11,790.
    • State Income Tax: California taxes all business income sourced from within the state.
    • Registered Agent and Compliance Costs: Costs vary but are required for ongoing compliance.
  • Nevada LLC Taxes and Fees:
    • No State Corporate or Personal Income Tax: This is one of Nevada’s most appealing features.
    • Annual List Fee: Nevada requires an annual list filing fee of $150.
    • Business License Fee: $200 per year for LLCs.
    • Commerce Tax: Applied only to businesses with gross revenue exceeding $4 million.

While Nevada appears more cost-effective in some areas, businesses that generate income in California are still subject to California’s taxes and regulations, regardless of their state of incorporation.

Will a Nevada Corporation Provide Legal Protection and Increased Privacy?

In most cases, out-of-state corporations aren't going to protect you from legal action. This is especially true when your company isn't registered with the state in which you conduct the majority of your business. To take advantage of these legal protections, your company must:

  • Be registered and incorporated in the appropriate jurisdiction
  • Conduct the majority of its business in the state in which it is registered
  • List a registered agent in the state in which it conducts the majority of its business
  • List a registered office in the state in which it conducts the majority of its business

A corporation is defined by the laws of the state in which it was incorporated. In simple terms, this means that a company is only provided with legal protection in states they are qualified to conduct business in. In many cases, a business owner will incorporate their company in Nevada and operate outside of the state for years until they're faced with legal action outside of Nevada. This leaves them completely exposed.

When a business doesn't qualify to conduct business in the state they primarily operate in, they aren't able to pursue legal action of their own. This leaves many companies unable to do things like:

  • Collect money owed to them
  • Sue for damages
  • Pursue infringement cases

In fact, there's not much a company can do from a legal standpoint when they choose to operate in this manner. The short answer is, incorporating in Nevada instead of California doesn't necessarily provide you with any additional privacy and certainly doesn't benefit you from a legal perspective. One major myth is that incorporating your business in Nevada offers exceptional privacy. This simply isn't true.

Privacy and Asset Protection in Nevada vs California

Nevada is known for its strong privacy and asset protection laws, but this may not provide significant benefits if your business primarily operates in California.

  • Privacy Protections in Nevada:
    • Nevada does not require LLC owners to list their names in public records.
    • Business owners can remain anonymous by using a nominee service.
    • There are no information-sharing agreements with the IRS.
  • Privacy Considerations for California-Based Businesses:
    • California requires LLCs operating in the state to disclose ownership details.
    • If a Nevada LLC operates in California, it must register as a foreign entity and comply with California’s disclosure laws.
  • Asset Protection Advantages in Nevada:
    • Nevada offers strong liability protection against business debts.
    • Charging order protection prevents creditors from seizing company assets.
    • No personal income tax means owners can retain more earnings.

However, California law will still apply if the business primarily operates in the state, reducing the effectiveness of Nevada’s asset protection laws.

Operating an LLC in Multiple States: Compliance and Costs

If you register your business as an LLC in Nevada but conduct business in California, you must register as a foreign LLC in California. This means:

  • Paying California’s $800 annual franchise tax in addition to Nevada’s fees.
  • Filing reports and meeting regulatory requirements in both states.
  • Maintaining a registered agent in both states.
  • Complying with tax obligations in both jurisdictions.

For many business owners, the costs and complexities of maintaining compliance in two states outweigh the potential benefits of incorporating in Nevada.

Frequently Asked Questions:

  1. Is it cheaper to form an LLC in Nevada or California?
    Nevada has lower initial costs and no state income tax, but California-based businesses still owe California franchise taxes and registration fees.
  2. Does forming an LLC in Nevada protect me from California taxes?
    No. If you conduct business in California, you must pay California taxes, even if your LLC is registered in Nevada.
  3. Can I remain anonymous if I register my LLC in Nevada?
    Yes, Nevada allows business owners to keep their names off public records, but if you operate in California, you must disclose ownership information.
  4. What are the legal risks of forming an LLC in Nevada while operating in California?
    If you fail to register as a foreign entity in California, you risk legal penalties, fines, and losing the ability to sue in California courts.
  5. Are there any tax benefits to forming an LLC in Nevada for California businesses?
    No significant tax benefits exist if the business primarily operates in California. California still imposes franchise taxes and state income taxes on businesses operating within its jurisdiction.

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