California vs Nevada LLC: Everything You Need to Know
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.3 min read
Updated November 10, 2020:
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 business people 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, however, incorporating a California-based business in any other state normally won't save business owners any money when it comes to paying taxes. In truth, it's more likely going to cost you more money when you consider that you'll have to comply with the corporate requirements of 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 in Nevada are not required to pay state income taxes because Nevada has no income tax to speak of. 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.
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 an 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 it has been incorporated in. 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 will provide you with extremely tight privacy. This simply isn't true.
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