subject: Incorporating In California Vs. Incorporating In Nevada [print this page] If you own or are starting a California business, you've probably considered the Nevada incorporation idea, right? Some well-meaning friend has undoubtedly shared advice that you should incorporate in Nevada, where the taxes are lower.
Incorporating in Nevada can seem like an attractive tax planning opportunity. And sometimes the option works. Before you leave for Las Vegas, consider the following secnarios:
Incorporating in California: When California Incorporation is the No-brainer Choice
Let's start by talking about when you absolutely have to incorporate in Californiano matter how attractive Nevada seems to be: If you operate your business in California and you're resident of California, forget about the idea of incorporating in Nevada to save taxes. You won't get this "tax planning" technique to work.
The problem with the Nevada incorporation option for California businesses with California owners is that your Nevada corporation will still need to register with the state of California. This foreign corporation registration means you'll still pay all the same taxes and franchise fees as a regular California corporation.
Furthermore, California will be able to tax the corporation on any of its income because the business activity occurs in California. And California will also be able to tax the shareholder and any shareholder-employees on all of the shareholder's earned and unearned income because the shareholder(s) reside(s) in California.
The bottom-line: If the business operates and the shareholders reside in California, you want to incorporate in California.
Incorporating in Nevada: When Nevada Incorporation in the No-brainer Choice
So when does Nevada incorporation make sense? Well, if the business activity occurs in Nevada and if the shareholders reside in Nevada, you may as well form the entity in Nevada. Nevada's corporation setup costs are modest. And Nevada doesn't levy an income tax. Choosing Nevada can be that simple.
If a Nevada business does incorporate in another state (like California), the business may have to pay franchise taxes and fees to the other state. Furthermore, the business by operating in Nevada will still have to register with the state of Nevada as a foreign corporation doing business in Nevada.
When Choosing the Right State Is Trickier
Choosing the right state in which to incorporate in trickier when the business operates across state lines or some chunk of the business can be relocated to a lower-tax state. In the case where a business operates in California, for example, but can relocate (say) the office or warehouse to Nevada, incorporating in Nevada may make sense. In this case, incorporating outside of California becomes another step in moving the business or part of it anyway out of the state. But moving a business or part of a business to another low-tax state will "move" part of all of the profits to that other state.
