If your business is making money from business conducted in California, even if incorporated in another state, you must still pay California taxes on the income. That is, you would be paying taxes in two states, potentially doubling your tax bill. Business owners are misled to believe that incorporating in a state that has no income tax, their business will not have to pay income tax. That is simply not the case. You are usually responsible for paying taxes in the state where the income is earned.
So if your business is making money in California, you are going to have to pay income tax in California. Being naive about this can have dire consequences. Many business owners have lost everything after being audited by their state tax boards. The California Franchise Tax Board is notorious for going after business owners that are incorporated in Nevada, but have some present or past connection to California. The Franchise Tax Board will take extreme measures to get what they feel they are owed.
In Gilbert Hyatt v. The California FTB wanted its share. The California FTB has been appealing and delaying the case since then and it is still far from over. To this date, the case has not been resolved. Hyatt may not even receive the judgement in his lifetime.
All other state tax boards will aggressively go after taxes they feel they are entitled to. If your corporation is not registered in the state where you conduct business, an out of state corporation will typically not protect you in case of a lawsuit. Corporations are creatures of state law and are only afforded legal protection in the states they are legally qualified to do business in.
Many business owners who incorporate in Nevada, and operate their business outside of Nevada, carry on their business for years until they are hit with a lawsuit outside of Nevada, leaving them fully exposed. Corporations that fail to qualify to do business in the state they conduct business out of are also unable to file their own lawsuits or collect amounts owed, via the California court system.
Businesses that fail to qualify to do business in their home state are also subject to penalties and fines. Additionally, the contracts entered into by these businesses can be voided at the option of the other side of the contracts. Accordingly, you should not incorporate in Nevada for liability protection if your business is not based out of Nevada. 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.
In order to receive the most personalized counsel when it comes to deciding where to incorporate your business, you should consult a reputable attorney. An attorney may be able to provide guidance in the local laws that will affect your corporation and offer an honest perspective on whether incorporating in Nevada is right for you. Call the Sutton Law Center today at for help with the decision to incorporate in Nevada. Choosing a Nevada Corporation There are numerous advertisements extolling the various benefits of incorporating in Nevada.
Benefits of Incorporating in Nevada If you will actually be operating your business out of Nevada, it is generally advantageous to incorporate in the state. Summary These reasons should help you proceed with caution when it comes to weighing the pros and cons of incorporating out of your home state.
Everyone at Sutton Law is so easy to work with! The two contracts and a copyright infringement letter your team wrote for me were great and you are making the corporate cleanup process so simple. So glad to have Sutton Law as my legal team for all my business needs. Feel free to use me as a referral if you ever have the need. Rachel Perlmutter. Working with the Sutton Law Center is always such a pleasure. Not only were they extremely thorough with our estate plan, but they helped to guide us toward working with our financial advisors and tax attorney.
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