Nevada has no franchise tax, no corporate income tax, and no personal income tax. It’s near the large markets of California. It sounds like a perfect state to incorporate your business in.
Unfortunately, incorporating in Nevada isn’t going to make your business immune from paying California taxes. In fact, a steady trickle of people have come into our office this year who have been sent notices of delinquent taxes by the State of California. These business owners have been in similar situations: they have California addresses, the business is conducted in California, and their only connection to Nevada is that is where an online service — maybe even a lawyer — told them to incorporate.
There may be legitimate reasons for you to choose to incorporate in Nevada, but if you conduct business in the Golden State, completely escaping California’s taxes isn’t one of them.
California require out-of-state corporations who do business within the state to register with the state. Registration requires the payment of a fee which is similar to the annual incorporation fee for a California corporation.
California require you to file corporate income taxes declaring the income earned from activities performed within the state. In addition, if your business has a retail presence in California, the state will expect you to collect state sales taxes for items sold in the state, regardless of where the business is incorporated or from where the items are shipped.
Bob lives in San Francisco and has a brilliant idea to create combined iPhone4S cases and coffee mugs which he will sell online. He’s going to make the “Cases4mugS” in his basement which will also serve as his shipping and fulfillment center. Bob searched the Internet for incorporation services. He found a web site that let him incorporate in tax-free Nevada, and he established an LLC there.
Bob will be required to register his Nevada LLC with California. He’ll will have to file LLC returns for all income earned for his work in California. In Bob’s case, that’s all of the corporation’s income. In addition, he will have to collect and forward to the state the sales tax for every Cases4mugS shipped to an address in California. Bob will also have to obtain a San Francisco City business license and may have to pay city payroll taxes, too.
If Bob doesn’t register his foreign corporation and pay the income and sales tax, he will be violating California law. If his business is successful it’s very likely that California will notice its existence and it will take steps to get its money plus penalties and interest.
In addition, we would urge Bob to check with a lawyer about the legal problems an unregistered corporation has. I am not an attorney and cannot give legal advice. But, run an Internet search on the topic of unregistered corporations and you’ll see many articles on the topic of how unregistered corporations cannot sue or defend themselves against lawsuits in California courts. In effect, it seems that unregistered corporations are sitting ducks in California courts.
Sure, the lure of “tax-free Nevada” or “corporate-friendly Delaware” is appealing. Your attorney may tell you legal reasons why those states — or others — are better places to incorporate than in California. Just make sure that you also check with a CPA to understand the financial implications and tax effects of your out-of-state incorporation.