Can I please form in Nevada? I want to avoid the $800 California tax!
So, I'll hear from folks that they want to form an LLC. That sounds pretty normal - another day at the office, if you will. Then they'll say that they want to form a Nevada LLC. Well, that's a slightly different story. See, every state has its own statutes about the protections afforded to corporations organized under their laws. In other words, for each state in the union, there are different laws, rights, privileges, etc for corporations that have incorporated, organized or formed under the laws of that state. Additionally, each state, as you can imagine, has its own schedule of taxes and fees imposed for the privilege of operating a business under those laws. These are more legal in nature and you really should consult with an attorney to find out whether or not these nuances really matter to you.
So, knowing that each state has its own rule book for corporations, why not just incorporate in the state with the best rules? Well, many have! Delaware and Nevada have long been known as havens for corporations seeking a friendly business environment. It almost could make a reasonable person think - why doesn't everyone incorporate there? Well, the dirty secret here is that while you may choose to organize under the laws of any state, most states will have a provision that will require you to register as a foreign entity if you have a nexus to that state. The term next here means that you have a true connection to the state in which you may have operations. Now, being a California CPA, the nexus that the Franchise Tax Board seeks to find is that you are transacting intrastate business. That means that you are entering into repeated and successive transactions in the State of California outside of interstate or foreign commerce. In other words, you're selling from San Diego and shipping product to Los Angeles.
Being a member or a manager of a California LLC or a foreign LLC is excluded from the meaning of "transact intrastate business." Similarly excluded are (i) holding meetings of managers or members or carrying on any other activities concerning the LLC's internal affairs; (ii) maintaining bank accounts; or (iii) securing or collecting debts or enforcing mortgages.
To take it one step further, just because you have a California driver's license doesn't mean that you automatically need to register. Even if you have California bank accounts or conduct meetings out here, that still doesn't establish a true nexus. What would create the nexus is that managing member or manager is actively transacting business of the LLC within California. In other words, you're more than a silent partner - you're involved in the operations of the business.
Now, if you are a member of an LLC and a California resident, you may be able to dodge the $800, but since you are a California resident, you wouldn't be able to skip out on California state income tax.
Overall, think about why you want to form in the first place. Call your accountant AND your lawyer and step it through. Each state has different protections available. Each state has different fees. Each state has different laws about nexus. Share your business objectives with your accountant and your lawyer and then make the decision to form an LLC or an S-Corp or whatever it is that makes the most sense for your business. All too often, we here that we just want an LLC - well why? What are you trying to do? Then go forward and form away...
Many happy returns...
Josh
