Incorporating in California v. Nevada

Incorporating in California v. Nevada

California vs. Nevada

Choosing to establish a business as a formal legal entity is a big decision. Business owners have several different types of business entities to choose from, along with deciding which state they should form their entity in.

When entrepreneurs in California make the decision to form a corporation, they often ask whether it is advantageous to set up in a different state. Nevada is most often mentioned because it is geographically close and has no corporate or personal income tax. Despite this, often there is no real advantage to a California business incorporating in Nevada.

CALIFORNIA V. NEVADA INCOPORATION

There are a number of “benefits” provided to California businesses as to why they should incorporate in Nevada. However, when comparing the states, there is not much advantage to incorporating in Nevada when a company is doing business in California:

• Filing and Maintenance Fees – Although Nevada says it has “nominal” fees, both the initial filing fees and annual fees to maintain corporate status are generally higher in Nevada than in California.

• Corporate Tax – A Nevada corporation does not pay state income tax. However, a business that operates in California will likely have to qualify to do business in California, and pay at least the minimum franchise tax in California. This is true even though the business may be a Nevada corporation because the critical issue is where the entity is conducting its business.

• Franchise Tax – California generally imposes a franchise tax, regardless of whether the entity is a California or foreign corporation. It is based on a proportion of property, payroll and sales in California compared to companywide totals. If a corporation is able to own property, employ personnel and conduct business in Nevada (or any other state), it may be able to reduce tax liability.

• Corporate Shares Tax – Neither California nor Nevada levies such a tax. 

• Personal Income Tax – Although Nevada has no personal income tax, a California resident pays California tax on all of his/her income, even if that income comes from outside California.

• IRS Information Sharing Agreement – While most state tax agencies share tax information with the IRS, Nevada does not. However, once a Nevada corporation qualifies to conduct business in California, it is subject to California’s agreement to share with the IRS.

• Reporting and Disclosure Requirements – Both California and Nevada require corporations to annually file articles of incorporation and forms identifying the officers and directors.

• Qualifications of Shareholders and Directors – Shareholders, directors and officers do not need to live or hold meetings in either California or Nevada.

• Liability of Shareholders – In both California and Nevada, corporate owners can be individually liable for wrongdoing under an “alter ego” theory.

• Ability to Limit Liability – California allows articles of incorporation to limit liability of corporate directors, except for certain intentional conduct defined by statute. Nevada state law simply provides that shareholders are not liable, unless they engage in intentional conduct.

• Removal of Directors – In California, directors may be removed without cause by a vote of the majority of the outstanding shares. Nevada requires the vote of two-thirds of the outstanding voting power.

Given the above overview, any benefits of Nevada over California incorporation are generally negated by the application of California law, or simply nonexistent.

LEARN MORE FROM A CORPORATE ATTORNEY

If you conduct business in California, and are thinking about incorporating your business in Nevada, it is important to consider whether there are good reasons to do so. The attorneys at Brown & Charbonneau, LLP can provide help to companies in choosing the right state for incorporation, as well as assisting with the incorporation process. Call us at 866-237-8129