General Questions

General Questions

What is a corporation?
Is an LLC a type of corporation?
What is the organizational structure of a corporation?
What is a “C” corporation?
What is an “S” corporation?
Can all corporations take advantage of S corporation status?
Is the decision to elect to be an S corporation permanent?
What are the advantages of a C corporation?
What are the disadvantages of a C corporation?
What are the advantages of an S corporation?
What are the disadvantages of an S corporation?
What is a “professional” corporation?
Who should form a professional corporation?
What are the advantages of a professional corporation?
Does it make sense to incorporate in Nevada?

Clients often raise the issue of incorporating in states such as Nevada and Delaware. Incorporating out of state is often not a good idea for small business owners given the additional financial costs that will be incurred by doing so.

Millions of companies regularly conduct business in the State of California. If you have a business nexus in California then you are part of its tax system. The following questions can be used to determine whether or not you are or will be a part of the California tax system and whether a California corporation or LLC is right for you:

    • Do you live in California?
    • Do you have a business location in California?
    • Do you or your employees work in California?
    • Do you own real estate in California?

If you answered “yes” to any of those questions then you are or will be part of the California tax system. This means that you must pay taxes in California, even if your corporation is another state such as Nevada or Delaware. Incorporating in another state with apparent lower corporate income tax is not likely to save you much money. 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.

Additionally, a corporation that incorporates in Nevada or Delaware must separately qualify to do business in California. This process takes as much time and can cost as much money as originally forming the corporation in another state. Moreover, you would also need to appoint a corporate agent to receive official notices in the other state — another cost you would have to bear. Finally, you would also have to pay annual registration fees, franchise taxes and gross receipt taxes (which can easily reach into the thousands) in two different states.

In conclusion, if your business is based in California, you likely are not going to save any money by setting up an out-of-state entity. In fact, it will likely cost you much more than setting up a corporation or LLC in California.