Are you wondering if you should set up a Nevada LLC or California LLC in 2023? If YES, here are their pros and cons and everything you need to know. When entrepreneurs in California make the decision to form an LLC, they often ask whether it is beneficial 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.
If you are analyzing California vs. Nevada LLC, the main issue to consider is where you’re planning to conduct the majority of your business. Most times, you won’t even save as much money as you might think by incorporating your California-based business in Nevada.
California has some pretty heavy tax requirements, and a lot of business people are looking for ways to avoid them. California indeed has one of the most powerful economies in the United States, but it can be quite costly to start a business in this state.
Notably, the Corporate Income Tax in California remains one of the highest in the country, perching at a startling 8.84 percent. The state of California also ranks 40th in corporate tax rankings, according to the Tax Foundation. However, the neighboring state of Nevada is ranked number one.
One very common belief among business owners in California is that they can save a lot of money on taxes if they incorporate it in the state of Nevada. Howbeit, incorporating a California-based business in any other state normally won’t save business owners any money when it comes to paying taxes.
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. Nonetheless, read on to understand the primary difference between a Nevada LLC and a California LLC.
Pros and Cons of a Nevada LLC
Nevada provides an extensive gaming culture that generates a lot of tax income for the state. Owing to this, a Nevada LLC is able to leverage this structure by having limited tax liabilities. Here are of the Pros and Cons of a Nevada LLC.
- No tax corporate profits or shares for small LLCs: Note there is no income tax department found within the State of Nevada. It simply means you don’t need to worry about your corporate profits being taxed by the state. Not even your corporate shares or LLC ownership is taxed by the state. There is no franchise tax or personal income tax within the state either.
- Business disputes are litigated differently: Nevada is a lot like Delaware in how it addresses disputes in the business world. It offers a business court that helps to manage disputes that may arise. In addition, the written opinions are not released to the public, which means binding precedents are not set.
- Charging orders apply to more situations in Nevada: indeed the only remedy for creditors of owners of a Nevada LLC is a charging order. This order is issued by the court, directing the company to send its dividends or distributions to a judgment holder instead of the owner, shareholder, or member. Note that most states have this structure within their laws, but Nevada applies it to more situations.
- There is a higher level of privacy with a Nevada LLC: When an LLC is formed in Nevada, the owners and shareholders of a corporation are not part of the public record. Note that this gives you a platform to stay private and anonymous, even though you’re applying to conduct business within the state. You’re even permitted as an LLC to issue the stock for capital, personal property, services, or real estate – including leasing and options.
- You’re not required to hold business meetings there: Some states mandate you to hold business or board meetings in the state as part of the rules of being an LLC. Nevada does not make this requirement. You are allowed to have the headquarters of your company in any state. Like most states, however, if you are located outside of Nevada, then you are expected to have a registered agent who can be available for business correspondence during regular business hours.
- Multi-state litigation may affect the privacy standards in Nevada: If you live in a different state than Nevada and are facing litigation, it is possible for a judge to decide to use the laws of your home state, not the laws of Nevada, as they apply to your case. Note that because you incorporate there doesn’t mean you’re automatically getting the privacy protections or precautions against liability.
- The privacy rules do not extend to everyone: Notwithstanding that the LLC privacy rules in Nevada protect shareholders and owners from prying eyes, there are no protections in place for officers, directors, or members. As part of the articles of the organization, you are required to appoint at least one member as the initial director of the company.
- Forming an LLC in Nevada is more expensive than in other states: Notwithstanding that, an LLC in Nevada is cheaper than a corporation; the fees that come with the business organization total $725. It tends to include a $75 fee for the articles of the organization, a $500 business license, and a $150 fee for a list of the LLC members.
- The annual list of officers and directors is posted online: You’re required to pay an annual fee as part of the list of officers and directors in a Nevada LLC. Once that information is submitted, the Secretary of State will post it on the website. Anyone can locate someone with a simple search with this information available to a public database.
- Some businesses may be taxed if they make $4 million: Since July 1, 2015, Nevada has started taxing all businesses which earn gross receipts that total $4 million or more in revenue. There are also industry-specific taxes, sales taxes, and a modified business tax which may apply for some LLCs. If you are subject to the tax, then there are no deductions for expenses that are allowed to apply.
Pros and Cons of a California LLC
A limited liability company (LLC) is one of the options for individuals who wish to start a business. It combines the tax benefits and flexibility of partnerships and the liability protection that comes with a corporation. Forming an LLC in California is a good option for start-ups. But, understanding the pros and cons will help you make the best decision for your business.
- One of the benefits of an LLC in California is the limited liability it offers. Members do not have to worry about their personal assets as they are not liable for the actions of the company. So, make sure there is a clear distinction between the business’ finances and the members’ assets.
- LLCs are usually pass-through entities. This means that all profits and losses go to members without government taxes on a company level. Members can file all of these on their Federal Income Tax returns. Because of this, you may find it easier to file taxes.
- The owners can decide how to manage the business. They can share the decision-making responsibility amongst themselves and be a member-managed LLC. California also allows manager-managed LLCs, which means you can hire/appoint a manager or managers that are more experienced and knowledgeable.
- You do not have to spend a lot of money on fees and initial paperwork. You may also find the process easier compared to the one needed when forming a corporation. In California, you have to pay for a one-time filing fee worth $70 to the Secretary of State. Submit the payment with the Articles of Organization.
- There are zero limitations to limited liability. LLCs do not protect you from risks and vulnerabilities completely. In some cases, a judge can rule that the LLC does not protect your assets. This situation happens when there is a failure to keep business transactions and personal finances separate. Another possible reason is the fraudulent management of a business resulting in other people’s losses.
- In terms of taxes, the IRS sees LLCs the same as they do with partnerships. The IRS does not recognize LLC as a tax structure the same way they do with corporations. Therefore, the government treats members as self-employed individuals. Members should pay for their social security and Medicare taxes, which are collectively called self-employment tax. The total net earnings of the business will be the basis for the tax.
- If the members choose to have S corporation tax status, they are expected to file the required paperwork with the IRS. Members who work for the company will have to pay social security and Medicare taxes based on the actual compensation and not the pre-tax profit of the company.
The Best between Nevada LLC and California LLC
When comparing Nevada LLC Vs California LLC, there is not much advantage. However, here are few important details to note.
- Filing and Maintenance Fees: Notwithstanding that 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. Nonetheless, 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.
- Corporate Shares Tax: Neither California nor Nevada levies such a tax.
- Personal Income Tax: Notwithstanding that 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: Even though 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.
- 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.
- 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.
- 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.
If you’re considering California vs. Nevada LLC, the main issue to analyze is where you’re planning to conduct the majority of your business. In most cases, you may not save as much money as you might think by incorporating your California-based business in the state of Nevada.
Given the above overview, any benefits of Nevada over California incorporation are generally negated by the application of California law, or simply nonexistent.