California is a notoriously bad state to do business in. Regulations, worker's compensation and tax issues overwhelm companies. Seeking relief, many incorporate in Nevada. Unless done carefully, this decision can lead to disaster.
Doing Business – Jurisdiction
Competence is a legal term used to define who has authority over something. Applied to this article, the term refers to the question of which state has the right to regulate a business. In California, the issue boils down to whether you are considered "doing business" in the state.
California is one of the most aggressive states when it comes to defining jurisdiction. If you maintain offices or employees of the State, you are considered to do business here. You must register with the state taxes and earnings, even if incorporated in another state. This tends to incorporate in Nevada an expensive option because you have to pay fees twice.
If you are caught "doing business" in California without having registered, you can be a difficult period. Initially, back taxes and fees come due. You will also be fined and probably suspended from doing business until an audit can occur. The Employment Development Department, California can collect back taxes and penalties. Your bank accounts can be frozen. Look at an example.
The California Franchise Tax Board tends to look at the facts surrounding a particular situation. Suppose I own a Nevada entity for the purpose of creating websites. I get e-mail in the mail, and work out of my house in San Diego. The tax agency will take the position that I do business in California. My office is here. I also take calls here. I work here. This scenario will be very difficult to defend. Play the scenario, I'll probably end up going out of business due to disruptions, stress and financial burden resulting.
So can you use Nevada business entities if you're in California? Absolutely. Generally, you need to use a double incorporation strategy. Essentially, an entity is in Nevada and one in California. An entity provides services to another through an agreement fair value, ie, you can not charge $ 1 per hour for services rendered. The entity must have a Nevada license, office, customary payables such as rent and typical items you find with a company. This strategy is typically used to hold assets of non-tangible, such as intellectual property or patent rights.
California has a brutal business climate. The Governator has promised relief, but an actor making promises is good, an actor making promises. Using Nevada entities can bring relief to your business as long as they are used properly.