California Businesses Incorporating In Nevada
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California Businesses Incorporating in Nevada
Overview
California is often considered a challenging state for businesses due to its strict regulations, workers' compensation, and tax burdens. To find relief, many companies incorporate in Nevada. However, this strategy requires careful execution to avoid potential pitfalls.
Understanding Jurisdiction
Jurisdiction determines which state has the authority to regulate a business. In California, jurisdiction is established if you are considered to be conducting business within the state. California aggressively enforces its jurisdiction rules. If you have offices or employees in the state, you must register and pay taxes in California, even if your company is incorporated elsewhere. As a result, incorporating in Nevada may lead to additional expenses due to dual taxation and fees.
Consequences of Non-Compliance
Operating in California without proper registration can lead to severe consequences. You'll face back taxes, fines, and potential business suspension until an audit is completed. The California Employment Development Department may also impose additional penalties, potentially freezing your bank accounts.
Example Scenario
Consider a business owner running a Nevada-incorporated company that builds websites. If operations, including receiving emails and calls, are conducted from a home office in San Diego, California will likely argue that the business is being conducted in the state. Defending against such claims can be challenging and financially draining, possibly forcing the business to close.
Utilizing Nevada Entities
Using Nevada entities while operating in California is possible, but it often requires a dual incorporation strategy. This involves setting up two entities: one in Nevada and one in California. The Nevada entity can hold non-tangible assets like intellectual property, while services are provided between the entities through fair-value contracts. The Nevada entity must operate legitimately with a business license, office space, and standard business expenses.
Conclusion
California's tough business environment can be daunting. Although there have been promises of relief, actions speak louder than words. Incorporating in Nevada can offer respite if done correctly, using strategic planning to ensure compliance and minimize risks.
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