Nevada vs California LLC: Which State is Better to Start Business?

If you are planning to start a new business, the question often arises as to which state is more profitable to register a company in. Very often Californian businessmen are especially interested in Nevada due to its nearby location and favorable taxation.

Those who are going to do business in California but are thinking about registering an LLC in Nevada to pay less tax will be especially interested in comparing these two states.

In this regard, we propose to compare Nevada LLC vs California LLC formation advantages. From this article, you will get answers to the following questions:

• Where is it cheaper to open a business: Nevada or California?
• Which one of the states has more favorable taxation?
• What are the other pros and cons of California and Nevada?

In most cases, when comparing California corporation vs Nevada corporation, the following pros and cons will also be quite pertinent. We won't look at this issue in detail but we'll try to mention important nuances.

Nevada vs California LLC Formation: Similarities

When comparing California LLC vs Nevada LLC, the process of incorporation is quite similar in many respects. Thus, in either state, you must choose a distinguishable business name for your LLC, which must be 100% unique, i.e. not like another business name that already exists in the state. That said, the restrictions and requirements are very similar in both states.

You will also be required to file your Articles of Organization with the Secretary of State and hire a registered agent. The cost of Nevada vs California formation is almost the same. Creating an LLC in California, the state filing fee is $70, whereas, in Nevada, it's $75.

Also, the list of common features between the two states includes the following ones:

• No Tax on corp shares;
• No Gift Tax;
• No Estate Tax;
• In both CA and NV, you are required to file regular reports with the state, i.e. report their CA or NV income, deductions, and credits separately under the personal income tax law. Such items pass through to LLC owners for purposes of taxation;
• Shareholders, directors and LLC organizers do not have to reside in the state or hold meetings in California or Nevada;
• Shareholders in California and Nevada, as well as owners of corporations, are individually liable for wrongdoing (alter ego principle).

LLC California vs Nevada: Differences

When comparing Nevada LLC vs California LLC, the most common thing people notice is that there's no personal income tax in Nevada. However, if you live and do most of your business in California, you need to understand that most of the advantages of incorporating in Nevada will not help you save your money.

That said, you will still be registering a business in California, in this case, as a foreign LLC. Under California law, your company will, at least, have to pay a franchise fee. Also, individuals residing in California pay income tax on all income, including that derived from out-of-state businesses.

Nevada LLC Formation: Pros and Cons

Nevada’s tourism and gaming business is quite active in the state, as well as many other key industries including mining, information technology, natural resource and technology, aerospace and defense, health, manufacturing and logistics, and so on. It's considered one of the most attractive states to create an LLC. This is mainly due to the fact that the state government offers a wide range of beneficial programs and support to those setting up a new business. You can check all active programs for 2022 on the Secretary of State's website. Also, many entrepreneurs are attracted to Nevada because of its favorable and straightforward taxation.

Nevada LLCs: Pros and Cons

Nevada LLC: Advantages

Let's take a closer look at the advantages of setting up an LLC in Nevada:

• No corporate income tax for small businesses. There's no income tax department in Nevada. You don't have to pay additional corporate taxes or franchise fees. Also, the state of Nevada does not charge individual income tax;
• Flexible business court (no binding precedent). Your business disputes will be handled in a business-friendly manner with a detailed review of the situation. Nevada respects the confidentiality of court rulings, and therefore, there are virtually no mandatory precedents;
• Charging order protection. The state offers one of the most beneficial creditor protections and mandates the transfer of dividends or distributions to the creditor. A “charging order” is a type of lien that provides the lien holder only an economic interest over the interest in the LLC to which the lien has attached. Importantly, this prevents personal creditors from seizing corporate shares and taking control, i.e. such an order is sent to the corporate entity (LLC) and not to the shareholders. While a similar principle is practiced in most states, in Nevada, an overwhelming number of court decisions use this type of order;
• High level of LLC confidentiality. Unlike many other states, in Nevada, lists of LLC shareholders and owners are not public. This allows you to remain anonymous (if you choose to) even when you apply to form an LLC or issue different types of stock;
• No requirement to hold business meetings within the state. You can be headquartered out of state and even outside the United States. The place and time of business meetings is your own affair. However, if the company's office is out-of-state, be sure to hire a reliable registered agent.

Nevada LLC: Disadvantages

Now let's break down the disadvantages of setting up your business entity in Nevada. This will also help compare Nevada and California corporations:

• Setting up an LLC in Nevada will cost more than in many other states. The fee to incorporate an LLC in Nevada is $75. This is the price you will see on most resources. In fact, this is only the state filing fee you will need to pay for the Articles of Organization. Next, you will have to file an annual list with the Secretary of State ($150) and get your Nevada business license ($200). Therefore, setting up an LLC in Nevada will not cost you less than $425. This total fee excludes other optional fees associated with LLC formation like LLC name reservation, DBA, certified copies, and a Certificate of Good Standing;
• Litigation in several states can affect confidentiality rules. If you operate your business in another state, or there are disputes between residents of different states, in Nevada, the court may take into account the laws of that corresponding state. This will include privacy requirements. Thus, keep in mind that even if Nevada's privacy terms are more beneficial than in many other states, they are not guaranteed;
• Businesses with more than $4 million in income are getting taxed. This requirement went into effect in 2015. Also, in some cases, industry taxes, sales tax, and modified business tax are paid;
• Privacy regulations don't apply to everyone. Nevada law only protects LLC owners and shareholders. Directors, members, and managers are not covered. On the contrary, lists of officers you will file with the Secretary of State each year, after which they are published on the Secretary of State's website and are available to all.

California LLC Forming: Pros and Cons

Now, for a full comparison of Nevada LLC vs California LLC, it's worth talking more about the state of California. Despite the relatively high taxes and fees, business is booming in the state. Moreover, some of the most attractive conditions are offered here to small LLCs and startups.

California LLC: Advantages

Note that when we talk about the advantages of opening an LLC in California, it's not only about comparing California LLC vs Nevada LLC benefits but also the laws and regulations of other US states:

• Limited liability (protection of personal assets of LLC members). In California, there's a "corporate veil" at the legislative level. Thus, the personal assets of LLC owners, members, and shareholders cannot be used to pay company debts or compensation, unless the members themselves mix company finances with personal assets. That said, unless you use a corporate account for personal payments and accept payments from customers to your personal account, it's likely that even in the event of any financial issues or penalties, your personal savings will remain untouchable;
• Most LLCs are pass-through entities. All profits and losses of the company are accepted directly by its members, without state taxes at the company level. Further, each member independently includes them on his/her tax return. Such an approach greatly simplifies accounting and tax records;
• LLC owners can decide for themselves what type of business management they are comfortable with. You can distribute responsibilities between LLC owners and members, manage the business personally as an owner, or appoint several third-party managers. The management structure is not limited, and therefore, you can hire professionals for the purpose;
• Cheap state filing fee. If we compare the real cost of incorporation in Nevada vs California, it turns out that in California, there are no compulsory additional fees at business registration.

California LLC: Disadvantages

The most important disadvantage of setting up a business in California is associated with the taxes:

• Franchise tax - from $800;
• Income tax for all California residents;
• Other types of taxes and fees are also possible.

In addition, in California, there are no liability restrictions for LLC members and owners. If you do business competently in California, as in many other states, there is also a "corporate veil" that protects the assets of the founders and members of the LLC in the event of any lawsuits. However, there is no such protection at the state level. And therefore, when it comes to lawsuits in this state, it's much more common for this "veil" to be breached. Thus, in some cases, you will have to use your personal savings to pay, among other things, the debts of the company.

An LLC is treated as a partnership from an IRS tax perspective. Accordingly, each member of the LLC is treated as self-employed. And therefore, in addition to income tax, LLC members will also pay Medicare tax.

When taxed under the S corporation scheme, the IRS taxes are paid based on actual compensation, not profits.

Nevada LLC vs California LLC: Taxes and Fees

When comparing Nevada LLC vs California LLC, you can already see that on the one hand, Nevada business registration turns out to be more expensive due to the initial registration fee. However, in the long run, taxes and fees are still higher in California. The situation is similar when comparing California vs Nevada corporations.

Conclusion

When comparing California and Nevada, we can see that each state has its own advantages, disadvantages, and requirements for LLCs. Thus, it's more expensive to open a business in Nevada, but further, taxation in California proves to be less favorable.

If you are deciding where it's better to do business in Nevada vs California, think about which state you will be working in. The most important thing, though, is to always consider your home state in the first place.

If you incorporate in Nevada and then do business in California as a foreign LLC, you'll just waste your money on double registration. After all, you'll have to pay for a foreign LLC registration as well. And such organizations in California still pay franchise fees along with many others. So the financial benefit will be questionable, and the complexity of your business operations will increase.

If you will be operating your business online, the choice between Nevada or California LLC depends mostly on what exactly you plan to do. In this case, we recommend researching additional licenses, permits, and fees, as well as consulting with a lawyer.