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:
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.
Table of Content
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:
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’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.
|No state income, corporate or franchise taxes, or bonuses for small companies;||Multistate litigation can affect confidentiality/privacy rules;|
|No taxes on corporate shares or profits;||Part of businesses (with more than $4 million in revenue) are getting taxed;|
|Setting up an LLC in Nevada will cost you more than in many other states (around $425). However, if we take California, LLCs in this state must pay an annual franchise tax of at least $800;||LLC Privacy rules do not apply to everyone;|
|Flexible business court (no mandatory precedents);||Nevada’s registration fees are far from the cheapest in the country;|
|High confidentiality and privacy for those LLC owners who choose to be anonymous;||The necessity to hire a registered agent in Nevada.|
|No requirements for operating agreements and business meetings.|
Let's take a closer look at the advantages of setting up an LLC in Nevada:
Now let's break down the disadvantages of setting up your business entity in Nevada. This will also help compare Nevada and California corporations:
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.
|No personal liability of the owner(s) for business lawsuits or debts;||Mandatory franchise and income tax;|
|Pass-through LLC taxation (no double taxation);||High annual franchise tax ($800);|
|Fewer recordkeeping and reporting requirements;||The IRS sees your LLC the same as they do with partnerships;|
|LLC owners are free to decide which type of business management to choose;||When taxed under the S corporation scheme, IRS taxes are paid based on actual compensation, not profits.|
|Cheap state filing fee.|
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:
The most important disadvantage of setting up a business in California is associated with the taxes:
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.
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.
|Tax on corp shares||No||No|
|Tax Foundation's, Personal Income Tax Ranking||N/A||49|
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.