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Where To Form A Corporation

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It's true that if you form a corporation in Nevada, Wyoming, Delaware, etc., you won't have to pay any corporate or individual income taxes in those states. But, if the corporation does business outside the state that you choose, you may find yourself double taxed, or more subject to other state taxes.

Doing Business, Domestic Corporations v. Foreign Corporations

"Doing business" means you have an office in that state, earn revenue there, or have employees there. A "domestic corporation" is a corporation formed in that state. For example if you are a Nevada corporation, then in Nevada your business is a domestic corporation. In all other states, your Nevada corporation is considered a "foreign corporation." The difference between a "foreign corporation" and a "domestic corporation" doesn't just apply in Nevada, it applies in all the states. So if a corporation is registered in Delaware, then it is a "domestic corporation" in Delaware, but a "foreign corporation" in the other 49 states.

Qualifying To Do Business in Foreign States

Qualifying to do business as a foreign corporation in a state such as California, is a lot like incorporating in California. You'll have to register with the California Secretary of State and pay the same (or more) filing fees as a "domestic corporation."

What Happens If Company Refuses / Fails to Register in a Foreign State?

If you are doing business in a foreign state and you don't register the corporation in the foreign state, then it is likely that your corporation will be subject to monetary penalties and likely be barred from suing anyone in the foreign state (bear in mind the defendants are likely to have the option in a lawsuit of moving the lawsuit to a venue in their state)--this means you won't be able to enforce any contracts in that state and people who owe your corporation money won't have to pay. Failure to qualify may even constitute a crime in certain states.

Form in the Right State - Tax Haven States Likely To Lead To Double Taxation

The corporation will have to pay state corporate taxes in the states where it is qualified to do business. How much tax will the corporation have to pay in any particular state where the corporation is qualified to do business depends on the level of business activity there. The rules vary from state to state. If the state imposes a "franchise tax" on corporations for the privilege of doing business, then the corporation will have to pay the franchise tax as well. So although in some states, such as Nevada, there are not taxes, your corporation is likely to have to pay the "franchise tax."

So even if you don't owe any tax in the domestic state, you may owe tax in the state or states where your corporation does business. The end result is no tax savings.

Other Advantages To Registering Outside California May Not Be An Advantage

There may be other advantages to incorporating in a foreign state because that state is business friendly. Today just about every state is business friendly when compare to California, arguably the most non-business-friendly state in the union.

Bear in mind, if the shareholders of the corporation don't live in the domestic state and the bulk of the business is not in the domestic state, then there's a likelihood that the corporation will not be allowed to take advantage of the domestic state's corporate law.

For example: If the business is incorporated in Nevada, but a majority of the shares are owned by California citizens and the corporation does most of its business in California; then pursuant to California law, such a corporation is a "pseudo foreign corporation" and the important portions of California's less business-friendly corporation law are applied by California courts, not Nevada law. Not many of Nevada's legal benefits would apply in California.

Tax Advice

When it comes to incorporating, I would strongly consider the state in which you do the most business in. If you decide to choose another state because of its tax advantages, then I would recommend discussing it with a tax adviser. For example, if the choices are between California and Nevada, then discuss it further with tax people located in Nevada and California. Don't take Nevada tax advice from a Californian, and vice-versa. Don't, as a Californian, make decisions about Nevada state taxes. Listen carefully to what they both have to say. You may find that you will end up paying more in taxes if you don't select the state in which you do business.

Beware of the State Marketing Schemes

So unless you are doing most of your business in a specific state, then there is no reason to form a corporation there, because although the marketing ploy of no state taxes may sound good, it may not apply to your corporation.

For more information, contact a Los Angeles corporate law attorney at Wex Law at (844) 4WEX-LAW.

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