Forming an LLC-living in CA, related permits, tax treatment


2

My scenario: I currently reside in CA. However, I will be locating to the state of Washington by the end of 2012. I (no other employees) am starting a 100% online service-based company, which will be operated only out of my home.

I would like to form an LLC in a neutral place, primarily because I will be moving to Washington eventually and because California is NOT a friendly state when it comes to business formation costs, etc. - I would not want to have to deal with re-forming in Washington when I move there. I will either form my LLC in Wyoming (leaning more towards here because it is the cheapest), Nevada, or Delaware. I realize that many of you would probably encourage me to just plain form my LLC in California, but again I do not want to do this because I will be moving.

I understand that in order to do this I will have to undertake the following steps:

  1. Form LLC in Wyoming, Delaware, or Nevada, pay all related filing fees and other costs (i.e. obtain registered agent, etc.)
  2. Register as a Foreign Business for the state of CA since this will be where I am physically located. (I am aware that I will have to pay $800/yr for franchise tax and that there is no way around this).

My Questions:

A. Since I will form in either WY, NV, or DEL, file as Foreign business in CA - will I need to register/file for the following in CA since this is where I will physically be doing business?:

a) Local tax registration certificate (for the city I live in, I'm assuming)
b) Business License (for the city I live in, I'm assuming)
c) Any other misc. permits/licenses required to operate my web-based home business?

or would/could I register for these in the state I form the LLC in?

B. Regarding taxes - I will elect to be taxed as a partnership. (I am aware that most will advise me to talk to a tax attorney of sorts, however I would still like to ask here) - please let me know if I am understanding this correctly. I will have to do the following:

a)pay annual franchise tax to CA regardless of business profitability ($800 - yuck)
b)pay income tax on my business's profits (per the flow-through nature to my personal income tax statement)

Is there anything I am not accounting for with respect to taxes?

C. Is one state (DEL, WY, NV) better than the other to form my LLC given the nature of my business (100% online, service, home-based)?

I really appreciate any information anyone can provide. It will be super helpful in determining what the next steps are for me. Thanks in advance!

Please note: I am not interested in being talked out of NOT initially forming in California. I understand that the way I want to do it may seem like more work to form my business right now, but in the long run I think it is the simplest/most optimal option for me.

LLC Foreign Tax California

asked Mar 7 '12 at 10:53
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Karen
11 points
  • California will waive the $800 minimum the first year, which is great for you since you plan on moving out of California by then. – Alain Raynaud 8 years ago
  • will they waive it for a LLC that is registering with CA as a Foreign business? I thought I read somewhere that that only applied to Corporations. Thanks for your help. – Karen 8 years ago
  • I wasn't aware California waving the $800 fee for a startup. The did this once before that I know of, back in 2000, except it was for two years. They retroactively rescinded it, leaving some businesses with some unexpected tax liabilities. They've done it before and can do it again. – Mike S. 8 years ago
  • They only waive it for Corporations in their first tax year, not LLCs – Henry The Hengineer 8 years ago

2 Answers


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I think by the generally well-written nature of your question you already know the answer to many of these, but let me add my thoughts.

A) You're correct in that should you decide to form an LLC in another state, you must still register as a Foreign business in CA, and meet all of the requirements for doing business there. That would include your local tax registration and business license. I'm not a resident of California, but generally you have to do everything a California-registered LLC has to do, except for the basic formation.

B) Regarding taxation, the answer is much the same. You have to pay any taxes that a California-registered LLC would, such as the franchise tax. Your real benefit will come when you phyically relocate to a more tax-friendly state. Until you do that, you won't save much.

Your (Federal) personal income tax treatment won't differ at all based on where you live though. You'll claim your share of the LLC income, likely through a K1 filing, and record that on your Federal tax return.

C) This question is somewhat subjective. I live in Nevada and have a Nevada-based S-Corp. My friend (also in Nevada) recently registered his LLC in Wyoming for the same reason you state: cost. Nevada and Deleware are generally seen as business friendly because they have well-defined corporate law structure and don't charge any business taxes for corporations that register there but operate elsewhere. I don't have much knowledge about Wyoming, but all three states seem like a good bet.

One tidbit: My cost to register in Nevada was $105 for filing and $125 to file the initial record of directors. That's pretty cheap. Nevada charges a $200 business license but because I registered as a home-based business startup, I could waive it by filing a hard-copy notarized document.

answered Mar 7 '12 at 11:45
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Chris W
131 points
  • Thanks so much for the quick response! One question, you mention that both Nevada and Delaware are known for their "well-defined" corporate law structure. Would you say that Wyoming also has a "well-defined" corporate law structure? Although, cost is my primary motivating factor at this point in determining where to form, I do also want to consider the legal protection aspect..thanks again! – Karen 8 years ago
  • I don't know much about Wyoming law, but I'm sure that it's adequate for most any business. It will give you the type of legal protection that you seek. I think Delaware's reputation is mostly of benefit to large multinationals. http://corp.delaware.gov/faqs.shtml#numcorpsChris W 8 years ago
  • Thanks for your input! – Karen 8 years ago

0

When you say "starting a 100% online service-based company, which will be operated only out of my home." do you mean the servers etc will be in your home?

If all the physical facilities like servers, registered agent offices etc. will be in another state(s), are you really doing business in California?

For the sake of discussion, lets assume you form in Navada. If you:

Have a PO box in Navada and get all your mail there.
Outsource your hosting to a provider in any state but California.
Have a Navada phone number (free with Google voice).

then what "business" (primarly interaction with the public) is the business doing in California?

It may be well worth your while to get professional advice on this point as if it is possible to structure your business appropriately you may be able to save substantial fees to the state of Calif.

I'm not trying to suggest anything illegal here, just suggesting that this might be possible.

For reference here are a couple of examples:

What Constitutes "Doing Business" - Utah Division of Corporations New York California

On March 4, 2011, the California Franchise Tax Board issued guidance
on what constitutes “doing business” in state beginning January 1,
2011.


For taxable years beginning on or after 1/1/2011, a taxpayer is doing
business in California if any of the following conditions are
satisfied:


—The taxpayer is organized or commercially domiciled in California.


—The taxpayer if actively engages in any transaction for the purpose
of financial or pecuniary gain or profit in California or


—Sales of the taxpayer in California, including sales by the
taxpayer’s agents and independent contractors, exceed the lesser of
$500,000 or 25 percent of the taxpayer’s total sales.


—Real and tangible personal property of the taxpayer in California
exceed the lesser of $50,000 or 25 percent of the taxpayer’s total
real and tangible personal property.


—The amount paid in California by the taxpayer for compensation
exceeds the lesser of $50,000 or 25 percent of the total compensation
paid by the taxpayer.


For the conditions above, the sales, property, and payroll of the
taxpayer include the taxpayer’s pro rata or distributive share of
pass-through entities (partnerships, LLCs treated as partnerships and
“S” corporations).


The new law affects out-of-state corporations and pass-through
entities and their partners/shareholders/members that have property,
payroll or sales in this state. Currently, they may not be considered
to be doing business in this state, but may be considered doing
business starting in tax year 2011 if they meet any of the thresholds
listed above.

answered Mar 7 '12 at 13:07
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Jonny Boats
4,848 points
  • I believe that I would meet the "doing business in California" by at least the first bullet point listed. Also, at least by the second one as well. Thoughts? – Karen 8 years ago
  • @Karen - Look at it from the prospective of the business (LLC), not your personal prospective. The LLC will not be organized or domiciled in Calif. (although you, an investor are). Also sales on the internet are a grey area - ref Amazon and collecting Calif sales tax. But generally just because someone in Calf buys something from an internet merchant does not meet the test. If it did you would have to file as a foreign corporation in every state where you had customers (hopefully all 50). Read the Utah article. – Jonny Boats 8 years ago
  • What about the compensation part? If you are only employed through the single-person LLC, then 100% of total compensation paid by the LLC is paid in California. – Hexedpackets 7 years ago

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