The Nevada Myth: Rethinking the Nevada Corporation

September 29th, 2022 by admin Leave a reply »

This may be a surprise to many, typically, corporations will be governed under California law despite being incorporated in Nevada. Let’s assume you do file a Nevada, yet you operate all of your business in California. Under this scenario, you are deemed to be a “pseudo foreign” corporation. If the corporation is a pseudo foreign corporation, California law in many areas will supersede the law of the state where the company was incorporated in. (See California Corporation Code §2115(b)). Therefore, for companies entirely based in California and doing business in California, practically all of the claimed benefits of incorporating in Nevada are out the window. It should be noted that if a Nevada corporation operating in California fails to qualify as foreign corporation, it may be subject to a number of sanctions. (See California Corporation Code §§2203, 2258, 2259).

Nevada v. California

The benefits typically touted by a Nevada corporation are the following: lower costs; tax savings; and greater privacy. But is any of it true? Below we will discuss some of these issues.

Expense: Contrary to what many people believe, it is more expensive to file in Nevada than in California. Here are some of the additional expenses: the initial filing fee is more; the Statement of Information is much more; you will be required to file a Statement and Designation of Foreign Corporation in California; and you will be required to hire a Nevada Agent for Service of Process each year. For large clients, the additional cost (of approximately $500 more) is not a big consideration, but for smaller businesses every dollar counts.

Taxes: The tax ramifications is usually one of the most important reasons for deciding whether to incorporate and where. Nevada’s secretary of state website says that Nevada has none of the following: (1) corporate income tax; (2) taxes on corporate shares; (3) franchise tax; and (4) no personal income tax. So how does this actually play out? The bottom line is if you are doing business anywhere other than Nevada, you will still be required to pay taxes in the state where you are conducting business. So if you are operating and generating business in Nevada, this can be a huge benefit, otherwise if you are generating money in California, you are required to pay California’s taxes. Furthermore, any income earned by a Nevada business and paid out to a resident of another state will be subjected to the taxation of that state. Therefore, the income passed on to the shareholders of an S-Corporation in Nevada will be taxed at both the federal level and in the state where the shareholder lives (this also applies to other pass-through entities such as LLCs).

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