In what state should I register my web-based LLC?

Question

DISCLAIMER: I understand that as a US corporation, you're required to pay taxes in whatever state you A) do business in, b) pay employees in, and c) have property in. I understand that registering in Nevada (a no-income tax state) will not save me any money on my taxes.

That said, I currently live in California, but because my business is internet based, I work remotely, from pretty much wherever I please. I plan on moving around a lot in the next 5 years. In order to register an LLC in California, there's an associated state registration fee of $800 (per year). This is a lot of money to me and my tiny consulting business. My friends, who also have LLCs, have told me that Nevada has much lower fees for registering. Legalzoom.com seems to indicate that, even if I'm primarily based out of California, I can register a Nevada LLC as long as I have a Registered Agent in the state (in this case, LegalZoom would act as my Registered Agent for $150/yr).

I'm still a little nervous, and don't want to get surprised with hefty fines or fees at the end of the year -- can I safely incorporate my LLC in a state with lower registration fees, or must I incorporate in California?

Answer 1

I have researched this question extensively in previous years as we have notoriously high taxes in California, while neighboring a state that has zero corporate income tax and personal income tax. Many have attempted pull a fast one on the California taxation authorities, the Franchise Tax Board, by incorporating in Nevada or attempting to declare full-year residence in the Silver State. This is basically just asking for an audit, however.

California religiously examines taxpayers with any evidence of having presence in California. If they deem you to be a resident in California, and they likely will based on the fact that you live in California (physical presence), you will be subject to taxation on your worldwide income. You could incorporate in Nevada or Bangladesh, and California will still levy its taxation on any business income (Single Member LLCs are disregarded as separate corporate entities, but still taxed at ordinary income rates on the personal income tax basis).

To make things worse, if California examines your Single Member LLC and finds that it is doing business in California, based on the fact that its sole owner is based in California all year long, you could feasibly end up with additional penalties for having neglected to file your LLC in California (California LLCs are considered domestic, and only file in California unless they wish to do business in other states; Nevada LLCs are considered foreign to California, requiring the owner to file a domestic LLC organization in Nevada and then a foreign LLC organization in California, which still gets hit with the minimum $800 franchise fee because it is a foreign LLC doing business in California).

Evading any filing responsibility in California is not advisable. FTB consistently researches LLCs, S-Corporations and the like to determine whether they've been organized out-of-state but still principally operated in California, thus having a tax nexus with California and the subsequent requirement to be filed in California and taxed by California. No one likes paying taxes, and no one wants to get hit with franchise fees, especially when one is starting a new venture and that minimum $800 assessment seems excessive (in other words, you could have a company that earns nothing, zero, zip, nada, and still has to pay the $800 minimum fee), but the consequences of shirking tax laws and filing requirements will make the franchise fee seem trivial in comparison.

If you're committed to living in California and desire to organize an LLC or S-Corp, you must file with the state of California, either as a domestic corporation/LLC or foreign corporation/LLC doing business in California. The only alternatives are being a sole proprietor (unincorporated), or leaving the state of California altogether. Not what you wanted to hear I'm sure, but that's the law.

Answer 2

Is it really necessary? If $800 / year registration fee is too much to you, an LLC is apparently not something you need right now.

Many people conduct web-based business online on personal terms. My suggestion is that you focus on your business first and try to grow it as much as you can before you get down to a company.

Answer 3

I would prefer to see you register in your home state, and then focus on making money, rather than spending time looking to game the system to save a few bucks. People worry way too much about these trivial fees when they should be focused on making their business successful. Get registered, get insurance, and then pour it on and start making money. Make $650 your target for a week's income - you can do it! Next year's goal should be spending $50 a month on a payroll service because you're SO BUSY you can't take the extra time to pay your own social security taxes.

Answer 4

In this case not only that you must register in California (either as domestic, or as foreign if you decided to form elsewhere), you'll also be on the hook for back-taxes if you didn't do it from the start. FTB is notorious for going after out-of-state LLCs that Californians open in other States trying to avoid the $800 fee.

Answer 5

Register in Nevada. It's a no brainer. I understand that it's not a great deal of money, but if you can save several hundred dollars per year, why not? It's the same amount (actually probably less) of paperwork to register in Nevada.

Answer 6

In GA, LLC fees are $50 a year. Incorporating is a one time $100 fee. This information is current as of September 2013.