Sunday, December 23, 2007

Do I Really Have to Pay Calfornia's Minimum Corporate Tax?

Question: Suppose I live in California, and I want an LLC in Nevada or Colorado. Is there a way to set it up so that I don't have to pay the idiotic $800 California fee?

I often hear radio commercials advertising the purported benefits of incorporating in states like Nevada. Before do that, you should consult with legal counsel and a qualified tax advisor before making any decisions. You mentioned forming and LLC, but many small business owners find that forming an S corporation is better for income tax purposes.

Whether you have to pay the minimum California franchise tax depends upon whether you are doing business in California. Even if you form an LLC or corporation in another state, you still have to register and pay the taxes on your California income if are regularly doing business in California. If you have an address, employee, inventory, bank account or significant business contacts in California, you are probably doing business here as defined in the law.

One advantage to forming a new California is that the corporation does not pay the $800 minimum for its first tax year. While it is called a "minimum franchise tax", it is really a minimum income tax payable in the first quarter of each taxable year (except for the first taxable year. By the time your corporation is in it's second taxable year, you will hopefully be making enough money so that you tax bill is higher than just the $800 minimum anyway. New California LLCs do not receive this benefit.

If you are going to incorporate in California and do business primarily in California anyway, there are few reasons not to form a California corporation.

About the Author
Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

No comments: