Can You Avoid Paying The California Franchise Tax By Incorporating In Nevada: How Is This Possible?

Can You Avoid Paying The California Franchise Tax By Incorporating In Nevada: How Is This Possible?

Starting a new business venture is an exciting occasion. Striking out on your own and being your own boss is a dream that millions of American aspire to everyday. After the initial euphoria of developing a business plan, picking a location and choosing a business name, the work really begins.

The only two things in life are certain, death and taxes. The state of California is known for taxing and regulating businesses more aggressively than the national norm.

Many budding entrepreneurs and small start-ups are keen on minimizing operating expenses and tax liability. California is unique in the sense that it applies a minimum franchise tax on all corporations and LLC’s based in California.

What Is The Minimum Franchise Tax?

The Minimum Franchise Tax is tax assessed on businesses located and or conducting intrastate transactions on a regular basis. The minimum franchise tax assessment is $800 regardless of the size of the corporation or LLC.

The other unique feature of the minimum franchise tax is that it can be assessed even if your business is inactive, operating at a loss, or filing a short period tax return (less than 12 months). So the burning question that everyone wants answered is, can you avoid paying the California minimum franchise tax by incorporating in Nevada?

The short answer is NO, but there are four ways to avoid the tax nonetheless if you fall into one of these categories.

Newly Incorporated Business

A newly formed business does not have to pay the minimum franchise tax in their first taxable year.

Qualified Corporation Exemption

The state of California does offer an exemption for military members. For tax years 2010-2018 a corporation will not be subject to the minimum franchise tax if it meets the following criteria:

The corporation is solely owned by a member of the United States Armed Forcesr
The owner is deployed during the tax yearr
The company operates at a loss or ceases operationr
Sole Proprietorship

If you operate you business as a sole proprietorship you don’t have to pay the minimum franchise tax. Income from your business will be distributed to your personally so the state personal income tax would be applied.

Dissolving Your Corporation or LLC

If your business venture falls through before it gets off the ground or didn’t generate income, you can still be assessed the minimum franchise tax if you don’t file the right paperwork with the Secretary of State. You can avoid the minimum franchise tax if you complete the following steps:

A Form LLC-4/8 Certificate of Cancellation is filed within 12 months from the date the Articles of Organization were filed with the California Secretary of Stater
Your corporation or LLC has no debtsr
The final tax return or a final annual tax return has been or will be filed with the Franchise Tax Boardr
Your corporation or LLC has not conducted any business from the time of filing the Articles of Organizationr
While trying to mitigate your tax liability is a noble goal, complying with the law in the long run is going to save you time, money and will be less stressful for you. We can help you chose the right structure for your business to minimize your tax liability. Please contact us today; we look forward to hearing from you.