Before You Incorporate in Nevada
Profit Ability Article Highlight

For many years, various companies have promoted Nevada corporations as a great way to protect your company from liability and at the same time to reap tax savings by being registered in a no-tax state. A renewed Franchise Tax Board push to crack down on tax shelters and avoidance schemes has brought unwanted attention to Nevada corporations and the manner in which they are used. We will explain this in greater detail below.

However, in short, the FTB is going to begin scrutinizing why a company is incorporating in low or no tax states like Nevada. If it appears that the motivation is largely based on tax avoidance, it could spell problems for a company's bottom line. In and of themselves, the Franchise Tax Board sees nothing wrong with Nevada corporations. Such corporations are deemed "foreign." However, if they are properly registered and paying their appropriate taxes, they have the same rights as a domestic entity and are as valid as any other.

Why a company is incorporated in Nevada is the key issue. If the purpose for the Nevada corporation is to avoid taxes, or if it appears that the purpose is to avoid taxes, there might be trouble. Also, if your company is doing business in California but fails to register in the state or to pay California taxes, there can be severe penalties. These penalties can affect both the company itself and the tax professional who was part of the scheme.

Finally, if your corporation is not in compliance with California regulations, it does not have legal standing, may not file suit in a California court and may have its contracts voided (R&TC 23304.1 (b)). A few other details to consider on this issue:

Tax Savings: Foreign corporations doing business in California must pay taxes in the state in the same manner a domestic entity does. So wherever the business is incorporated, the taxes may be the same.

Tax Avoidance: The Board of Equalization has ruled that the state will not recognize a corporation formed solely for tax avoidance.

Location of Business: According to Spidell's California Taxletter, a corporation is considered to have a California domicile in the state if (1) its principle office or place of business in located in the state or (2) the business is managed or controlled from California.

Penalties: The penalty for unregistered corporations operating in California but failing to file a California return is $2000.

For questions on this or other entity structure issues, please feel free to contact our offices.