Is it legal to live in one state but have a business and pay taxes in different?

Asked over 1 year ago - Costa Mesa, CA

I live in CA, and just started online selling business and want to open LLC. Right now I don't need an office or storage, I can work from home myself (I know that technically it is my business location and I should register it here), but thinking about future and better place for my business (especially because of taxes), I could move to Nevada after year, or even if I won't, I could open an office and storage there, wouldn't be it smarter to start company there?
Is it worth to do it? Is it ok to live in CA and be a business owner and pay taxes in Nevada? Any other advices about that?

Attorney answers (3)

  1. Ryan Steve Alexander

    Contributor Level 10

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    Answered . You can organize your legal entity in any state, and operate the business from California, that's the simple answer. Second, there are many states with lower tax implications than California, and Nevada is a popular choice for those seeking to relocate from California. You're going to need to address both the business and personal income tax issues for purposes of receiving any form of real savings . And no, your proposed plan will actually increase your tax burden rather than reduce it. Here's the scoop on the taxes, and how the states determine liability:

    Business Taxes: Keep in mind that if you, while in California, contribute to the management and operations of a business located out of state, the company is "operating" in California, and will have the obligation to pay business (franchise) taxes to California. California business tax liability arises on the basis of operating within the state, and not because it's formed in a foreign state.
    Moreover, if you're organized in another state and working from of California, you'll likely pay business taxes in the foreign state in addition to California business franchise taxes, if the foreign state collects such taxes (No, Nevada does not assess an annual business tax.).

    A company would not have business tax liability if you were receiving investment income as part of your investment in an out-of-state business which you did not participate in the management or operations of such company in California. This is not what you've described as you'd be operating the company from California.

    In comparing business taxes between California and Nevada, you'll save 8.84% (minimum of $800) per annum in business taxes with a Nevada entity over a California entity, so long as you can exclude California tax liability.

    Personal Income Tax (the real savings): So long as you're a California resident, you'll have personal income tax liability to California. Only those sums earned while you are a resident elsewhere would be excluded from California personal income tax liability. This means that you can't live in California and work in Nevada and avoid the California personal income tax liability. Moreover, to avoid California income tax liability you have to satisfy the residency requirement whereby you'd have to maintain residency in Nevada (home/apartment - not just storage/office), and that you cannot spend more than 6 months out of the applicable tax year in California, and during such visitations you could only be a seasonal visitor, tourist, guest (not working from your second home).

    Assuming you're a Nevada resident and assuming you'll make $46K-$1M, you'll save 9.30% per annum in personal income taxes, so long as you can exclude California tax liability.

    Basically, the scenario you've proposed is not a viable option. If you want the better tax rates, you'll need to operate the business from the foreign jurisdiction, and if you're operating from such state, you should definitely consider changing your residency to take advantage of the additional savings.

    If your contemplating the move, but need to get started, consider starting the business in California, and make the leap to Nevada when you're prepared. There are ways to avoid the tax consequences in the re-location efforts, if you plan ahead.

    Additionally, I appreciate the fact that you're contemplating these changes before you make your initial business filing, but you now understand the personal implications as well. Addressing the implications now can potentially avoid unintended consequences once you re-locate the business. Your accountant will be a good resource for what you need to do as well.

    Good luck.

    For legal advice and representation, consult an attorney. This response was provided for informational and... more
  2. Pamela Koslyn

    Contributor Level 20

    6

    Lawyers agree

    Answered . If your business is "technically" in CA (and what's technical about it? You're in CA and doing the work), then you should pay CA state taxes. The Franchise Tax Board actually send inspectors to see whose signs are on the doors and who's actually doing business in CA buildings, with IRS addresses to compare.

    Paying taxes to the state you're actually in has benefits, such as being able to use the state's judicial system to pursue and defend cases.

    Down the line, if you do move to another state, you could transfer to "foreign" company to the new state.

    This ois likely not your only question about starting an online business. You've already started selling, but you should see a business/IP lawyer ASAP about choosing and acquiring a viable and available trademark, appropriate disclosures, disclaimers, terms of use, privacy policy and COPPA kids' policies for your site, copyrighting your site's pages, contracts with vendors, etc. etc.

    Avvo doesn't pay us for these responses, and I'm not your lawyer just because I answer this question or respond to... more
  3. Todd Matthew Heine

    Contributor Level 13

    2

    Lawyers agree

    Answered . I don't see why someone in your situation wouldn't run the CA LLC and then transfer the assets to an NV LLC in the future. An LLC most likely pays taxes where the profit-generating activities go on.

    As an aside, Nevada (like Delaware) is generally seen as a business-friendly state to incorporate, for several reasons, regardless of where the business actually runs.

    Total Mobility Law is an international law firm that lets companies do global business with the knowledge and... more

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