Learn more about the difference between Nevada and California LLCs.
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Comparing Nevada LLC vs California LLC starts with understanding the nuances of each state. In this article, we’ll cover the differences between Nevada LLCs and California LLCs, each state’s pros and cons, and much more. Keep reading to discover if either state is the right choice for your new business.
Before we get into state-by-state differences, it’s important to understand exactly what a limited liability company (LLC) is. An LLC is a legal business entity that provides limited liability protection by separating owners’ assets and liabilities from those of the business.
Because of this separation, LLC owners (who are called “members”) are usually protected from the business’s liabilities and debts. That simply means that if someone sues the business or the business goes into debt, the personal assets of the LLC members are protected.
LLCs also enjoy a lot of flexibility in how they are structured and managed. For example, you can form a single-member LLC or multi-member LLC. And LLCs can member-managed or manager-managed.
You can learn more about the full definition of limited liability companies here.
To begin comparing Nevada LLC vs California LLC, let’s look at the pros and cons of each state. We’ll start with Nevada.
Besides benefits common for all LLCs, such as personal asset protection, tax advantages, and liability protection, there are a host of advantages that come out of forming an LLC in Nevada.
As most people know, Nevada boasts a unique and extensive gaming culture. In turn, Nevada LLCs are often able to take advantage of limited tax liabilities. For example, there is no personal income tax in Nevada.
Here are some of the benefits of forming an LLC in Nevada:
Nevada’s Digital operating agreement system is another hidden gem of starting your LLC there. The Nevada Secretary of State has become part of cutting-edge legislation that aims to completely take business formation into the digital realm, with all itinerant protections and governance.
While Nevada LLC formation offers a host of advantages, you also need to consider a few disadvantages or potential pitfalls. For example, if you’ll be conducting the bulk of your business in another state (such as California), forming an LLC in Nevada may not save you as much money as you think. In fact, it could wind up costing you even more.
That’s because you’ll need to file Articles of Organization (or the equivalent) and pay state fees in all states where you’ll be doing business. If your business is based in another state and you form in Nevada, you might even need to file a foreign LLC, which would lead to even more fees.
Next up, we’ll explore the pros and cons of California LLCs.
California limited liability companies come with many benefits. The advantages of forming a California LLC include:
For many new business owners, the Golden State also has one other distinct advantage: it’s the state they call home. If you live in California, odds are good that you’ll be doing the bulk of your business in the state. For that reason, forming an LLC in California means that you won’t have to file a foreign LLC to conduct business there.
While California LLCs offer business owners the chance to thrive, you also need to consider a few disadvantages or potential pitfalls. For example, California LLC owners are required to pay some hefty fees and taxes (including an $800 annual franchise tax).
The disadvantages or considerations of a California LLC include:
Next up, we’ll take a closer look at how Nevada LLCs and California LLCs are taxed.
By default, LLCs are treated as pass-through entities for the purposes of paying federal income taxes. The designation of pass-through entities means LLC members pay taxes on their portion of an LLC’s financial gain on their individual tax return. This is unlike most corporations, in which profits are taxed twice, first at the business level and again at the individual shareholder level (known as double taxation).
While single-member LLCs default to a sole proprietorship designation and multi-member LLCs to a partnership designation, LLCs can also file paperwork and elect to be taxed as a corporation. The reason for doing so usually has to do with the particular business and location, as sometimes a corporate tax structure actually benefits an LLC.
One of the great selling points of forming an LLC in Nevada is the favorable tax structure offered by the state.
There is no personal income tax and no corporate income tax in the state. This means that, even if you set your LLC up to be taxed as a corporation, no state income taxes will be due. It also means that LLC members typically owe no state tax on any income they make from their Nevada LLC.
Your tax ID number will determine what federal employment taxes your LLC will owe to the IRS. Some Nevada employers will owe state taxes on top of the federal employment taxes. Nevada participates in a “Modified Business Tax” (MBT) structure that is paid directly to the Nevada Department of Taxation (DOT) quarterly based on payroll. Within any calendar quarter that your LLC pays over a certain amount in taxable wages, your corporation will owe the MBT tax.
Will your LLC be selling goods to customers in Nevada? If so, sales tax will be due. You can register online with the Nevada Department of Transportation (DOT), or download the paper form to mail. Once you have successfully registered, each business location owned where your LLC’s goods are sold will receive a sales tax permit. The DOT will exact a “combined sales and use tax” periodically throughout the calendar year, and this tax can be paid online through the DOT system.
One other type of Nevada LLC tax to consider is the commerce tax. This is a tax placed on the privilege of doing business within the state of Nevada and applies to any Nevada LLC whose gross annual taxable revenue exceeds a certain amount. If your LLC owes a commerce tax, it will be paid directly to the Nevada DOT.
Your California LLC will need to pay a wide variety of business taxes.
These include the tax that’s payable to the California government, like California sales tax and California state tax. You will also need to pay federal, self-employment, and possibly payroll tax to the IRS, based on how much your LLC pulls in annually.
Unless they opt to be taxed as a C corporation, California LLC members only pay federal income tax on their personal tax returns, while the business itself is exempt from federal income taxes.
California LLCs must pay, at a minimum, $800 in annual franchise tax to the state government every year. For LLCs with more than $250,000 in annual income, this franchise tax increases.
California business owners carry a particularly heavy tax burden, so it’s a good idea to talk with an accountant or other tax professional to determine what you’ll owe to the federal, state, and local governments.
When it comes to starting an LLC, the steps are similar regardless of whether you form in Nevada or California. They include:
When it comes to starting an LLC, Nevada and California both offer certain benefits. Nevada LLC owners especially enjoy the gaming culture and tax benefits in the state. Conversely, California LLC owners take advantage of a unique economy and large customer pool in the Golden State.
That said, the two states are quite similar in some respects. For instance, the state filing fee to file your Articles of Organization in Nevada is $75. And the filing fee to form your California LLC is $90 ($70 for your Articles of Organization and $20 for your Statement of Information).
When it comes to acquiring any type of business license or permit you need, Nevada and California are quite similar. Both states will require you to obtain a business license (by filing your Articles of Organization and paying your state filing fee). Beyond that, what types of licenses or permits you need will depend on your industry. For instance, restaurants and bars may need to obtain a license to sell alcohol or liquor on their premises.
Be sure to check with the Secretary of State where you’re forming your business for full filing requirements, information on paying your initial filing fees, and more.
Finally, business people who are deciding on where to form an LLC need to consider one major factor: where will they do the bulk of their business? If your business will be primarily based in Nevada, you should probably form in Nevada. And if your business operation will be primarily in California, you should probably form in California.
That’s because you will need to file Articles of Organization and pay state filing fees in any state where you do business. And if forming in a state outside of where your business is based, you may even have to file and pay for a foreign LLC. That’s why forming in Nevada when based in California may not save you as much money as you think (and may even wind up costing you more).
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Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.