Why California? |
MINIMUM FRANCHISE TAX LAW WAS CHANGED TO FAVOR NEW
CORPORATIONS
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California tax law is more favorable after January 1,
2000
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The minimum California franchise tax is the amount a
California corporation
must pay the first quarter of each tax year whether it is active, operates at a loss or does not do business.
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The
current minimum tax is $800.
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Now, the good news. Effective January 1, 2000, the minimum tax ($800) is NOT due on incorporation.
Moreover, a minimum $800 tax payment is not due during the corporation's
FIRST tax year. The first $800 minimum tax is due on the 15th day of the 4th
month of the corporation's SECOND tax year. |
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Example:
If your corporation's first tax year
ends on December 31, 2005, then the first $800 minimum tax payment will not
be due until April 15, 2006.
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The new law gives new corporations the first tax break on
incorporation and the second tax break during the corporation's first tax
year (which is usually a short year). The corporation will be liable to pay at least the minimum franchise
tax of $800 its second tax year. |
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Keep in mind that the corporation is still
subject to estimated tax payments with respect to income or profits, if any,
in ALL tax years including the corporation's first tax year.
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Note that LLCs are liable for the minimum franchise
tax in all years (no two year exemption for LLCs).
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For further information see the California Franchise Tax
Board's web site -- Tax Assistance: Bank and Corporations.
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If you or your business are in California,
then there is little or no reason to incorporate in another state.
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CALIFORNIA TAX RETURN DUE FROM OUT-OF-STATE
CORPORATIONS TOO
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Corporations doing business in California -- even if
incorporated in another state -- are required
to file a California corporation tax return. California law imposes heavy penalties on Corporations doing
business in California that fail to file.
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According to the California Franchise Tax Board:
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"Any corporation 'doing business' in California is
also subject to the minimum franchise tax. 'Doing Business' means
actively engaging in any transaction for the purpose of
financial gain." Emphasis added.
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OUT-OF-STATE CORPORATIONS ARE SUBJECT TO CALIFORNIA
LAW
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EXAMPLE: A Nevada corporation doing business in California is
subject to California law.
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If the non-California corporation is a false or pseudo foreign
corporation it is subject to many California laws. See Calif. Corp. C.
2115(a).
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EXAMPLE: A Nevada corporation is owned by a California resident, the
corporation’s employees mostly live in California, and the corporation’s
sales are mostly to California customers. Such a non-California
corporation is a false or pseudo foreign corporation and therefore
subject to many California laws.
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If the non-California corporation is a false or pseudo foreign
corporation, California law
supersedes the law of the jurisdiction in which the corporation
is incorporated as follows:
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Annual election of directors (Corp C §301);
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Removal of and filling of director vacancies (Corp C §§303-305);
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Directors' standard of care (Corp C §309);
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Liability of directors for unlawful distributions (Corp C §316);
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Indemnification of directors, officers, and others (Corp C
§317);
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Limitations on corporate distributions in cash or property (Corp
C §§500-505);
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Liability of shareholders for unlawful distributions (Corp C
§506);
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Shareholder meetings (Corp C §600);
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Shareholders' right to cumulate votes at any election of
directors (Corp C §708(a)-(c));
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Supermajority vote requirement (Corp C §710);
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Limitations on sales of assets, mergers, conversions, and
reorganizations (Corp C §§1101, 1151-1152, 1200-1203);
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Dissenters' rights (Corp C §§1300-1312);
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Records and reports (Corp C §§1500-1501);
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Action by the attorney general (Corp C §1508); and
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Rights of inspection (Corp C §§1600-1604).
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Legal Source: Section 2115 of the California Corporations Code
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According to the California Secretary of State:
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"A foreign (out-of-state) corporation
transacting intrastate business in the State of California must qualify
to do so with the Secretary of State's Office. 'Transacting
intrastate business' is defined as entering into repeated and
successive transactions of a corporation’s business in this state,
other than interstate or foreign commerce." Emphasis
added. |
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California
Incorporation
