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The purpose of this article is for those who feel the California LLC Annual Franchise Tax of $800 per year is too high, and instead, they are wondering if they should form an LLC in another state instead of starting a California LLC.
If you live and work in California, and you form an LLC in another state, you are required to register that out-of-state LLC as a Foreign LLC in California. This creates 2 LLC filing fees, a Registered Agent in the foreign state, annual reports in both states, and possible state and local tax obligations in the foreign state (and in CA, of course).
So this begs the question, what does it mean to “do business in California?”
What Constitutes Transacting/Doing Business in California?
The rules of “doing business” vary by state, however, there is one national rule of thumb which most courts will use. A company is “doing business” if a substantial part of its ordinary business is transacted there.
So what defines a “substantial part of ordinary business”?
Of course, this is open to interpretation, but let’s look at a common example to paint some context.
Who: Dave is a 32 year-old US citizen who lives in San Diego, California.
What: Dave is currently a sales consultant. Most of his clients are in California, but he also has a lot of clients across the US. He wants to form an LLC and expand his business. He is planning on doing a lot of business through the internet, creating and selling online courses.
His Thinking: Because Dave is working with clients all over the US, and soon-to-be, all over the world, he is thinking he’s “doing business everywhere”, and therefore, he can form an LLC outside of California to escape the $800 per year LLC Annual Franchise Tax.
Think of it like this: even if Dave formed an LLC in, say Delaware, but he is a resident of California, he already pays state and local taxes in California, primarily works from home in California (or within state borders), makes phone calls from California, accepts contracts while in California, and keeps files stored in his home office (physically or digitally) in California, then it sounds like he’s doing business in California.
Just because Dave is doing business online (who doesn’t these days?), it’s not enough. I’d say, it’s best for Dave to play his cards clean from the start.
What’s the point of forming an LLC in another state just to save $800/year, if it could eventually cost him a lot more (and expose his to risk)?
Sure, the “LLC police” aren’t going to be knocking on Dave’s door next week to check up on him, but there are compliance departments within the California Secretary of State and the Franchise Tax Board, and eventually, he’s bound to get caught and fined.
Further, there are risks to doing business as an unqualified entity in CA:
1. Denied access to California courts (inability to enforce a contract, as an example).
2. Required to file/pay taxes, as well as penalties and fines.
3. Grayness in the law about the ability to bring a counterclaim.
4. Personal liability may arise if you are acting on behalf of an unauthorized entity. While some states have statutes more open to interpretation, California has clearly defined statutes that impose fines on individuals acting for noncomplying foreign entities.
Source: California Corporations Code, Sections 2203, 2258 and 2259.
As for the details on what constitutes “transacting business” in California, here is more info:
“Before transacting intrastate business in California the business must first qualify/register with the California Secretary of State. (California Corporations Code section 2105, 15909.02, 16959 or 17708.02) California Corporations Code sections 191, 15901.02(ai) and 17708.03 define “transacting intrastate “as entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce.”
Source: California Secretary of State: Frequently Asked Questions
Rather than spend time, energy and money on dodging California’s annual franchise tax fee (which exposes Dave to fines, taxes, and worse, liability), I recommend he instead focus on business growth, product development, marketing, sales, etc.
I like to think of the $800/year as the cost of doing business in CA ;) And unfortunately, I don’t see (nor recommend) any way around it.
References
California FTB: Doing business in California
California FTB: Help with doing business in California
Matt holds a Bachelor's Degree in business from Drexel University with a concentration in business law. He performs extensive research and analysis to convert state laws into simple instructions anyone can follow to form their LLC - all for free! Read more about Matt Horwitz and LLC University.
Hi, I’m looking to do rental arbitrage, although I don’t plan on getting any property at All in California I’m a resident. Do I have to form my llc in California? Or should it make more sense to form the llc where I would be renting my first property?
Hi Mike, here’s what Id’ do in this scenario. I’d form an LLC in the state where the property is located (since the LLC will be transacting business there). If I’m just going to have this one property, and this one LLC, then I’d foreign qualify this LLC in California.
However, if I’m going to have multiple properties and multiple LLCs over time, I’d set up a parent LLC – aka holding company LLC – (say in Wyoming, or in Ohio). Then that parent LLC will own, and manage, the child LLCs. Then I’d foreign qualify the parent LLC in California (and not any of the child LLCs).
Hi Mike, I’m looking to structure my LLC’s in similar way. My question – does the parent LLC in Wyoming need to pay CA franchise tax ($800) as a foreign holding company? Let’s also say the members of the parent LLC live in CA.
Hi Dan, on the technically correct and conservative side, yes, the Wyoming LLC should be foreign-qualified in California. The reason why is you’re “running that” company from California.
Hi Matt,
I live and work out of my home in NJ, and formed a DE LLC in 2014. My business is 3rd party recruiting. As “headhunters” we find, screen and present clients with potential household employees to hire. We are strictly an on-line / zoom business. We service 40+ clients per year all over the USA. In 2022 we had 2 clients from CA, and this year we have had one so far. We dont advertise in any state, or market to any state. We have an on-line presence (website/facebook/google). In your opinion, do we need to register with CA as doing business there? THANK YOU!
Following
Hi Jessica, I just replied to David.
Hi David, I wouldn’t register my Delaware LLC as a Foreign LLC in California. Just having a few clients there doesn’t constitute “transacting business” in California.
However, you running this business from your home in New Jersey is “transacting business” in New Jersey. Having said that, foreign LLC requirements aren’t always strictly enforced. So you can continue to operate using your Delaware LLC. Or you could be proactive and register your LLC as a Foreign LLC in New Jersey. Or you could wait until you get a letter from the New Jersey Division of Revenue requiring that you do so. That letter may or may not ever arrive. And it may or may not include a fine for failure to register as a Foreign LLC.
Currently, as per statute, that fine is $200 per year. There is also a chance additional penalties and costs are assessed on top of that. The applicable statute is the New Jersey LLC Act, Section 42:2B-57 (Registration of Foreign Liability Company; liability; violations, penalties). You can find a copy of the New Jersey LLC Act here (New Jersey LLC Act, Title 42, Chapter 2C). And just search for “$200”. It’s under the section titled, “65. Effect of Failure to Have Certificate of Authority”. Hope that helps.
I formed a single-member LLC to do business in California. The sole member of this LLC is a Stock Corporation I have incorporated in Colorado with myself as the sole director. I’m wondering whether I am required to register my Colorado corporation as a Foreign Corporation in California.
Regards,
Hi T, I don’t believe you need to register your Colorado Corporation as a foreign Corporation in California.
Hi Matt – what a wonderful resource this article – and all the comments – provides!
I have an LLC in Oregon where I live, doing mostly online training for a variety of clients, including one based in California. To be clear I do not go to California, and I do not conduct the work anywhere other than from my office in Oregon. The service I offer is presentation training.
However when I go online to complete the CA out-of-state business registration, the site says: “An out-of-state limited liability company that provides professional services cannot register in California. (California Corporations Code sections 13401 and 17701.04(e).)
Am I wrong that I *am* offering a professional service and that I therefore cannot/do not need to register in CA?
I realize of course I will need to talk to my own tax and legal folks on this but I wonder if, with your legal eye, you think I am misinterpreting that guidance? It kind of seems like it’s saying “register in california if you are doing anything OTHER than professional services” – but that doesn’t seem at all logical.
Do you have a different take on this?
Thanks Kirsten! If I back up one step, why do you need to register your Oregon LLC as a foreign LLC in California?
To answer your question, no, that’s not the correct interpretation. That say that if you operate a Professional LLC (PLLC) out of state, that the out-of-state PLLC can’t be registered as a foreign PLLC in California. Furthermore, presentation training likely wouldn’t be considered “professional services” in California.
Hi Matt,
I read through ALL the comments and while some situations are SO close to mine, none are an exact match. My sister and I have formed a WY manager-managed partnership LLC for the purpose of real estate investment (which now I’m thinking maybe we shouldn’t have, but it’s done, so whatever). I live in AZ, she lives in CA. If we list me (in AZ) as the single manager and buy property in Ohio to rent out using a property manager in OH, are we “doing business” in CA? Do we need to foreign file in AZ and CA? I know we’d have to foreign file in OH at least.
Hey Amanda, what is the Multi-Member Wyoming LLC for… to hold all real estate investments? If so, how many properties are you planning to buy? It might be better to use the Wyoming LLC as a parent company. Then you form child LLC(s), owned by the Wyoming LLC, in the states where they’re needed.
Here is my reply to your question as asked though: California is such a pain lol. To be above board here, you can foreign qualify your Wyoming LLC in California and Ohio. Arizona isn’t really enforced. So you can ignore that one for now, and if you’re ever required to do so, you can take care of in the future.
Hi Matt, the WY LLC is meant to be the parent company. We were going to do REPT’s for each house and list the LLC as the beneficiary. But I’m thinking maybe we should just do LLC’s for each house, or asset grouping up to a certain value.
I see. Honestly, there’s a lot of ways to structure things, and there’s rarely every one “best” solution for everyone. I’d recommend speaking with an asset protection attorney who also practices estate planning in the state where you reside. A “Real Estate Privacy Trust” is just a Revocable Living Trust, and generally speaking, there isn’t a ton of liability protection. So if you had multiple properties all owned by one Trust (with the WY LLC as the beneficiary), you’d still have all your assets under one roof. Something to consider/look further into.
Ok, yeah, we were looking at doing multiple trusts and one LLC. But alternatively, if we do an LLC in the property investment state (OH) and our WY LLC is the sole member of that OH LLC, which LLC should we use to contract with a property management company in OH? Is there any benefit to using one LLC over the other?
Yeah, there’s a few ways to “slice the pie” lol. In that case, you’d want each LLC that owns property to have a separate contract with a property management company.
To confirm, a company based in CO that provides services to a CA company, remotely, would not need to register as a foreign CA company and pay CA taxes on the income from the CA company client?
Hi Liz, correct.
Hello Matt,
Thank you for writing this article. Very informative.
I’d like your feedback regarding my scenario. I’m currently a full time resident of California. I’m considering forming an LLC, in which I would be a member, to build a house on a lot that I own in Colorado. The current home on the lot is being used as a rental property. I do not plan on keeping/occupying the house myself, but would sell it on the open. In this situation, do you believe the LLC would be categorized as “doing business” with California, and thus I would have to pay the $800 annual LLC tax?
Thank you greatly for your input!
Jamie
Hi Jamie, I can’t say absolutely, but this doesn’t sound like the LLC is doing business in California and I’d just use a Colorado LLC.
Hi Matt,
Thank you for the information, I am a veteran who lives in California, I want to start an online business and I just found out that an LLC in California will cost $800/year.
Do you know of any way that a veteran would be able to start a business in California?
Is there any benefits that can make me pay less than $800? or maybe a specific business certification for veterans?
Thank you in advance
Hi Solomon, you’re very welcome. Unlike a few states that let veterans form an LLC for free (and give them a tax break), California doesn’t have such a program. However, there are two things working in your favor right now. Because of Senate Bill 154, California LLCs are free until June 2023. And because of Assembly Bill 85, California LLCs don’t pay $800 Franchise Tax for 1st year. However, you’ll still have pay the $800 every year after that. I wish there was something else to do, but honestly, this is just the cost of doing business in California.
Here’s another tip for you: If you don’t need your LLC open right away, you can wait and file in January 2023 (or file now, but use a delayed LLC effective date of 1/2/2023). This will push your first $800 payment ahead by another year (effectively saving you $800). Meaning, if your California LLC is approved in 2022, your first $800 payment will be due by April 15, 2023. But if your LLC is approved (or becomes effective) in 2023, your first $800 payment isn’t due until April 15, 2024. Hope that helps!
Hi Matt,
A few investment partners and I will be building an apartment building in CA. We all live and work in CA. We will be creating a CA LLC to own, build, and operate the apartment building. The partners want their personal information to be private (rather than being listed as individual LLC members in the CA statement of information filing).
So we are thinking of forming an LLC in another state, and that out of state LLC will be listed as the single member of the CA LLC in the CA statement of information filing. Will this out of state LLC need to register as a foreign LLC in CA?
Hi Kai, we can’t guarantee anything regarding the FTB as they’ve recently been more aggressive. However, the out-of-state LLC shouldn’t need to foreign qualify in California. Another option to consider if having your LLC be Manager-managed and having one Manager. Then just list this person in the California LLC Statement of Information. Hope that helps.
Hi Matt! Great article. Question… My partner (49%) lives in AZ. I (51%) live in CA. We have a small business making and selling a skincare product. We sell online and in stores in many states including CA as well as in several other countries. Presently, our manufacturer and fulfillment house are in CA but we may move this to AZ in the future. We have been considering creating our LLC in AZ since my partner lives there and the costs are lower. Currently I am a CA Sole Proprietor. If we do a foreign entity in CA, do we keep the current business license, sales permit and EIN issued to me as a CA Sole Proprietor or do we need new ones for CA? Or do we not need any of those at all with our LLC in AZ since we’d need to get AZ versions instead? And if we did the AZ LLC + CA Foreign Entity, what would the additional costs and paperwork be for California? Trying to figure out if it’s more cost effective to do it this way or to create the LLC in CA instead. Apologies if this is redundant. Your advice is greatly appreciated! Thank you…
Hi BK, thank you. Since you are doing business in California, forming the LLC in Arizona will not save you any money because the LLC will need to be registered as a foreign LLC in California. Also, regardless of where the LLC is formed, you’ll need new business license(s), sales tax permit(s)/license(s), and a new EIN.
Will you ever leave California and move to Arizona? I ask because that may change things. Meaning, it might be better long-term to form an LLC in Arizona, register it as a foreign LLC in California, pay California taxes and file California tax returns, and then after you leave California and cut ties, you can revoke the foreign LLC qualification… therefore saving money down the road).
If you are not going to leave California, then you can form the LLC in either state you want and then register it as a foreign LLC in the other state. Having said that, because California has a lot of components to wrap your head around, it may be easier (from a mental, organization, and administrative perspective) to form the LLC in California and register it as a foreign LLC in Arizona. You also have the controlling interest in the General Partnership, so assuming that’s the case in the Multi-Member LLC, it might also be easier (again, thinking long-term) to form the LLC in California and register as a foreign LLC in Arizona. This way, in the future, if your partner sells their interest to you, you can withdraw the foreign LLC in Arizona and be left with your California LLC. Hope that helps.
Just got told by our new CPA that this may apply to an LLC I am the managing member of. We are a NV LLC owning & renting real estate in NV and making all our income in NV. The registered agent is in NV. Of the 3 partners, the larger holder is based in NV. I am in CA and the 3rd member is in NY. Now I handle the books (on a computer in CA), deposit the checks that are mailed to my CA address, and handle a few phone calls a month. Of course we each file our K1s and mine does go with my return to CA. Does this make us a CA Foreign LLC? I hope not as these fees would really impact our finances.
Hi David, yes, your Nevada LLC is doing business in California because you are doing business on behalf of the LLC in California. The Nevada LLC should register as a foreign LLC in California. The Nevada LLC will need to pay California LLC franchise tax and file California Returns (ex: Form 568). Hope that helps. Apologies for the bummer news.
Hi Matt,
I had high hopes of starting a business and registered an LLC in California and also got a resale license. However, I never conducted any business as far as selling anything or buying anything except for a website. I am still liable to pay the $800 annual tax?
Hi Michelle, yes, the $800 franchise tax is owed simply for the privilege of being able to do business in California and not whether or not business was done. Crappy rule, I know :(
Hi Matt, thanks for your time.
I am a resident of OH and have a single member OH llc. I perform all of my work online (primarily accounting services) for a client in CA. I never travel to CA. Do I need to register my llc in CA?
Hi Christa, you’re welcome. No, in this case, providing services to a client in California from Ohio is not considered transacting business in California. And therefore, you don’t need to register your Ohio LLC as a foreign LLC in California.
Matt,
Thanks for the great site. My situation is little more complicated (i think). My LLC is pending ownership in some oil/gas drilling interests – this LLC I will only use for investing activities. I live in CA, but project itself is going on in Illinois. I set the LLC up here in CA as I wasn’t sure if setting it up in another cheaper state would matter since I live here in CA. Not sure if their are different rules will LLCs that are doing investing activities vs. actually selling product/services.
Hi Ender, thank you! Since California is among the most strict states when it comes to what it means to “transact business”, I think you were smart in forming your LLC in California. Whether or not you need to register your California LLC as a foreign LLC, we can’t specifically say. The whole “transacting business” thing in a bit of a gray zone (except for California, which is explicit). Meaning, most states don’t define what it means to transact business. They define what is not transacting business (it’s a short list; for example, see 805 ILCS 5/13.75). This allows the states more room for interpretation. Thank you for your understanding and I hope that helps.
Hello, Matt! Thank you for being such a wealth of information. My partner and I are planning on creating an LLC but not sure if it’s necessary to form in CA. He lives in CA, but might move eventually. I live in NY but plan on moving next year for my MBA. My parents live in Michigan, and it’s technically my permanent address so I was thinking we could form there since the fees are significantly lower than CA. I know it’s best to just bite the bullet since CA’s rules are the strictest, but I am wondering if since our business is fully online, we do not need to register in CA. And since my partner may not even be there after a certain time. Any advice would be appreciated! Thank you!
Hey Sandra, thank you! And you’re very welcome! This whole avoiding California is a gray area. If the business has any ties to California, the state often notices. The best way to avoid a California LLC filing is to have no tie, connection, or activity. And being online doesn’t matter to the state, since someone is running things from their home, office, cafe, etc. And that home, office, cafe, etc. is located somewhere. You are probably a bit safer here, since your partner is soon moving. Forming an LLC in Michigan could be worth considering. Hope that helps :)
Hi,
Bit of a conundrum here. I am active duty and am a resident in the state of Oregon. I have an LLC in Oregon, but get moved around often. No matter where I move, I am still a resident of Oregon because of laws regarding active duty (I pay Oregon taxes, not California taxes, even though I live here). It is a small business where I make things out of my own home and sell them online. Do I still need to for a foreign LLC in California before I start up?
Hi Mike, thank you for your service! To be honest, it’s a bit of a gray zone. Technically, the LLC should qualify as a foreign LLC in California if the LLC is doing business in California.
Hi,
I formed my Healthcare Staffing business in DE because of the advantages. But I will run my business in CA at the beginning it’s a C Corp. Do I need to apply for foreign qualification or other licenses? Thank you
Hi Kadriye, if you have a Delaware Corporation that is doing business in California, then yes, you need to register your Delaware Corporation as a foreign Corporation in California. You’ll need to check locally in California regarding any licenses since that varies by industry and by location. Hope that helps.
Hi Matt.
Question: If I plan on buying a rental property out of state (I live in California), is it best to set up the LLC in California and foreign in the state I’m buying the property? Or start the LLC in the state the property is in?
Hi Dee, you can go either way, however, you may want to consider California as the state where the domestic LLC is formed, as that is likely the most “not likely to change”. The reason why is that you may be buying and selling properties in multiple states. And let’s say in the future, you stop doing business in Texas, for example… you could then cancel/withdraw your foreign LLC qualification in Texas. So keeping California as your “base” LLC state, could be easier logistically. Hope that helps.
Hi Matt!
I formed an Arizona LLC in 2019 but have yet to conduct any business. I am moving to San Diego, California in 2020 and will start doing business with my Arizona LLC in the state of California. What are the steps I need to take to do business in California with my Arizona LLC? Or would it make sense to transfer (if that is possible) my Arizona LLC to a California LLC?
Thank you so much!
Hey Noah! There are three ways. First, you could register your AZ LLC as a foreign LLC in CA. Second, you could dissolve the AZ LLC and form a new LLC in CA. And third, you could domesticate your AZ LLC into a CA LLC. Think of this like a “conversion”. The first and third option will retain the EIN, bank account, and history, while the second option will not. Hope that helps.
Hello Matt,
So, they do check by residency? Is there a specific regulation for truck drivers? They are always on the road and in different states daily. Thank you.
Hey Matt,
Absolutely loved the article and have a question I hope you can answer, I’m starting a private label FBA LLC. I live in California, however I will be selling the products on the US amazon marketplace and will never touch the products or have any physical operations. I’m looking into the prospect of forming my LLC in New Mexico and also Wyoming. If you do believe that I can form my LLC in a different state than California, do you think that I should form it in New Mexico because please do correct me if I’m wrong but I believe New Mexico has all the same protections as Wyoming plus New Mexico has no public database of ownership and no annual maintenance like Annual Reports. Thank you very much for your time. Your information is very helpful and respected thanks again.
Hi Nolan, while no one will stop you from forming an LLC in New Mexico or Wyoming, California residents running companies from California are deemed to be transacting business in California. Hope that helps.
I am a psychologist working two days a week. I moved to San Diego from Ohio. I formed my LLC over 10yr ago in Ohio. I work part time, conducting video therapy with my Ohio clients sitting in my CA home. I recently opened an office in CA with the hope to see CA clients up to total of 10 clients a week. Do I need to register my LLC in California? Does the $800 yr fee consider the income generated by the LLC. Not sure it is worth it if I work part time. Any alternatives?
Hi Inbar, the $800 annual fee is an annual franchise tax, not an income tax. So it’s owed regardless of income. Furthermore, licensed professionals cannot operate an LLC in California. We have more information here: most California professionalscan’t form LLCs. Hope that helps.
Hi Matt,
I want to launch an educational website to help people make better food choices.
I do not wish to charge money for it at this time, but want to protect my personal assets from liability if people misuse it.
Since I don’t plan to earn money from it, does it make sense to incorporate in another state? I live in California and I built the website here, but I won’t be declaring any portion of my time or expenses on my taxes.
What LLC options would work best for this?
Do Terms of Service which limit liability have to list the legal business name (LLC) of the entity operating it for it be binding?
Hi Victoria, it sounds like you’ll still be doing business in California even though no income will be collected. However, it may be best practice to speak with an attorney and double-check on that. And you’d want your Terms of Services to list the name of the legal entity. Hope that helps.
Hi Matt,
I am registered NJ as an LLC S-Corp. I strictly sell online and have no physical presence in CA. I just will ship items into their state by common carrier. I saw they state that doing business for profit is considered doing business but since I am strictly interstate commerce is that exempt?
Hi Bob, while we’re not able to tell people specifically whether or not they are doing business in particular state (it can be a complex matter), something like this is most often considered interstate commerce, which by itself, doesn’t require a foreign LLC registration. Hope that helps.
Thanks, and that pretty much goes for every state correct?
I realize I should contact a lawyer but looking for generalized rules as a start. I saw the interstate commerce is federal law but the CA rep when I called pointed me to FTB publication 1060 where it states any business engaging in business for profit. So that is where this is conflicting and wasn’t sure.
Hey Bob, in California there are corporate laws about doing business as well as tax laws about doing business. To be more specific, it would be best practice to speak with a tax attorney. Hope that helps.
Matt, I appreciate all of your responses and input. I am considering creating a LLC for a new Financial Services business and currently live in Texas. I have a large clientele in California and will do a lot of business there, but have no desire to live there any longer. I am not sure I’ll remain in Texas either and may end up in Idaho. Any thoughts and recommendations would be greatly appreciated. Thank You.
Hi Donald, where an LLC should be formed (or registered as a foreign LLC) comes down to where it is legally doing business. Each state has different laws around this, California’s being the most strict. It’s best practice to speak with an attorney (or a few) to determine if you’ll be doing in business in California (regardless of where you end up moving). At first glance, it’s likely that you are. This is a simplified summary, but California has two bodies of law which govern this. You have the California Corporations Code (see Section 17708.03; see “a”) and the California Revenue & Tax Code (see Section 23101). Note, there are also other applicable sections, too. So if you are doing business in California, an LLC can either be formed there and then registered as a foreign LLC in your soon-to-be new home state, or vice versa… you can form an LLC in your soon-to-be new home state and then register it as a foreign LLC in California. If you’re not in a major rush, it could be a good idea to determine where you’re new residency will be (since an LLC will also be transacting business in that state) and then determine where the LLC should be formed as a domestic LLC and then registered as a foreign LLC, if applicable. As an example, if you remain in Texas, forming a domestic Texas LLC with foreign registration in California will be a little more affordable. Reason why is a CA domestic LLC formation and foreign LLC registration cost the same ($70), but a domestic Texas LLC is $300, and a foreign LLC registration in Texas is $750. Overall though, it sounds like (unless you end up residing in California), you’ll have 2 filings to maintain… one in your state of residency and one in California. So that’ll mean a Registered Agent address will be needed, annual filings, state tax filings, and possibly, business licenses. And on a final note, if you are going to move soon, maybe a conversation with a tax attorney can help. Choosing where you move will impact your personal state income taxes (which may or may not be material). While Texas doesn’t have personal state income tax, California and Idaho do. Having said that, state income tax isn’t the only thing to consider when moving to a new state. I know that’s a lot to chew on, but hopefully it was helpful :)
Hi Matt,
Thank you for this very informative article. I live in CA and am partnering with a friend in FL to start an import business. The transactions will be done in FL. Both of us will be actively participators.
If my friend creates a single member FL LLC, declares himself as a manager and make me the other manager, will that structure avoid the need to create a foreign LLC in either CA or FL since I am not an owner of the LLC?
Thank you.
Hi Jon, you’re very welcome. It’s best practice to have a conversation like this with a tax attorney, however, regardless of where the LLC is formed or its activities are conducted, a non-registered foreign LLC is considered to be doing business in California if any of its Members, Managers, or other agents are conducting business in California on behalf of the LLC. So you being a Manager of the LLC (although it’s a Single-Member LLC, and formed in Florida), because you are “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit” on behalf of the LLC, the LLC is therefore doing business in California. The LLC should register as a foreign LLC, pay $800 annual franchise tax, file Form 568, and file any other applicable returns. Hope that helps.
Hi Matt!!
Thanks a lot for the article!!
Please answer my question too :)
Im a truck driver, I have California driver license. There is one owner in CA, im working as a truck driver on his truck. He gave me 1099 form.
So question is:
im plaining to open llc or s-corporation and continues working with this truck owner.
But, im running throw all states during 24 days in month. I don’t have any home in CA. Im always working.
So should I pay CA state tax at the and of the year? or I can open LLC or S-corporation in WA, or some other state with 0% state tax and pay no state tax? because in fact I spend my almost all time in truck.
Thank you for help!
Hey Al, you’re very welcome! It’s best practice to have this conversation with a tax attorney or a qualified tax professional. Based on what you said, it sounds like you have residency and domicile in California. Therefore, California will deem you responsible for filing state income taxes as well as the California LLC franchise tax. So even if you formed an LLC in Washington, that Washington LLC would need to be registered as a foreign LLC in California. Furthermore, even with a Washington LLC, you’d still pay state income taxes in California. And if you elect to have your LLC taxed as an S-Corp, you’ll need to pay payroll taxes. Those are filed at the federal, state, and local level. State and local payroll should likely be paid in California. In summary, it’s likely best to form the LLC in California. Having said that, this is just a general reply.
Also, it’s important to note that you don’t “form” an S-Corporation. An S-Corporation is a federal tax election (aka tax entity) that “sits on top of” a state entity, like an LLC or Corporation. When most websites talk about “forming an S-Corp”, they are technically referring to forming a Corporation and then electing to have that Corporation taxed as an S-Corporation (instead of a C-Corporation). However, an LLC can also elect to be taxed as an S-Corp. We have more info on that here: LLC making S-Corporation election.
Thank you for answer!
So as I understand I need to change my residency. As I understand, I should change just my California driver license on, for example, nevada or texas driver license and after that I will have nevada or Texas residency and its open for me the possibility for llc with no tax and without out of state llc function.
Am I right?
Hi Al, you’re welcome. We can’t comment specifically on it, however, if you actually move and change your residency, then that’s where you’ll be responsible for paying state income tax, if any. And yes, you can form your LLC in that state, too.
Hello Matt, I have the same situation- my husband is a truck driver and he travels between CA and IL. His employer will pay him with 1099, and had suggested him to form an LLC. We heard about NV and how great it is to register an LLC there. Technically, my husband is a CA resident. From what I’m reading, we migh get into double trouble if we register LLC in NV.. What is this franchise tax anyway- he is a truck driver, not selling goods or having a restaurant in CA.. Thank you for your advise.
Hey Matt. Thanks for the great information!
My in-laws currently have an LLC organized in California where almost all of their work is performed. I am preparing to take ownership of the service related business.
Looking at the articles of organization it would appear that we could keep the LLC organization but change the CEO and Manager/s. I live in Utah and will be running the business from here. There will primarily be income earned in California will some being earned in Utah. We will not be able to provide an agent for service of process as seems to be required.
In your opinion would we be better off creating a new LLC in Utah and registering as a foreign LLC in California? Or, make changes within the currently structured LLC and find a solution to the agent for service?
Thanks for the help!
Hi Chris, a situation like this, which has many variables and details, is best discussed with an attorney. However, what do you mean by not being able to provide an agent for service of process? You can always hire a Registered Agent company instead of being the agent yourself… if that’s what you meant. Does that help?
Matt, I’ve thoroughly read your Q&As and didn’t see my question answered— I’m doing business in primarily 2 or 3 states (CA, TX, FL) in real estate (will be buying/selling and renting out my properties) I am originally from one (CA) and will be moving to Florida as I like the market there and the weather. But for instance when I move to FL I’ll keep my house in CA and rent if out for minimal cash-flow (after mortgage/ insurance/ property taxes/ upkeep etc.) and then I’ll be renting a single property out in FL while also living there and trying to find/ flip other real estate in FL… and then in TX I’ll have a rental property garnering some cash-flow… I know you’ve said to LLC in same state(s) in which anyone will be doing business in, but what if you’re truly doing business in 2, 3, or 4 states in real estate? This can’t be that uncommon, especially for people from smaller closer bordered states doing real estate business in a handful of clumped nearby states… Is Delaware LLC still a good option to consider, or is it good to research the best out of the proposed states (in my case TX, CA, FL and possibly outside chance N.&S.Carolinas). Any input? Greatly appreciated
Hey Brian, we’re currently working on a large piece about transacting business. But it’s a beast and will take some time. Every state has different laws. In short though, it comes down to where you’re transacting business. And like you said, you’re doing business in CA, TX, and FL. It’ll be best practice to have a conversation with a real estate attorney (or a few). You’ll want to discuss forming an LLC in each state (for each property) vs. forming an LLC (say in FL) and registering as a foreign LLC in all states where you’re doing business vs. forming a holding company (say in WY) and that WY LLC owns child LLCs, each set up in the state where there’s property. Or maybe they have a different recommendation altogether. Hope that helps though.
Thank you so much for your articles! My business was about to form an LLC in DE (while we live in CA) as some people had recommended it would save us money. After stumbling on your website and reading your articles yesterday, I did thorough research, and realized this was a terrible idea! You saved us $$ and headaches…very much appreciated! Happy New Year!
Hey Melissa! So happy to hear that. While you can form an LLC in Delaware, you’d ultimately have to register it as a foreign LLC in California. Glad you found this article. This is the heart of it all. It comes down to where you’re transacting business. Happy New Year :)
Hi Matt,
This site is awesome — well done.
Question for you, if you don’t mind.
My family and I are starting an online business together, and plan to form an LLC. One of us live in California , and the other two live in Arizona. Looking at options, can we form the LLC in Arizona with just the two of us ?
Thanks for the great info here.
Jolie
Hi Jolie, thank you. It comes down to where you’re transacting business. Because the one member resides in California, you’re likely doing business in California and Arizona. You may want to look into forming an LLC in Arizona and registering as a foreign LLC in California or vice versa. Hope that helps.
This article is great information if you are doing business. I see some questions about rentals, but mine might be a little different. I am a California resident who wants to setup an out of state LLC, in Utah for example, and the LLC will only own a piece of rental real estate in Utah and this Utah LLC will not own any property in California. It will be passive income as the income is generated from the rental property and the income is sent to LLC bank account from the property management company in Utah.
It seems like in this scenario there is no work being done from California and there would not be a need to setup as a foreign LLC, except for the fact that the LLC is a single member LLC, and the owner is a california resident.
Thanks
Hi Dar, unfortunately, California will still consider you doing business in California. I’ve written pretty extensively about this in another comment I’d like to point you to. It’s on this page: Why you shouldn’t form an LLC in Wyoming. Please scroll down the comment section and search (command + f on Widows, command + f on Mac) for “Colin”. I hope that helps.
The Wyoming example provides good information and it all makes sense.
But I would think there would be a creative way around that, like instead of the California resident owning the out of state LLC, the existing California LLC owns a new Utah LLC. As I would want to setup a new LLC to put in new rental property for better asset protection.
Sounds like this new Utah LLC, even though owned by a California LLC would need to register in California as doing business, and pay $800 min tax. So it would essentially just be best to setup a second California LLC.
Just not sure if rules change when a second LLC is owned by an existing LLC instead of an individual.
Hi Dar, I agree with a different LLC owning the property. As per the Franchise Tax Board, the Utah LLC (being owned by your California) will need to pay franchise tax, pay an LLC Estimated Fee if applicable, file Form 568, and file any other applicable returns. If you look at example 1 (under Doing Business in California) on the Franchise Tax Board: 3556 LLC MEO page, the FTB considers your Utah LLC the same as Paul. As per the Secretary of State and the need to foreign qualify, I will reply back in a few days. Our research team is looking into this. Thank you.
Hi Dar, I’m following up. We looked into this and couldn’t find any reference material or case law with this specific situation. However, since the FTB is requiring filings and taxes, we’d err on the side of caution and foreign qualify. Hope that helps.
I live in Ireland and want to create Amazon business in the USA. My business is registered here as a sole trader, can I create an LLC in the USA. I have to pay tax here in my own country and will I also have to pay tax in the USA. I’m told if I register an LLC in Delaware, I will only have to pay a flat rate of 300$ per year is that correct. Is there other fees I would have to pay too. I would also like to know how can get an Agent that I know is legit and not going to be ripped off. I’m not as US citizen any help would be really appreciated. Thank you Pauline
Hi Pauline, the $300 Delaware Annual Franchise Tax is better thought of as the LLC Annual Report. Although it is referred to as a “tax”, and it technically is a tax, it’s the not the only type of “taxes” you’re thinking of. You will need to speak with an accountant who works with non-US residents to determine your US tax obligations and filing requirements. Also, the term “Agent” can have multiple meanings. In the context of LLCs, you will need a Registered Agent. If you want to hire a Registered Agent Service, we recommend Northwest Registered Agent. They can form your LLC (and be your Registered Agent) if you don’t want to do that yourself. If you hire them to form your LLC, they include Registered Agent services free for the 1st year.
Once you decide where to form your LLC and it’s approved, you’ll then want an EIN (Employer Identification Number) from the IRS. We have instructions on that here: how to get an EIN without an SSN. And then you’ll want to open a bank account for your LLC: non-US resident US LLC bank account. Hope that helps!