Forming Your Business Out-of-state

You are probably familiar with companies that will form a corporation or LLC out-of-state. While this is certainly legal, you should be aware of some of the downsides:
  • Officially, you are required to register as a "foreign" corporation or LLC with the California Secretary of State Foreign corporations and LLCs must pay the same taxes as domestic (California) businesses, so you will not save any taxes.
  • You must allocate earnings according to the state where the revenue was earned, which will result in more complex tax returns and increased tax preparation fees.
  • If you decide not to voluntarily register with the California Secretary of State, you will be required to register when you hire employees or sell items. Both the Employment Development Department and the Board of Equalization will request your state ID number.
  • Foreign corporations and LLCs cannot get Small Business Certification to sell to the State.
  • It violates the "think globally, buy locally" mantra. When companies pay taxes and fees to other states it places a higher burden on everyone else.