The relocation of a business from California to Nevada is usually considered a tax savvy move. However, before jumping to make this transition, consider the pros and cons of this decision.

Nevada, a privacy and tax haven, is ideal for the small business owner – no income tax, less regulations, and a high threshold for the Commerce Tax. But, before moving the business, there are several aspects to review.

California is known for its strenuous regulations such as Prop 65 and its heavy tax monitoring like California Franchise Tax Board (FTB). So, of course, California has rules regarding business transfers such as the successor liability.

Are there residency requirements for operating a business in Nevada? Is it more profitable to operate in Nevada? What are the benefits of operating in Nevada rather than California?

For starters, a business that desires to operate in Nevada requires that the business actually functions in Nevada such as a clothing store located in the local market square versus an online store operated in California. An online business that functions in California would have no jurisdiction in Nevada unless the owner and sole operator of the business physically moved to Nevada.

Businesses in Nevada are privacy and tax havens. Making it, perhaps, one of the most pro-business states. Businesses are allowed alternate officers with no signing authority for public record whereas the actual officers of the company remain secret.

Nevada Residency for Business Tax Purposes

Is a Nevada residency needed for business? Yes and no. Many taxpayers often elect a part-year or full-year residency in Nevada purely due to its beneficial treatment of businesses.

So, if a taxpayer wants to live in a different state, like California, and does not want to become a full-year resident of Nevada, the following must be considered: is the business physically present in Nevada? The physical presence test is king when it comes to determining the status of a resident and business.

Example #1

Taxpayer A, living in California, decides to open a business selling jewelry online. It’s a small business so Taxpayer A wants to save as much money as possible. They talk to their friends and get an idea to move the business to an income tax-free state. So, could they? No. The business is online and the taxpayer is physically present in California.

Example #2

Taxpayer B, living in California, has a small tax preparation business. It’s a seasonal business, usually spanning from January to April. Taxpayer B decides to move their business to Nevada. From January to April, Taxpayer B lives and operates their business in Nevada. From May to December, Taxpayer B lives in California.

Now, because the tax preparation business is seasonal, Taxpayer B decides to take periodic distributions during the year to cover their bills. So, which part is taxable in California? The distributions are taxable, not the income on the company. Why? Taxpayer B is a resident of California but they did not conduct their business there. The business is physically present in Nevada. However, the taxpayer will still need to pay income tax in California since they were only temporarily in Nevada.

As mentioned earlier, Nevada is a tax and privacy haven. The threshold for the Nevada Commerce Tax, a privilege tax, is $4 million. In other words, the business would have to make $4 million before they are taxed. If a company made $4.1 million, they are only taxed on the $100,000. This is ideal for small companies who cannot afford the business taxes.

With regards to privacy, Nevada gives companies the discretion to appoint public officers of the company who do not have a signing authority. This means the actual officers remain fairly anonymous.

Nevada is among nine states without state income tax. This includes their business, for the most part. The exception being, of course, the Commerce Tax if the amount exceeds the $4 million.

How Do I Relocate My Business from California to Nevada?

As mentioned before – successor liability, the major headache. California, like many states, has established successor liability to prevent shady companies from bailing on their bills. The successor liability is the exception to the rule which states when a company sells or transfers assets to another company, the second company is not liable for the debts and liabilities from the first company.

Successor liability is used when a company is held liable for the debts of another. This happens when (1) the company agrees to the debt, (2) the transfer is as a result of a merger or consolidation, (3) selling the business, and (4) the asset transfer was done on the basis of fraud.

Successor Liability

Expanding on the previous section, successor liability is used in four scenarios – agreement, merger and consolidation, sale of business, and fraud. In the first scenario, the simplest example of this would be Company A selling an asset to Company B that still had a lien on it from a financing company. The second company agrees to buy the asset and pay-off the lien for the first company.

The second scenario is a merger or consolidation. If Company A sells all their assets to Company B but it was part of an agreement to merge companies, Company B would still be on the hook for Company A’s debts.

The third scenario is selling a business or selling and/or transferring assets to another company for the purpose of continuing the business. In other words, simply transferring the business to another jurisdiction or for the purpose of changing the identity of the business, does not erase the debt.

For example, Company A decides they do not like California’s taxation system. So, they decide to open Company C in Nevada and transfer all their assets to them. However, they still owe California almost $1,000 for franchise taxes and penalties. They tell California they are no longer operating. California decides to investigate and finds the same taxpayer is operating Company C in Nevada with Company A’s assets. They determine Company C is liable for the tax.

The fourth scenario is fraud. The example is the same as the last example except Company A decided to skip out their franchise tax, state income tax, federal income tax, and debts to their vendors. In addition, to not paying their bills, Company A has decided to try to hide their relationship to Company C and lie to the California FTB. When the deception is uncovered, it is determined in California courts that Company C now owes all debts for Company A.

When qualifying for Nevada residency, ask yourself the following two questions – ‘am I establishing residency to live in Nevada,’ or ‘am I establishing physical presence for my business?’ Either way, both scenarios are possible.

If you’re interested in living in Nevada on a permanent basis, Nevada has made it fairly easy – as long as you spend less than 183 days in your last resident state in the time leading up to residency and file a declaration of domicile (and take the necessary steps given by that document), you can establish residency.

If you’re interested in residency for a business purpose, it’s a little different. If a taxpayer would like to remain in California but move their business to Nevada, they would have to follow the appropriate steps set up by Nevada’s Secretary of State such as registering their business, establishing a physical address in Nevada, and paying for their formation fees.

Establishing Nevada Residency for Businesses

To operate a foreign company (a company operating in another state), the company must have a physical presence in Nevada. The physical presence test cannot be understated especially in an era of online shopping. There is a common misconception that a business can claim any location if it’s ran online but that is not the case.

A taxpayer who spends their winters in Nevada does not qualify for residency. Why? They are physically present in Nevada for a temporary visit. Even if they bring their online business with them to Nevada, it does not count as Nevada income because yet again, the stay is temporary.

What are the Terms of the Declaration of Domicile?

The declaration of domicile has been mentioned a few times throughout the article. The declaration of domicile is a sworn statement submitted to the district court of a Nevada county where a taxpayer wants to be declared a resident.

The declaration of domicile requires the taxpayer to make a sworn statement that it is their intention to live in Nevada. The sworn statement allows Nevada to hold the resident accountable. It also cautions the taxpayer against making false statements such as seeking residency status for the purpose of evading taxes. Meaning if someone claimed they lived in 

Nevada so their business could have very little taxes but really they operated the business out of Kansas the whole time, that statement would be disingenuous.

Are There Residency Requirements for a Business Entity in Nevada?

Residency is a term that really refers to the individual taxpayer. When discussing businesses establishing themselves in a different jurisdiction, we look at the physical presence test to determine the location of the business.

For businesses online, yet again, the determination of where the business is located and operated really depends on the taxpayer. For physical storefronts, factories, etc., the determination comes down to where the business is physically located.

The residency requirements for a business in Nevada hold the business must be physically there (or the taxpayer in cases of online businesses). The requirements also hold that any company which desires to operate in Nevada must first establish themselves in Nevada through the Secretary of State.

What are My Business’ Tax Obligations in Nevada?

When operating a business in Nevada, there is a tax obligation. While Nevada does not require an annual return for businesses, there is an exception – the Commerce Tax, a privilege tax. The Commerce Tax is used for businesses which bring in a revenue exceeding $4 million.

Sales Tax Implications for Nevada Businesses

As mentioned in the previous passage, sales tax is a necessary tax obligation all businesses will face. In the state of Nevada, this tax can vary from 4.6% to 8.265%.

For taxpayers who used to tax-exempt manufacturing labor in California, they are in for a bit of shock with Nevada – any labor used to manufacture a good sold at retail is taxable. Whereas repair and installation labor is tax-exempt.

However, Nevada, like California, does charge sales tax on rental property as it is considered retail under both states’ tax laws. In both states, the taxpayer has an option to pay the sales tax at the time the property is purchased or collect the tax from the renter over the period of their lease.

Nevada Residency Questions

How Does My Business Transition to Nevada?

First, before notifying the California FTB, the appropriate paperwork must first be filed with Nevada. It’s essential to retain a registered agent in Nevada before submitting the paperwork. After establishing a physical address in Nevada and receiving the approved licenses from Nevada, the business should notify California FTB. Before notification though, the business should make certain their final returns with California FTB are filed.

How long do I have to live in Nevada to claim residency?

Nevada has a unique way to request residency – taxpayers can actually file a sworn statement with their district court. It’s known as a ‘declaration of domicile.’ Of course, the statement has to be backed with evidence – proof of residency and a promise to make their home in Nevada permanent. In other words, a taxpayer is not pretending to stay in Nevada simply to obtain tax benefits.

To establish residency, Nevada has a few simple rules. Nevada requires the taxpayer to not have lived 183 days before in previous state the taxpayer had residency in. Nevada also requires an intent to stay and a physical presence (which is needed for the declaration of domicile).

As a general rule for residency, the IRC usually refers to physical presence test. If all else is too vague, the residency can usually be determined by the state they spent the most time in.

Changing Your Residency from California to Nevada

If a taxpayer decides to leave California behind for Nevada, there are a few things to consider.

One, if there’s a business, close it properly in California, only after the business has been approved in Nevada. Two, change all pertinent documents to establish residency. Change your voter registration, your driver’s license, etc. This will help establish your intention to remain in Nevada on a full-time, permanent basis.

Three, if there’s a business, you will have to notify FTB. If the company owes any debts in California, your new business may have the same debts in Nevada. It’s recommended when transferring your business out of state, you consult with an appropriate attorney and tax professional.

Get in Touch with Tax Crisis Institute

Are you looking to relocate your business to the state of Nevada? Tax Crisis Institute has helped countless small to large businesses relocate to Nevada from neighboring states like California. We can save your business time and money by cutting through all the red tape.

We’ve been helping businesses since 1985, so call us today for a free initial consultation.