You know, when it comes to a corporation there’s different options. Some will incorporate on their own. Typically, not do everything correctly. They might use like a legal zoom service or use an attorney. I’ll tell you the biggest probably mistake they make they don’t really take into consideration the taxation situation.
You know maybe they read online about type of entity they want to have or maybe talk to an attorney about what they recommend, but they don’t always must they come to us first, they don’t really address taxation issues. And that’s where it can get them into trouble or at least be less favorable for them in the short term. It’s more of a long-term consequence.
Typically, we have a lot of clients that might initially form an entity outside of their State that they live in and operate their business from. They think they can get out of State taxes. And they realize okay, well I actually need to form a foreign entity in my home State. And then they still have to pay all the fees associated with that. A lot of times they want to pay more money as they thought they were going to save money by trying to be sneaky in registering the business out of the State. When they find out in order to be complied they actually have to register their own state. They have Nexus in that State right? That’s one issue we run into a lot of times.
We have a new client who’s a window cleaner. And his accountant who’s I guess no longer around advised him that he set up a Nevada corporation. He lives in California and his business is in California. And the idea was to do that he would save the $800 a year charged by the Franchise Tax Court. The Franchise Tax Board Californian charges and $800 minimum fee. And yeah not everybody’s tax is able to pay that so the thought was ok well you just register Nevada and in California will save you 800. The last eight years, yes that’s been the case but the problem is you know the State doesn’t go by that rule. So it’s just kind of a ticking time bomb. When the State catches up with him you know, they’re going to hit him with $800 a year. Because he was basically operating in California but he wasn’t registered right. So the long term money, 90% chance maybe he’ll get caught and maybe he won’t. But you know, they are trying to track down on more and more. So there’s potential risk there.
The other risk that he has is since he’s not registered as a foreign corporation in California, he doesn’t have a legal protection here. So if somebody falls off a building and sues him, he doesn’t have any corporate liability protection because he’s not registered in California. Totally unaware of that right, so people try to do things on the cheap or you know, they try to kind of a black hat of accounting right. If there’s any problem, it will catch up with them eventually. So a lot of the stuff does not happened right away or let’s say there’s a lawsuit right, so you might be operating for 20 years and never is there a problem, but once you get a lawsuit, that’s when all these things can come to the surface. Or if someone gets audited right. Again maybe, you know, 5 years is fine, nothing’s happen but also they audited and then they get reigned. So you know that’s the potential risk there.