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Tax wise, with only source of income in CA, should I incorporate in WA or CA?

Asked by: Tim  — 4 July, 2012

Trying to see from a tax standpoint which one makes the most sense. I live in WA, my business partner in CA. Our only source of income and client is in CA. Where should we incorporate to optimize for tax? (I hear CA may force us to pay tax in CA even if we incorporate in WA as our only source of income is from CA. Is this true?)

We would like to keep all people that work with this client as subcontractors but will need to talk to accountant to see if this is possible.

Answered by: admin  — 4 July, 2012

Dear Tim,

I understand your reluctance in registering your business in California, as it would be exposed to the high Franchise Tax this state levies on all registered businesses, however it is also important to correctly establish the domicile for your business. In other words, if a case can be made that your business has enough activity in California to require it to register there, then registering in Washington would not help much.

I invite you to read Mary’s answer to a question “Georgia company doing business in Florida“. She explains the definition of “transacting business” in a state, and you can use it to see if your business would fall under such definition in California or not, and make your decisions accordingly.

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