CA 'C' Corp. - Posted by Kurt Schultz

Posted by Kurt Schultz on September 11, 2003 at 08:53:53:

Hello, Mr. Bronchick -

My NV Corp. doesn’t buy & sell RE, it borrows money and lends money. Lately, I’ve been looking at having it buy discounted notes.

Can you point me in a direction to learn the official word regarding situs requirements for California? I know that CA Law is accessable on-line, but reading has often cured insomnia.

Kurt Schultz
GIO@thipdar.com

CA ‘C’ Corp. - Posted by Kurt Schultz

Posted by Kurt Schultz on September 09, 2003 at 22:38:01:

For Mr. Bronchick:

While reading this article:

I’ve encountered a claim that needs to be qualified, in order to make the claim accurate. I’d appreciate it if you could verify what I say here and edit your article to make it more accurate.

quote

6) INCOME SPLITTING

If you operate as a sole proprietor, you are taxed on all profits you make, even if you reinvest the money into the business. A “C” corporation is a separate taxpayer from you. The corporation pays its own tax, but usually at a lower rate than you pay (“C” corporation tax is only 15% up to $50,000). If you take a small salary and leave the rest of the profit in your corporation, you can effectively reduce your overall income tax.
endquote

The situation in California isn’t nearly as pleasant as you’ve portrayed here. We found that since my wife’s ‘C’ corporation was considered to be neither a sales company nor a service company, it was construed as a “personal holding company”, and the tax rate was nearly 34%. That was to be the starting tax rate, and is in fact higher than either of our personal tax rates would have been if we filed separately.

Another rude surprise for our situation was when we discovered that California requires that we pay a minimum tax every year, even if the corporation makes no profit.

Our reaction was to elect to have the corporation obtain ‘S’ corporation status. Unfortunately, that hasn’t been particularly satisfying either.

Kurt Schultz

Re: CA ‘C’ Corp. - Posted by William Bronchick

Posted by William Bronchick on September 10, 2003 at 08:51:24:

The personal holding company is addressed in my corporation manual. The IRS will call your C corporation a personal holding company if it is used merely as a conduit for passive investments to avoid personal income tax rates.

I generally don’t recommend C corps for rental properties because of the passive nature of the income; that is better suited for an S corp, LLC or Limited Partnership.

Also, I think you are confusing CA franchise tax law and federal income tax law.

The personal holding company tax is part of the FEDERAL (not California) tax code that states you cannot have strictly passive income in a C corp to avoid the personal tax rates. Having a mix of passive and active income in a C corp will get you around the PHC rules. You can read more on the technical requirements of passive vs. active income in a C corp here:

http://www.nysscpa.org/cpajournal/old/14469571.htm

The CA state franchise tax is a MINIMUM tax that applies to ALL corporations, S or C. And, forming your entity in NV to do business in CA doesn’t alleviate the issue.

Re: CA ‘C’ Corp. & alien NV ‘C’ Corp. - Posted by Kurt Schultz

Posted by Kurt Schultz on September 10, 2003 at 12:26:03:

Hello, Mr. Bronchick -

Thank you for a timely reply.

What you’ve just posted here is what we learned, subsequent to creating CA and NV corporations.

Your reference to NV Corporations reminds me that I’ve been trying to find out what the situs requirements are for my NV Corporation, with regard to the rare occasion when it does business in California.

Given that I’d rather not register my NV Corporation as an alien Corporation in CA, what’s the most amount of business that I’m allowed to do in California before such registration is required?

Kurt Schultz
GIO@thipdar.com

Re: CA ‘C’ Corp. & alien NV ‘C’ Corp. - Posted by Bronchick

Posted by Bronchick on September 10, 2003 at 13:20:33:

You asked:

“Given that I’d rather not register my NV Corporation as an alien Corporation in CA, what’s the most amount of business that I’m allowed to do in California before such registration is required?”

The answer, unfortunately is very little. CA, being a high-tax state, makes it very difficult to do business without registering. Simply buying and selling a few houses might be “doing Business”. And, the CA withholding rules for escrow companies will get you in the end if you sell a property without first registering the company.