There has been a lot of talk lately about the “mass exodus” of residents and businesses leaving California. Some news would have you believe that everyone is running from our state’s high income, sales and property taxes and fleeing to greener pastures in low-tax states like Washington, Texas or Nevada.
Though there is some truth to it, the idea of a mass exodus from California is still a bit overblown. Yes, some people are leaving and it makes sense why. If the situation is right, there is certainly a case to make for some businesses and individuals to move to a lower-tax state.
It’s also important to keep in mind that it’s much easier for an individual or family to make a big move out of state than it is for a business. This is what we want to talk about today. Does it make sense for you to relocate your business out of California? What are the pros and cons of such a drastic move?
Some business may be dependent on their California locations. We’re talking about brick and mortar companies with local customers—businesses that may thrive because of a desirable location and customers with higher average incomes. There’s still plenty of money to be made here, which is why many business owners are content staying where they are and paying higher taxes and property costs.
There are also many startups that are dependent on their California locations. Silicon Valley, Orange County and Los Angeles offer more angel investors and sometimes the owner(s) have to be present in-state to get the company off the ground. Later, they may be in a position to move, but not right now.
In other cases, a move out of state may be very viable. E-commerce continues to grow and evolve, especially in the wake of the pandemic that forced many businesses to completely change their sales and distribution models. It is becoming less and less necessary for there to be brick and mortar store locations, as sales are easier to make nationwide through e-commerce strategies. Where you base your business and where you ship from don’t really matter. You can set up shop anywhere, including in a state where income taxes, property expenses, labor costs and living expenses are much lower.
However, starting a new company wherever you want is different than relocating your established California-based business. This is where it gets tricky. There are complex residency tax laws, and you have to determine if you, the business owner, are also moving out of California or if you are running your business (and thus collecting income from it) in another state while maintaining residency here. In the latter scenario, your business may save on some taxes and expenses, but your income is still subject to California state income tax.
Over the course of the next few weeks, we will explore some of the specific rules, regulations and tax laws that you need to understand as a California business owner. We will discuss different situations where a business relocation out of state may or may not make sense. Our goal is to help you understand your options and determine your best business ownership plan.
Stay tuned to the Illumination Wealth Blog as we continue with this topic of relocating your business outside of California. If you want to discuss your specific business plan and financial strategies, contact us today to speak with one of our trusted advisors.