If you’re a resident of California and you want to do business anonymously, you need to be careful how you set up your company structure.
The reason for this, is that the State of California has a very long-arm statute that says you’re “doing business” in the State of California for a variety of financial reasons, even if all your customers are located outside the State. The California Franchise Tax Board has a good article that summarizes the financial “thresholds” the State of California uses to determine if you’re “doing business in” the State.
Basically, the State says the following:
- If your gross sales for the company is 25% or more for the State of California, or the gross sales exceeds a threshold (just over $600k) IN the State of California, even if under 25% of your overall sales
- Or, the assets (real or personal property) owned by the company and located in the State of California is 25% or more of the total assets of the company, or the total assets exceeds a threshold (just over $60k) IN the State of California, even if under 25% of the assets owned by the company
- Or, the payroll compensation paid is 25% or more in the State of California, or the California payroll compensation exceeds a threshold (just over $60k), even if under 25% of the overall compensation paid to folks outside of CA.
If the answer is “yes” to any of the above, then the State of California says you’re “doing business” in the State of California.
Why is this significant? Because, if you’re a resident of California, the odds are you will hit one of the thresholds if your business is even moderately successful. Because the State of California shares data with the IRS, the State of California will come calling, charging you back taxes, fees, penalties and interest which can add up if you manage to stay under the radar for a while.
The longest I’ve heard California residents avoiding the State is about 3 years. Most will hear from the State within 1-2 years.
Because the State of California requires registration of a company if it’s “doing business” in the State, anonymity can be difficult. Standard parent/child setups won’t work.
What will work, is registering a company (LLCs only, not a corporation) as “Manager Managed” and the Manager happens to be an Anonymous LLC that only manages the operating company in California.
How do you do this?
Setting Up a New Company to Do Business Anonymously in the State of California
If you’re starting your business for the first time, here’s the structure you want:
YOU/PARTNERS –> (own) an Anonymous LLC in NM as the Management Company
YOU/PARTNERS –> (own) a regular LLC in CA as the Operating Company
Why NM? Because it’s the least expensive to setup and maintain. Would another state, like WY or DE be better for asset protection? Not really, because the Management Company isn’t doing anything. It doesn’t own the Operating Company. It’s not handling money. It shouldn’t own any assets.
How does the regular LLC in CA remain anonymous? In the State of California, we need to disclose either owners (i.e. Members) or Managers. So, we disclose the Manager, which is itself an Anonymous company. This preserves anonymity.
Do you pay taxes in NM? No. The Management Company is not operating. It handles no cash. It doesn’t even need a bank account or a FEIN. No taxes to report, pay or file.
What’s the catch? There are a couple:
- The State of California requires a California address, so you need to get a virtual mailbox (or UPS mailbox) — not a PO Box — so that the address doesn’t trace back to you publicly. It must be located in the State of California. Fortunately, you can use this address for the New Mexico Anonymous LLC Management Company.
- This only keeps ownership information off the Secretary of State website. If you’re a licensed professional, or have other filing / registration requirements personally, this may not be an effective strategy.
How do you get started? Order from these links:
- First, Form an Anonymous LLC in NM as the Management Company: https://www.l4sb.com/product/anonymous-llc-formation/?form-state=New+Mexico
- Next, Form a Regular LLC in CA as the Operating Company: https://www.l4sb.com/product/llc-formation/?form-state=California
Already Have a Company, and Need to Register in California Anonymously?
To figure out the right approach to do this, you need to first ask yourself, “Is your current company anonymous?” If not, then ownership information is already out there and to maintain your anonymity, you need to consider starting over. Or, contact us to discuss options.
If, however, you already have a company and it’s anonymous, the next question is, “Is your current company an Operating Company, such that it’s currently generating revenue?”
If the answer is “no”, then we recommend using your existing, anonymous company as a Management Company to a new LLC in California as your Operating Company. You merely need to form a CA LLC in the right way, specifying your existing anonymous company as the Manager, and you should be good to go. You can get started with this one link:
- Form a Regular LLC in CA as the Operating Company: https://www.l4sb.com/product/llc-formation/?form-state=California
If the answer is “yes”, however, then there’s more work to do. Specifically, you need to register your current operating company as a “Foreign LLC” in California, but to avoid exposing ownership information, we need to indicate either an OWNER (i.e. MEMBER) or a MANAGER for your Operating Company. Our recommendation would be to setup a NM LLC as a “Management Company” for your Operating Company, then switch your Operating Company to a “Manager Managed” LLC if it isn’t already (which takes a bit of work – depending on whether it’s a Corporation or not, and what it’s status is), then foreign file the Operating Company as a Foreign LLC in the State of California.
A bit of work, depending on the status of the operating company. Here are the links for more information, pricing and to order for most of that:
- Anonymous LLC in NM as a Management Company: https://www.l4sb.com/product/anonymous-llc-formation/?form-state=New+Mexico
- Foreign LLC in California: https://www.l4sb.com/product/foreign-corporation-registration/?form-state=California
Note that the above assumes your Operating Company is already a Manager Managed LLC. If it’s not, there’s a bit more work to do. Specifically:
- If a LLC, but Member Managed, then you need to (1) Amend the Articles to make it a Manager Managed entity, and (2) you need a new Operating Agreement (we charge $29 for this).
- If a Corporation, then you need to convert the entity to a LLC, although we wonder whether you didn’t answer the first question, “Is your current company anonymous?” correctly, because it’s very difficult to have an anonymous corporation. Contact us to discuss options.