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Comment by justboxing | Hacker News Reader

... and then get ready to be taxed into Bankruptcy.

CA has 1 of the highest business taxes. LLCs have to pay the State $800 every year, even if your business is losing money or has no revenue and even if you are a single-member LLC, in which case IRS regards it as a pass-through entity.

On top of that, if you form your business in San Francisco, you are mandatory charged a 4% "Healthy San Francisco" city tax that is supposed to helps pay for employee's healthcare.

> 2008 Health Care Security Ordinance, which provides health care to San Francisco residents without insurance (the Healthy San Francisco program) and requires businesses to help fund health care for their employees in San Francisco.

Source: https://www.tripsavvy.com/restaurants-healthy-san-francisco-...

Restaurants were busted running a scam where they passed on this tax to the customer and pocketed the $$ themselves, but that's a whole different story (see Source link above).

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Turns out, providing a baseline of healthcare costs money. I'd rather restaurants didn't line-item it and just raise the cost of food (maybe they have to line-item it? not sure) but in either case I'm happy to pay extra given that when we weren't paying, it simply meant a bunch of people were wandering around playing healthcare bankruptcy roulette.

I think there will be a lot of "growing pains" as businesses adjust to "actual cost of an employee." Typically my friends back in Texas make fun of me for this after my move to SF, then turn around demanding the removal of illegal immigrants... despite the fact that every one of their favorite restaurants out in Houston exists because of their ability to underpay unreported workers. I see very little difference (costs go up because employees actually get healthcare now vs costs go up because historically underpaid employees have to be paid at least minimum wage because they're reported now).

> On top of that, if you form your business in San Francisco, you are mandatory charged a 4% "Healthy San Francisco" city tax that is supposed to helps pay for employee's healthcare.

This is misleading right-wing B.S. This only kicks in once you employ 20 or more people.[1] Anyone reading this on HN, if they eventually do employ 20 people, probably would want to offer them health insurance by that time.

[1] http://sfcityoption.org/hcso-compliance/employer-spending-re...

> This is misleading right-wing B.S.

LOL. No. I campaigned for Barack Obama and met him in 2008. That's how 'right wing' I am.

> Anyone reading this on HN, if they eventually do employ 20 people, probably would want to offer them health insurance by that time.

That's a benevolent attitude, but practically, it will drive your business bankrupt if you are paying the CA-rate health care costs. That's the single biggest reason why even big corps like Wells Fargo, Charles Schwab and Bank of America are relocating many of their employees to Arizona and Colorado and elsewhere.

Obama is a New Democrat who lean right-wing ("conservative") on fiscal/economic issues.[1]

> CA-rate health care costs [are] the single biggest reason why even big corps like Wells Fargo, Charles Schwab and Bank of America are relocating

Source?

[1] https://en.wikipedia.org/wiki/New_Democrats

What makes it right or left wing bs? Can't it just be an incorrect statement? It could just be me, but I didn't detect any political undertones to the parent comment.

Misrepresenting the taxation level and/or financial solvency of California is a regular right-wing trope, targeting the general attitude that governments should provide social services.

But they should be the ones to decide, right?

CA has 1 of the highest business taxes.

If you want to do business in California, you will be paying that tax whether you register in California or another state. Consequently, if you're in California there's no reason to consider exposing yourself to the jurisdiction of another state.

You mind find the "startup mechanics" video from YC's startup school 2017 pretty interesting. The case is made that resolving disputes in Delaware (by being incorporated in Delaware) is greatly preferred to any other state (CA for example).

IIRC it is generally preferable to incorporate in DE for dispute resolution but doing so does not exempt you from paying CA taxes & fees. You will still need to pay the minimum tax amount if you are doing business in CA.

Yes this is correct. I have an LLC in Nevada and I still have to register an LLC in California because I live and work here. It's a foreign LLC entity.

If you get to the point of having more than 50% of your employees outside of CA, I believe you can avoid registering as a foreign entity.

Could you expand on that?

I really don't understand.

In this case, a foreign entity is an LLC that is registered in another state, but does enough business in CA to require registering in CA. In this case you register as a "foreign entity".

Agreed.

Direct link to the video: https://www.youtube.com/watch?v=2_IpVq6vKR0

PS: It seems the original startup school video is gone. This version is linked by their page: https://www.startupschool.org/?course=1

"Do business in California" is nebulous. Many startups are at the stage of being a single-member LLC working out of their own garage. No property rental, no payroll, no customer transactions (yet). Legally speaking such an entity could be registered anywhere. Doing so in California for the first year or two is needlessly inefficient of your scarce resources at that stage.

Companies that do business in California must pay California taxes no matter where they are incorporated.

Correct. This fact seems misunderstood by many people but the rules are very clearly written.

Define do business.

If an LLC, say software services, incorporated in DE provides some consulting to a firm in California, that counts?

Depends on a lot of things, including where that LLC has its principal place of business, whether it owns property in a California, where its employees perform their duties, etc. Talk to a CPA or better yet a tax attorney with California experience

Not the franchise tax.

> All LLCs (not classified as a corporation) that are doing business in California, or file an article of organization or certificate of registration with the Secretary of State must file Form 568, Limited Liability Company Return of Income, pay the annual minimum franchise tax of $800, and LLC fee (if applicable).

https://www.ftb.ca.gov/businesses/Structures/Limited-Liabili...

Yep. The limitation though is that a foreign entity only has to pay the tax on its California receipts. So if 10% of your $1 million annual profits are derived from California, you pay the 1.5% (min $800) on that $100,000 and not the whole thing.

And btw that’s the rule in every state. They all want to tax whatever revenue is generated in that state (unless they don’t have a business tax at all, which is somewhat rare)

I just recently moved and also moved my single member California LLC to a single member Tennessee LLC. While there is NO INCOME TAX in the beautiful state of Tennessee, it still costs around $400 a year to register the LLC in Tennessee. So not a huge savings over the $800 LLC fee in California.

> ...taxed into Bankruptcy.

Given that you're taxed on profits (reductive, I know) isn't this literally impossible?

God forbid Californians value healthcare and that a city 45 minutes from the HQ of the richest company in the world, in the midst of a homelessness crisis, attempt to improve the lives of its at-risk citizens

http://sfist.com/2017/06/26/2017_san_francisco_homeless_cens...

The $800 "minimum tax" on LLCs and C-corps is assessed whether you have any revenue or not.

If you can't come up with US$ 800 a year to pay a business tax you're pretty much bankrupt already and it wasn't the tax that killed you.

> If you can't come up with US $800 a year to pay a business tax

That is not only condescending but also insulting to people who are working very hard to just survive.

I would respectfully request you to come down from your ivory tower of tech employment and notice the small people. My brother has an LLC and does landscaping. After paying all sort of bills and liabilities his company made $4K profits last year. $800 is pretty big amount compared to those profits. The profits might look negligible but he was able to employ 2-3 people on hourly wages, invest in buying a vehicle, equipment and so on.

When we talk about inequality we should realise that $800 flat tax hurts the poorest of poor lot more than people like you and me. This eventually adds up into making poor people even more miserable than rich people.

It could have been lot more sensible to say don't pay any taxes if you are making less than $20K profits. That would help poor people more.

I am not saying this about you but I come across so many people in tech industry who claim to have bleeding heart for poor and yet are totally ignorant of reality of poor people.

That isn't true at all. Most small businesses start out extremely lean and at risk.

$800 to obtain the privilege of operating in one of the world’s largest economies seems like a bargain to me. Were I one of those small businesses I would find some way to get that funding. A loan, a credit card, something. There are plenty of reasons people want to be in CA to do business, and that’s not that big of an expense for the value of operating there, in my opinion.

And by the way I’m not in agreement with most taxes; I am almost a Libertarian. I’m also not a Californian. I’m just saying, I think it’s not that big a deal in the grand scheme.

Calling "starting a business" a privilege completely moves you very far away from the libertarian space.

It’s the world we live in. Ask me personally what I think and I’ll tell you it’s a God-given right to start a business with little government mettling. In the real world, especially one largely run by statists, it’s considered a privilege.

I'm using the language of statists because most people today are statists. It doesn't necessarily follow that I also personally agree with the idea, though I can see why you'd draw that conclusion.

> $800 to obtain the privilege of operating in one of the world’s largest economies seems like a bargain to me.

It might be, but that's not what the tax is for. The $800 tax applied to LLPs, LLCs, and corporations isn't a tax on the privilege of operating a business in California: sole props and non-limited-liabilty partnerships can operate as businesses in California and don't pay the tax.

The privilege you pay for with the tax is that of offloading business failure risk onto the public while protecting your own personal assets with a publicly granted corporate liability shield.

From personal experience: Hiring your designer buddy who lives in San Diego while the two other guys in your company lives elsewhere entitles you to pay $800 a year in somewhat unexpected tax, even though you're not selling any services to any CA companies. Yea, jumped in feet first, but really did not enjoy the $800 bill that came with it.

> From personal experience: Hiring your designer buddy who lives in San Diego while the two other guys in your company lives elsewhere entitles you to pay $800 a year in somewhat unexpected tax, even though you're not selling any services to any CA companies

No, it doesn't, you can do that as a sole prop or (non-LLP) partnership, and not pay the $800 tax applied to corporations, LLPs, and LLCs.

Asking the public at large to absorb for you (by granting you a personal liability shield) the risk that that the resources you give to the business plus those it is able to earn will not be able to meet the businesses liabilities is what you pay the $800 for. Which is why only the limited liability entities pay the tax.

Many small businesses start out as sole proprietorships or general partnerships that don't pay the tax for the privilege of a corporate-style liability shield for investors that applies to LLCs, LLPs, and corporations.

They often convert to an LLC or corporation if they scale beyond a very small operation, because at any but the smallest scale $800/year is nothing (it's less than the wages—not total cost—of a full time minimum wage employee in the state for two weeks.) But, you only need to start that way when you have or are seeking early investors that are protecting substantial assets outside the business; lots of people starting a small business sink most of their personal assets into them initially anyway, so the corporate liability shield isn't protecting anything: if the business fails, they are personally wiped out with or without it, and their exposure is limited more by personal bankruptcy than anything else.

What’s the benefit to the business of that $800 fee? Why is it almost 4 times more than Delaware? Do I get a nice engraved plaque or something? I am being serious: WHY does it cost $800 just to exist?

> What’s the benefit to the business of that $800 fee?

Doing business in California: both local and foreign LLCs doing business in CA pay it.

> Why is it almost 4 times more than Delaware?

Why shouldn't it be?

> WHY does it cost $800 just to exist?

You can do business as a sole proprietor or general (or limited, but not limited liability) partnership without the franchise fee. You are paying for the right to do business in CA with a liability shield. The potential value to you (and cost to the public) of such a shield, all other things being equal, is greater in a bigger market. California has more than 30 times the population and 40 times the GDP of Delaware.

Delaware is 5x South Dakota for exactly the same thing, just to exist. At a certain level of receipts it doesn’t matter and the tax rate is more important, or what the corporate law structure is like.

But yeah, there’s really no valid reason other than the fact that California can get away with it.

No, you get to do business in the 6th largest economy in the world. If you don't like it don't do any business here.

That type of thinking has pushed entrepreneurs and businesses to move to more friendly and competitive states.

It's simply a bad policy to start aspiring small businesses in debt. $800 isn't much to many of us on here but it is for a lot of people that want to be entrepreneurs in different fields from different backgrounds. Most businesses have other startup costs as well.

California already has the highest state income taxes. The privilege of doing business here is already accounted for. The franchise tax fee is just a bad policy and it's regressive.

> $800 isn't much to many of us on here but it is for a lot of people that want to be entrepreneurs in different fields from different backgrounds.

And, so, they start businesses as sole proprietorships, or general or limited partnerships, and reorganize as LLCs or corporations once they've proven the idea. They are exposed to more (and the public exposed to less) risk of unmet business liability, but they can still run a business.

We always see entrpreneurs praised for taking risk, why are we hearing so much complaint that California charges for the privilege of offloading risk on to the public?

> California already has the highest state income taxes.

California has a pretty progressive income tax. It's the highest at the top income bracket (> $1 mil is taxed at around 13%), but it's significantly lower at the low end than many other states including Alabama, Arizona, Connecticut, Kansas, Maine, Maryland, Minnesota, New York, Oregon, Rhode Island, Vermont, West Virginia, Wisconsin, and DC.

That is much more a result of the much higher basic cost of living vs those other states than it is CA's progressiveness when it comes to taxes.

I'd be willing to bet that if you adjusted the brackets for cost of living, CA is taxing the poor more than those other states are.

> I'd be willing to bet that if you adjusted the brackets for cost of living, CA is taxing the poor more than those other states are.

Why bet when you could actually look up the figures yourself? California has a very progressive income tax with more brackets (ten) than other states, starting at 1% for the lowest bracket. Meanwhile North Carolina charges a flat 5.75% and Wisconsin's lowest income tax bracket is 4%.

Because a cursory lookup doesn't tell you much. Taxes are much more nuanced than a tax table. There are studies showing that a flat tax without loopholes or special deductions is a higher effective rate for the wealthy than a "higher" marginal rate in a progressive system. Additionally, states vary in what is deductible or non-taxable income.

> That type of thinking has pushed entrepreneurs and businesses to move to more friendly and competitive states.

Or simply get an LLC from another state. Seems like there are states (Utah?) where there is no annual fee/tax.

I believe you only need a CA LLC if you hire employees in CA.

Not quite that simple but you’re right that if you can be physically present outside the state and do business for California clients then you’re probably not going to pay the franchise tax.

But no state allows you to register any entity for free. Lowest I’ve seen is South Dakota at $50 per year with no other tax on receipts.

ND is $50 to renew, but $150 filing fee. Wyoming is $100 filing fee and also $50 to renew.

If you don't like it don't do any business here.

Ask Detroit how that worked out for them.

Seems to me like all the states where its so easy to do businesses there are no businesses. Maybe that's why they are making it so easy because no one comes there. You are complaining about CA but forget why it grew in the first place. CA governments have been leading the way for many years on what is required to be done for the economy.

There's a few businesses I wanted to try but paying $800 was absurd so I forgot it

You do know you don't have to form an LLC to try out a business? Just got for it as a sole proprietorship and file an LLC later if it starts working.

No you can get sued pretty quick

And when you are sued, your one man, tiny operation LLC will offer essentially zero protection. Unless you are selling parachutes to base jumpers, you'll be fine.

Interesting how given the tax does exist, the city with the HQ of the richest company in the world is in a homelessness crisis in the first place. Perhaps these taxes are not actually useful?

Or mayhaps the tax rate is too low and should be much higher for them?

For who? Also I'm asking about effectiveness, not necessarily the amount.

If they are not useful unless they are at a certain amount, then what would that be and why aren't they at that level already? And wouldn't that just mean that anything below that level actually is useless if it doesn't meet the minimum needed to do anything?

don't troll

It's commentary on the situation existing and a question on whether the taxes are effective. Why the sensitivity and how is your post constructive?

Apple is registered in Delaware. Again, reductive, but as other commenters said... don’t troll.

Why did you mention Apple in your comment then? Also operating in California means paying taxes in California and the minimum franchise tax is assessed regardless of corporate status or income: https://www.ftb.ca.gov/businesses/faq/712.shtml

What is reductive about wondering why a situation that you outlined exists for decades when there are specific extra taxes to help battle it?

Some Californian counties and cities [1] tax top line and fixed franchise/license taxes, irrespective of profitability.

[1] https://www.sidley.com/en/insights/newsupdates/2013/09/phase...

Correction: Just San Francisco. It even says so in the linked page.

It is impossible. He’s just repeating talking points he heard but does not understand.

What is impossible? The minimum franchise tax? Are you sure that you understand?

https://www.ftb.ca.gov/businesses/faq/712.shtml

>> Minimum tax is the amount you must pay the first quarter of each accounting period whether the corporation is active, operates at a loss or does not do business. The current minimum tax is $800.

"taxed into Bankruptcy"

If you're not making $800 then you don't have a business - you have a hobby.

There's no number on the amount of money you have to earn to be a business. Corporate structures can be useful even if they don't directly earn money.

Either way, yes it's just a cost of doing business in California, and so profits need to be greater than the cost for the business to be sustainable. Perhaps it's not a great description to say "taxed into bankruptcy" but it's no different than "did not meet costs and ended in bankruptcy", with the costs specifically being taxes.

Sure, there is no minimum (tho it could be argued that $800 is the minimum tbh) but even if you only charge minumum wage ($11) that’s less than two weeks work.

More likely the hourly equivalent will be a lot higher. A dog walker would make that in 4 days at worst. A week or two if they are casual ones.

So to not make that it’s not the taxes that are killing your business.

Funny though.. ALL taxes are passed to the customer. Businesses don’t pay taxes, customers do.

Then customers don't pay taxes, their employers do. You can keep going around in circles adding another link to who pays pointing to where they got their money. Saying anyone else but the entity signing the check pays a tax gets silly.

The only time you can dispute this is when the tax is directly on an activity that requires two participants. Who pays sales tax, the buyer or the seller?

This is in fact not an irresolvable metaphysical dispute but an introductory undergraduate economics problem, and the answer is that it depends on the elasticity of the market.

tax incidence is not nearly as simple as you are making it out to be. how much the tax cuts into the business's surplus vs the customer's totally depends on the situation.

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