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If you really want to be rational about your company (no personal or business income tax), live cheaply relative to San Francisco, and yet be close to it, start

If you really want to be rational about your company (no personal or business income tax), live cheaply relative to San Francisco, and yet be close to it, start your company in Reno, NV. Rents are 1/2 to 1/3rd of what they are in SF. There is a relatively large and growing tech scene (Gigafactory is being built in Reno, there are several drone startups, SNC does space/military stuff, IGT and Bally Technologies are also headquartered there). San Francisco is a 3.5 hour drive or a 45 minute flight. Even if you flew to San Francisco every week for meetings and rented a 4 bedroom house, you would save money over a 2 bedroom apartment in SF. Las Vegas (where I primarily live) is another great option, although it's further from SF and puts it out of driving range (1.5 hour direct flight to SF). It seems irrational (and a disservice to investors) to start an Internet company that can be based anywhere in the Bay Area these days, especially if you plan on being successful. Say you personally net $10M on an exit. In Nevada you would only the 20% federal long-term capital gains tax, or $2M. In California, you pay the 20% federal tax plus 13.5% state income tax - your tax bill rises by 67.5%. That same $10M exit costs you $3.35M in taxes (not to mention the negative effects of CA's business income tax, higher payroll taxes, office rents, living expenses for employees, etc. on your valuation). Personally, I'd rather have the extra $1.35M in the bank or spend it on buying a bigger house or a few Ferraris than give it to Jerry Brown (plus I happen to like soda [1]). Mark Zuckerberg alone has paid a multi-billion dollar penalty for the mere privilege of living in California. [1] http://www.npr.org/blogs/thesalt/2014/11/05/361793296/how-did-berkeley-pass-a-soda-tax-bloombergs-cash-didnt-hurt http://www.npr.org/blogs/thesalt/2014/11/05/361793296/how-di...

at-fates-hands 12y ago
This. Great advice. I often wonder why people never associate "start-ups" with "small business". There are plenty of states who talk about having very favorable tax structures for small businesses, none of which include California. Reno is a great example of being able to leverage favorable tax structures and still being close to "the action" so to speak. This is such an obvious win-win on so many levels, I'm not sure why more people talk about utilizing states like Nevada for these advantages. If you look at this map, Nevada has one of the best business climates, which is right next to California, which has one of the worst: http://taxfoundation.org/article/2015-state-business-tax-climate-index http://taxfoundation.org/article/2015-state-business-tax-cli...
- gamblor956 12y ago
  Compare the success of Nevada's businesses with those of California's. Can you think of any major Nevada success stories outside of the casinos or Zappos? (Even Zappos found success as a Cali company before it moved to Nevada.) As it turns out, having one of the "best business climates" is usually not correlated with actual business success. States with "favorable" business climates have such climates precisely because businesses would not otherwise succeed in those states. This puts such businesses at a disadvantage when they try to expand to non-favorable states: without the tax subsidies, they simply aren't efficient enough to succeed in a cutthroat, capitalist environment. Tax Foundation's "best business climates" ranking is based purely on tax rates. It doesn't even take into account tax incentives! If they're going to rank states based on tax policies, they should be ranking based on effective tax rates, not hypothetical maximum marginal tax rates. The other major flaw with the rankings is that they don't take into account the other factors that matter far more to a small business: such as market opportunities, customer availability, employee quality, and support services, none of which you will find in any meaningful qualities in any of the states ranked in the top 10 of the Tax Foundation rankings.
lsc 12y ago
The thing is, the tax rates only matter if you are successful. Well, mostly. You mostly only pay taxes on profit. (there are exceptions, like payroll taxes, but those are mostly federal.) I'd be happy to promise to pay a billion dollars if my company ever has more than two billion dollars on hand, if paying that billion makes it even slightly more likely that my company will become that successful in the future. Face facts, as a friend used to say, your company will probably fail before it makes enough money to pay significant taxes. And money on the upside? it's got diminishing marginal value. Making promises to give away some of the upside, if it gives you a better chance of getting to the point that there is a significant upside, often makes a lot of sense. All that said, complexity matters a lot. I mean, until I start making money, I don't really care what the tax rate is - I'm not making much money, so I'm not paying much in taxes. But I'm paying my accountant, and even then, my accountant makes me think at least a little about taxes. And taxes are super complex. When your company is small, you will spend more money figuring out how much to pay than you will spend on actual taxes. Complexity is a cost even when you are small and posting small profits.
- at-fates-hands 12y ago
  >>> Face facts, as a friend used to say, your company will probably fail before it makes enough money to pay significant taxes. I have a freelance business I'm working on getting off the ground. I have to pay quarterly taxes on the revenue I bring in. I just wrote a check for close to $900 on around $2500 of revenue I had taken in for two clients. To me, that's a significant amount of money coming out of my pocket for taxes.
  - lsc 12y ago
    S-corp or llc? that sounds a lot like your income tax or equivalent (you pay something very much like income tax on profits for pass-through entities) - which is to say, if you were farming out this work to someone else, most of that tax bill would follow the money you are paying someone else to do the work. At that much, I'd guess you are paying income tax at a rate that would indicate that you have significant other income. Income tax/fica are the hardest to get around (and most regressive) tax you have to face, but if you wanna stay in America, there's not a lot you can do. (you can shave off something around ten percent if you want to leave California and move somewhere without a state income tax... but there's no getting around federal income and FICA tax.)
gamblor956 12y ago
That's horrible advice. Tax decisions should never drive business decisions until the amount of tax actually becomes a material financial statement item. If you let tax effects drive your business decisions as a startup, you end up with a structure more complicated than the most efficient option, and most of the future tax "savings" disappear to lost opportunities or maintenance of your "optimized" structure. (not to mention the negative effects of CA's business income tax, higher payroll taxes, office rents, living expenses for employees, etc. on your valuation). Nevada hasn't turned out so well for the many startups who have moved there. Check out re/code's entire series of the Downtown Vegas experiment. It turns out that money isn't everything, or even the most important thing. If your business couldn't succeed in California, moving to Nevada won't make a difference. Mark Zuckerberg alone has paid a multi-billion dollar penalty for the mere privilege of living in California. Zuckerberg chose to pay a lot of taxes for the privilege of living in California, the state which made it possible for him to earn many billions of dollars. Without Silicon Valley, nobody would remember or care about Zuckerberg today. (Even Zappos, Nevada's only success story to date, found its initial success in California.) Zuckerberg did the right thing: he paid it forward so that California could continue to be the place where people go to make it big.
- downandout 12y ago
  Nevada hasn't turned out so well for the many startups who have moved there. Bad companies and/or ideas will fail anywhere, and they will fail faster in high burn rate areas like the Valley. Good (internet) companies will succeed anywhere. When was the last time you refused to install an app based upon where the company behind it was based? Tax decisions should never drive business decisions until the amount of tax actually becomes a material financial statement item. Nonsense. You should plan for failure, but you should also plan for success. Without Silicon Valley, nobody would remember or care about Zuckerberg today. Also nonsense. Facebook was a great, viral product. No one cared, cares, and in the beginning, even knew, where it was based (and it didn't start in the Valley either).
- 7Figures2Commas 12y ago
  > That's horrible advice. Tax decisions should never drive business decisions until the amount of tax actually becomes a material financial statement item. If you let tax effects drive your business decisions as a startup, you end up with a structure more complicated than the most efficient option, and most of the future tax "savings" disappear to lost opportunities or maintenance of your "optimized" structure. Tax considerations should never be the sole driver of business decisions but that isn't a good justification for ignoring them. Founders, for instance, should know about 83(b) elections and Qualified Small Business Stock (QSBS). Incidentally, California is one of the few states in which the exclusion of gains from the sale of QSBS is not allowed. I would venture a guess that close to 100% of tech startup founders today have no idea what QSBS is even though it can allow them to eliminate up to 50% of their capital gains tax when they sell their company. Your comment seems to be based on the flawed assumption that legitimate tax planning involves complicated corporate structures. There's nothing complicated or expensive about choosing to reside in Nevada (because of the lower costs, business-friendly environment, etc.) and structuring your Nevada-based business as a Nevada corporation. That is far less complicated and expensive than, for instance, choosing to reside in California and structuring your California-based business as a Delaware corporation, which is something that a ton of California startups do based on the hopeful assumption that they're going to raise capital from investors who will require Delaware incorporation. > Nevada hasn't turned out so well for the many startups who have moved there. California isn't a panacea for startups either. For every Facebook, there are countless ventures that never took off. Startups fail at a very high rate. Wherever they're located.
aagha 12y ago
I wouldn't advocate moving to another state in a location that's 3.5 hours drive and 3 hours by plane (not 45 minutes--airport time on both the front and back end will be an hour). However, I would recommend checking out the East Bay. Berkeley and Oakland particularly. Cheaper rents, good startup community, 30 minutes to SF by BART.

at-fates-hands 12y ago

This. Great advice. I often wonder why people never associate "start-ups" with "small business". There are plenty of states who talk about having very favorable tax structures for small businesses, none of which include California. Reno is a great example of being able to leverage favorable tax structures and still being close to "the action" so to speak. This is such an obvious win-win on so many levels, I'm not sure why more people talk about utilizing states like Nevada for these advantages. If you look at this map, Nevada has one of the best business climates, which is right next to California, which has one of the worst: http://taxfoundation.org/article/2015-state-business-tax-climate-index http://taxfoundation.org/article/2015-state-business-tax-cli...

gamblor956 12y ago
Compare the success of Nevada's businesses with those of California's. Can you think of any major Nevada success stories outside of the casinos or Zappos? (Even Zappos found success as a Cali company before it moved to Nevada.) As it turns out, having one of the "best business climates" is usually not correlated with actual business success. States with "favorable" business climates have such climates precisely because businesses would not otherwise succeed in those states. This puts such businesses at a disadvantage when they try to expand to non-favorable states: without the tax subsidies, they simply aren't efficient enough to succeed in a cutthroat, capitalist environment. Tax Foundation's "best business climates" ranking is based purely on tax rates. It doesn't even take into account tax incentives! If they're going to rank states based on tax policies, they should be ranking based on effective tax rates, not hypothetical maximum marginal tax rates. The other major flaw with the rankings is that they don't take into account the other factors that matter far more to a small business: such as market opportunities, customer availability, employee quality, and support services, none of which you will find in any meaningful qualities in any of the states ranked in the top 10 of the Tax Foundation rankings.

lsc 12y ago

The thing is, the tax rates only matter if you are successful. Well, mostly. You mostly only pay taxes on profit. (there are exceptions, like payroll taxes, but those are mostly federal.) I'd be happy to promise to pay a billion dollars if my company ever has more than two billion dollars on hand, if paying that billion makes it even slightly more likely that my company will become that successful in the future. Face facts, as a friend used to say, your company will probably fail before it makes enough money to pay significant taxes. And money on the upside? it's got diminishing marginal value. Making promises to give away some of the upside, if it gives you a better chance of getting to the point that there is a significant upside, often makes a lot of sense. All that said, complexity matters a lot. I mean, until I start making money, I don't really care what the tax rate is - I'm not making much money, so I'm not paying much in taxes. But I'm paying my accountant, and even then, my accountant makes me think at least a little about taxes. And taxes are super complex. When your company is small, you will spend more money figuring out how much to pay than you will spend on actual taxes. Complexity is a cost even when you are small and posting small profits.

at-fates-hands 12y ago
>>> Face facts, as a friend used to say, your company will probably fail before it makes enough money to pay significant taxes. I have a freelance business I'm working on getting off the ground. I have to pay quarterly taxes on the revenue I bring in. I just wrote a check for close to $900 on around $2500 of revenue I had taken in for two clients. To me, that's a significant amount of money coming out of my pocket for taxes.
- lsc 12y ago
  S-corp or llc? that sounds a lot like your income tax or equivalent (you pay something very much like income tax on profits for pass-through entities) - which is to say, if you were farming out this work to someone else, most of that tax bill would follow the money you are paying someone else to do the work. At that much, I'd guess you are paying income tax at a rate that would indicate that you have significant other income. Income tax/fica are the hardest to get around (and most regressive) tax you have to face, but if you wanna stay in America, there's not a lot you can do. (you can shave off something around ten percent if you want to leave California and move somewhere without a state income tax... but there's no getting around federal income and FICA tax.)

gamblor956 12y ago

That's horrible advice. Tax decisions should never drive business decisions until the amount of tax actually becomes a material financial statement item. If you let tax effects drive your business decisions as a startup, you end up with a structure more complicated than the most efficient option, and most of the future tax "savings" disappear to lost opportunities or maintenance of your "optimized" structure. (not to mention the negative effects of CA's business income tax, higher payroll taxes, office rents, living expenses for employees, etc. on your valuation). Nevada hasn't turned out so well for the many startups who have moved there. Check out re/code's entire series of the Downtown Vegas experiment. It turns out that money isn't everything, or even the most important thing. If your business couldn't succeed in California, moving to Nevada won't make a difference. Mark Zuckerberg alone has paid a multi-billion dollar penalty for the mere privilege of living in California. Zuckerberg chose to pay a lot of taxes for the privilege of living in California, the state which made it possible for him to earn many billions of dollars. Without Silicon Valley, nobody would remember or care about Zuckerberg today. (Even Zappos, Nevada's only success story to date, found its initial success in California.) Zuckerberg did the right thing: he paid it forward so that California could continue to be the place where people go to make it big.

downandout 12y ago
Nevada hasn't turned out so well for the many startups who have moved there. Bad companies and/or ideas will fail anywhere, and they will fail faster in high burn rate areas like the Valley. Good (internet) companies will succeed anywhere. When was the last time you refused to install an app based upon where the company behind it was based? Tax decisions should never drive business decisions until the amount of tax actually becomes a material financial statement item. Nonsense. You should plan for failure, but you should also plan for success. Without Silicon Valley, nobody would remember or care about Zuckerberg today. Also nonsense. Facebook was a great, viral product. No one cared, cares, and in the beginning, even knew, where it was based (and it didn't start in the Valley either).
7Figures2Commas 12y ago
> That's horrible advice. Tax decisions should never drive business decisions until the amount of tax actually becomes a material financial statement item. If you let tax effects drive your business decisions as a startup, you end up with a structure more complicated than the most efficient option, and most of the future tax "savings" disappear to lost opportunities or maintenance of your "optimized" structure. Tax considerations should never be the sole driver of business decisions but that isn't a good justification for ignoring them. Founders, for instance, should know about 83(b) elections and Qualified Small Business Stock (QSBS). Incidentally, California is one of the few states in which the exclusion of gains from the sale of QSBS is not allowed. I would venture a guess that close to 100% of tech startup founders today have no idea what QSBS is even though it can allow them to eliminate up to 50% of their capital gains tax when they sell their company. Your comment seems to be based on the flawed assumption that legitimate tax planning involves complicated corporate structures. There's nothing complicated or expensive about choosing to reside in Nevada (because of the lower costs, business-friendly environment, etc.) and structuring your Nevada-based business as a Nevada corporation. That is far less complicated and expensive than, for instance, choosing to reside in California and structuring your California-based business as a Delaware corporation, which is something that a ton of California startups do based on the hopeful assumption that they're going to raise capital from investors who will require Delaware incorporation. > Nevada hasn't turned out so well for the many startups who have moved there. California isn't a panacea for startups either. For every Facebook, there are countless ventures that never took off. Startups fail at a very high rate. Wherever they're located.

aagha 12y ago

I wouldn't advocate moving to another state in a location that's 3.5 hours drive and 3 hours by plane (not 45 minutes--airport time on both the front and back end will be an hour). However, I would recommend checking out the East Bay. Berkeley and Oakland particularly. Cheaper rents, good startup community, 30 minutes to SF by BART.