Here’s What Businesses Should Know Before Leaving California (2023)

Businesses have long chosen to headquarter in California over other states. But since 2018, many large corporations have moved their headquarters out of state, including Tesla, Oracle, and Nestle. The change is undoubtedly driven, at least in part, by the state’s expensive cost of living, high taxes, and complex regulatory environment.

While large corporations have the legal resources to navigate moving elsewhere, small businesses are often left wondering: What does it take to leave California? This article walks through five key steps to move your business out of the Golden State.

Informing the Franchise Tax Board and IRS

In general, moving operations out of California protects your business income from California income taxes. However, the California Franchise Tax Board may be able to tax at least some of that income if the business is registered in California, its income is derived from in-state sales or services, or the legal entity is a pass-through entity for tax purposes (e.g., a partnership) and the resulting pass-through income is recognized by one of the business’s owners based in California.

Moving operations is necessary to “leave” the state for income tax purposes, but more is required. Technically, the business will remain subject to California income tax if it continues to “actively engag[e] in any transaction for the purpose of financial … gain” in California.”

(Video) Here's Why Businesses Are Leaving California

Next, memorialize that the business is no longer subject to California tax. To terminate your tax status as a California business, you must file any outstanding California tax returns; pay all outstanding balances, fees, and interest; and then file your business’s final California tax return. Make sure to check the “final return” box and write “final” at the top of the first page. Remember that this won’t bypass California taxes on California-generated income or any income for pass-through business owners residing in California.

Make sure to inform the IRS of your new address, as failure to do so can result in missed correspondence. You can inform the IRS by including your new address on your business’s next tax return. If it’s early in the tax year, inform the IRS at the same time you file your California tax returns by filing IRS Form 8822-B.

Converting, Merging, or Transferring your Business

Closing a California business is relatively easy—when you’re ready, terminate its legal existence in California and “cease” in-state operations. The closing process largely depends on the entity’s form. Sole proprietorships and general partnerships don’t need to register with the California secretary of state upon formation, so they don’t need to file anything with the SOS to close. Corporations, limited partnerships, limited-liability partnerships, and limited-liability companies do register with the SOS upon formation, so they must file forms of dissolution (corporations) or cancellation (LLCs and partnerships). Do this by filing a closing form with the SOS within 12 months of filing your business’s final-year tax return. If you’ve suspended your business, you first need to revive it before you can dissolve it. Do so by filing an application for revival.

Moving a business out of California for legal purposes is a little harder. The three primary methods are converting the California entity into an entity organized under the laws of your new home state; merging the California entity into a new entity organized under the laws of your new home state; and, less common, transferring business assets to a new entity organized under the laws of your new home state.

Conversion is often the simplest but is limited to certain business forms. LLCs, LPs, and GPs can convert to a foreign business entity—corporations cannot. A merger requires a bit more paperwork, including forming an entity in the new home state and filing a certificate of merger with the new state’s SOS. Transferring assets involves the most work because it requires the preparation of documents to memorialize the transfer of each asset.

Before converting, merging, or transferring assets, make sure counsel confirms that doing so won’t unintentionally breach, terminate, or negatively affect current agreements. Some of your contracts may include anti-assignment or change of control provisions that will be triggered, including vendor and customer contracts, as well as loan and lease agreements. This concern mainly applies to transfers of business assets to a new entity and is especially problematic during our current high-inflation environment—you could end up renegotiating with vendors for the same services or supplies at a higher price. Often, state statutes cause anti-assignment provisions not to apply to conversion and certain types of mergers. California has such statutes in place, but make sure to confirm with counsel that they apply to your situation.

(Video) What's Behind California's 'Business Exodus'

Registering as a Foreign Entity in California

Whether you convert, merge, or transfer your assets to a new entity, if you plan to continue conducting business in California, you should consider whether to register as a foreign entity there (or to use the proper word, qualify). Many fret over this strategic business decision, and with good reason. California’s rules regarding foreign qualification are ambiguous, and registering can prompt unnecessary attention from the California Franchise Tax Board.

Ambiguity. Generally, a business must register if it “transact[s] intrastate business” in California. The phrase “transact intrastate business” is defined as “entering into repeated and successive transactions” in California. There are fact-specific questions to consider based on the business’s in-state activities and unsurprising statutory exclusions (e.g., owning shares in another company that transacts intrastate business). But after a deep dive, you’re often still left without much clarity.

Penalties. Failure to register results in a $20 daily penalty. Equally important, until the business pays its penalties plus an additional $250, it cannot effectively sue others for claims based in California state courts. Also, each person knowingly involved is exposed to a misdemeanor charge carrying a penalty of up to $600.

The greatest penalty derives from a business’s noncompliance with California’s tax rules, not its registration rules. As noted above, a business engaging in California transactions may continue to be taxable in California. Not only does this result in California taxation, but nonfiling and nonpayment can also result in penalties (e.g., $2,000 annual failure-to-file penalty) plus interest on unpaid taxes accruing at 5% per month (up to 25%).

Flagging the franchise board. In deciding whether to register, a key concern of many businesses is that registration increases the likelihood of attention from the California Franchise Tax Board. Registration automatically requires a business to file a California tax return. Even if the business would not otherwise owe California income tax, registering triggers a filing requirement, an $800 minimum tax liability, and unwanted monitoring.

Filing Licenses and Permits

Nearly 75% of U.S. businesses are sole proprietorships. Even though they don’t need to register with the SOS, they’re subject to most of the same licensing and permitting requirements as other businesses. These include building permits, zoning and land use permits, health permits, public safety permits, professional licenses, sales tax licenses, and home-based business licenses. Even if your business is exempt, licenses can often provide access to funding and limit owners’ personal liability. Upon your business’s closure, make sure to cancel all of your business’s state and local licenses and permits. Failure to do so can result in a trail of paperwork, communications, and additional fees.

(Video) California Has Very Few Good Places Left. Here's One Of Them.

Knowing the Hiring Laws in the New State

Employment law is a beast of its own, so be ready for changes in rules wherever you go. California generally voids employment non-compete agreements and non-compete clauses in other employment-related agreements. On the other hand, Texas and Nevada—two of the top destinations for former California businesses—generally enforce employment non-competes if the restrictions are reasonable in time, geography, and scope of activity. You should check the new rules your business will have to follow.

Moving a business is hard. But it may be harder to ignore potential gains from lower taxes, cheaper living, and a more permissive regulatory environment. The realities are enough to give any business owner pause. If you choose to leave, be ready to take these steps.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Sergio Broholm is an associate in the Corporate group at Shartsis Friese. He focuses on mergers and acquisitions, emerging companies, and general contractual and transactional matters.

Jack Frisbie is a law student at USC (’23). Since working as a Treasury analyst at Belk, he has focused on business law and strategy.

Jeremy Babener is the founder of Structured Consulting and previously served in the US Treasury’s Office of Tax Policy. He consults for businesses on strategy, partnerships, and marketing.

(Video) Never Start a Business in California

We’d love to hear your smart, original take: Write for Us


Why are companies moving away from California? ›

California state and local economic policies have raised business costs to levels that are so high businesses are choosing to leave behind the many economic benefits of being in California and move to states with better business climates featuring much less regulation, much lower taxes, and lower living costs.”

What companies left California? ›

Companies Leaving California: Every Announcement Since 2020
Hewlett Packard Enterprise (HPE)TexasSearch HPE jobs
TaniumWashingtonSearch Tanium jobs
OracleTexasSearch Oracle jobs
Charles SchwabTexasSearch Charles Schwab jobs
49 more rows

Will be considered doing business in California if it has sales of what amount or more to California customers? ›

Introduction to Doing Business in California

You are engaged in any transaction for the purpose of financial gain within California. You organized or commercially domiciled in California. Your California sales, property holdings, or payroll exceed the specified amounts or are at least 25 percent of your total business.

What companies moved from California to Texas? ›

List of companies that moved to Texas
  • Chevron is selling its headquarters campus in San Ramon, California and moving jobs to Texas. ...
  • Caterpillar is moving its global headquarters to Texas. ...
  • Hewlett Packard, which already has a substantial presence in Houston, announced that it will move its headquarters from San Jose.

What state are most Californians moving too? ›

Texas is currently the number one destination state for those leaving California. That's been true for several years, though some of the other top destination states have shifted recently.

Why are people trying to leave California? ›

Why are so many people choosing to leave California? Various factors contribute to decisions to move. The leading factor is cost — it is far more expensive to live in California than in other places, and multitudes have decided they are unable or unwilling to pay the premium to live in this state.

What are 5 reasons why people are leaving California? ›

Top Reasons Why People Are Moving Out of California
  • High Cost of Living. California is an expensive place to live. ...
  • Rising State Taxes. ...
  • Political Problems. ...
  • Unemployment. ...
  • Housing Crisis. ...
  • Insecurity. ...
  • The Convenience of Working from Home. ...
  • Social and Economic Challenges.

Is California declining? ›

According to Department of Finance estimates, the state has lost residents to other states every year since 2001.” Instead of zooming past 40 million to 45 and then 50 million by mid-century, as earlier projections indicated, California may remain stuck just under 40 million indefinitely.

Do I have to pay taxes on an LLC that made no money California? ›

LLC Corporations

It is mandatory for all corporations to file annual tax returns, even if the business was inactive or did not receive income.

How do I avoid LLC tax in California? ›

Can I avoid the California Franchise Tax? There's no way for a registered business to legitimately avoid the California Franchise Tax. Sole proprietors and general partnerships don't have to pay the California Franchise Tax, but they also don't have any personal liability protection.

What are the 3 largest sources of tax revenue for California? ›

California largely relies on three revenue sources — the personal income tax, the sales and use tax, and the corporation tax. Together, they make up 95% of General Fund revenues.

What are the top 5 states Californians are moving to? ›

Allied Van Lines Identifies the Top 5 Cities Californians are...
  • Dallas, Texas.
  • Austin, Texas.
  • Seattle, Washington.
  • Phoenix, Arizona.
  • Houston, Texas.
20 May 2022

Is it true Californians moving to Texas? ›

The number of Californians decamping to Texas jumped from just over 60,000 in 2017 to more than 85,000 in 2018, according to U.S. Census data analyzed by William Fulton at Rice University's Kinder Institute.

Is moving from California to Texas worth it? ›

One of the biggest benefits of living in Texas is that it has no state income tax. This is great for entrepreneurs looking to start their own business. There is also a significant difference in the cost of living between California and Texas. Home prices in Texas are nearly 60% lower than those in California.

Where is the cheapest but nicest place to live in California? ›

Ventura in Los Angeles is an affordable California beach town to live in if you want to be somewhere with beautiful views and charming weather. Some other inexpensive coastal cities to live in California are Long Beach, San Pedro, and Eureka.

What is the most moved to state in 2022? ›

Likewise, southern states with mild weather and outdoor recreation, like Florida, North Carolina, South Carolina, and Tennessee, top the charts for inbound compared to outbound moves.
Most popular states as of third quarter 2022.
Rank2022In-to-out ratio
6 more rows
8 Nov 2022

What is the #1 state people are moving to? ›

1. California

Rising housing costs, rising taxes and politics seem to be driving many people to look for opportunities elsewhere. Other factors that emigrants have cited are the rising threat of wildfires and the constantly increasing cost of living. Many families from the state are relocating to Texas.

What are the biggest problems in California? ›

Key Issues
  • Agriculture. California is home to the largest food and agriculture industry in the nation. ...
  • Climate Change. Senator Feinstein has a proven record of fighting to protect our climate and eliminate harmful greenhouse gases.
  • Drug Caucus. ...
  • Economy. ...
  • Education. ...
  • Energy. ...
  • Environment. ...
  • Foreign Affairs.

Are people leaving California 2022? ›

Big Takeaways. moveBuddha's data in 2022, shows CA is seeing the biggest outflow in the country with a move ratio of only 51 moves in for every 100 out. According to the U.S. Census, California lost the 2nd most residents in the country April 2020-July 2021 population estimates (only behind New York).

What city is the cheapest to live in California? ›

Sacramento. Sacramento is the cheapest large city to live in California. It's also the capital of California and one of the state's most diverse cities. It has its own funky local culture and also features easy access to popular destinations like San Francisco and Lake Tahoe.

What age group is leaving California? ›

About 77 percent of the increase came among those in their prime earning years of 35 to 64. In 2019, 27 percent of net domestic migrants were aged 35 to 44, while 21 percent were aged 55 to 64. (See Figure 2.) To be sure, the largest increase in net domestic migration was among those aged 65 and over.

Why are Californians fleeing California? ›

Because California's lockdowns during the pandemic were so strict and lasted so long, its economy went into a tailspin and then only grew anemically compared to the national average. Unemployment and subsequent unemployment claims were abnormally high, and the state did not have the funds to pay unemployment benefits.

Where are Californians not moving? ›

Nearly 250,000 residents have left California between 2020 and 2021, mostly because of lack of affordability. Almost one-third of those are moving to Texas, according to U.S. Census data.

What part of Texas is most like California? ›

The only part of Texas you will find that is similar is the far west, out around El Paso and Big Bend. In terms of terrain, the El Paso / Big Bend regions are most similar to Southern California. The Austin area has some some parts that are a little reminiscent of parts of the SF Bay Area.

What city are Californians moving to? ›

From his research, Clark has found that Californians are almost exclusively moving to Texas' four large metro areas — Dallas-Fort Worth, Houston, San Antonio and Austin.

How do LLC owners avoid taxes? ›

An LLC can help you avoid double taxation unless you structure the entity as a corporation for tax purposes. Business expenses. LLC members may take tax deductions for legitimate business expenses, including the cost of forming the LLC, on their personal returns.

How do I avoid $800 LLC Fees in California? ›

Short form cancellation. If you cancel your LLC within one year of organizing, you can file Short form cancellation (SOS Form LLC-4/8) with the SOS. Your LLC will not be subject to the annual $800 tax for its first tax year.

How much money do you have to make to be considered a business? ›

Unincorporated Businesses

As a sole proprietor or independent contractor, anything you earn about and beyond $400 is considered taxable small business income, according to Fresh Books.

Can I live in California and have an LLC in another state? ›

As a California resident, you are free to register the LLC for your online business in any state.

Should I pay myself a salary from my LLC? ›

Do I need to pay myself a salary? If you're a single-member LLC, you simply take a draw or distribution. There's no need to pay yourself as an employee. If you're a part of a multi-member LLC, you can also pay yourself by taking a draw as long as your LLC is a partnership.

Why do LLC pay less taxes? ›

LLCs provide their owners with limited personal liability, in addition to a variety of tax benefits including avoiding double taxation, QBI deductions and business deductions.

Who pays most taxes in California? ›

The richest 1% of California tax filers pay the largest share of their income in state and local taxes (12.3%), but the 20% of filers with the lowest incomes pay the next highest share (11.4%).

Why is California taxed so much? ›

Like most governments, California relies primarily on taxes to fund the public services that it provides to its individuals and businesses. California's state and local governments raise well over $200 billion annually in own-source revenues to provide public services, with roughly 60 percent of this from taxes.

Which city in California is the best to live? ›

Best Places to Live in California in 2022-2023
  • San Jose, CA.
  • San Francisco, CA.
  • San Diego, CA.
  • Sacramento, CA.
  • Santa Barbara, CA.
  • Los Angeles, CA.
  • Santa Rosa, CA.

What is the best state to move to right now? ›

The top state is Massachusetts, which ranked first in the nation for education and health, fourth for safety, sixth for quality of life, and 10th for its economy. It did rank a low 44th out of 50 states for affordability, but its overall score was enough to eke out a win over the closely-second next state.

Is California still the best state to live in? ›

California is one of the best states to live in, in part, because of its income growth. With around 8.4% of Americans having moved last year, which is a historic low, WalletHub today released its report on 2022's Best States to Live in. California ranked first in the number of restaurants it has per capita.

Why are so many people leaving California? ›

People leaving the state have lower incomes and education levels than those moving in, with the state's high housing costs frequently cited as a reason for leaving. Yet census data suggest housing costs also drive migration within the state, with potential consequences for income patterns across California.

What Texas city has the most Californians? ›

Houston leads Texas in most Californians relocating from this county, says new study - CultureMap Houston.

Why are people moving from California to Florida? ›

People are moving from California to Florida for a range of reasons, like warm weather, beautiful beaches, and a lower cost of living.

Which state is safer Texas or California? ›

According to the Federal Bureau of Investigation, the violent crime rate in California was 441.2 per 100,000 residents while it was 5 percent lower in Texas at 418.9 (FBI, 2020 ). In contrast, the property crime rate in Texas was slightly higher at 2,390.7 per 100,000 versus 2,331.2 per 100,000 in California.

Are people happier in Texas or California? ›

Study: California Ranks as 4th Happiest State — Well Ahead of Texas and Florida.

Who is richer Texas or California? ›

The economy of the State of Texas is the second largest by GDP in the United States after that of California. It has a gross state product of $2.0 trillion as of 2021.
Economy of Texas.
GDP per capita$69,486 (2021)
Population below poverty line10% (15% considering cost of living)
Gini coefficient0.474
7 more rows

What are the top 5 reasons why people are moving out of California? ›

The Main Reasons Why People and Celebrities Are Leaving California
  • Rising State Taxes. The current top marginal income tax rate is 13.3% but legislators want to raise to nearly 17%. ...
  • Housing Crisis. ...
  • Political Problems. ...
  • Social and Economic Problems. ...
  • Filth. ...
  • Insecurity. ...
  • Devastating Wildfires. ...
  • Ease of Working from Home.
30 Oct 2022

Are companies really leaving California? ›

According to a new Stanford University Hoover Institution report released on Thursday, the rate at which companies have been leaving California has risen dramatically since 2018, with the 153 company headquarters relocations in 2021, more than doubling the 75 that left in 2020.

Are companies actually leaving California? ›

Overall, California lost 352 corporate headquarters from 2018 through 2021, according to Ohanian. Several large companies have shifted headquarters or operations to Texas, including Tesla, Charles Schwab (SCHW), Oracle (ORCL), Hewlett Packard Enterprise (HPE) , and McKesson (MKC).

Where is the most affordable living in California? ›

Cheapest Places to Live in California
  • Bakersfield. With a median home price of just $254,430, Bakersfield is a surprisingly cheap place to live in California. ...
  • Stockton. The notorious boom and bust town of Stockton, CA continues to offer cheaper house deals. ...
  • Fresno. ...
  • Clovis. ...
  • Sacramento. ...
  • Fontana. ...
  • Chico. ...
  • Eureka.
21 Sept 2022

What state should Californians move to? ›

Livability: It's hard to leave the California weather — and its accompanying lifestyle. So climate, natural beauty and attractions must be a relocation consideration. For those keeping “fun” in their departure formula, the spreadsheet says Hawaii is tops, then Florida, Massachusetts, Washington state and Rhode Island.

Where are Californians moving too? ›

From his research, Clark has found that Californians are almost exclusively moving to Texas' four large metro areas — Dallas-Fort Worth, Houston, San Antonio and Austin.


1. What Businesses Are Leaving California?
(Bald Brothers Team)
2. California Struggles To Keep Businesses, Is This A New Trend?
(CBS Sacramento)
3. Report highlights exodus of businesses from California
(KTLA 5)
4. How California Tricks Businesses for Profit
(California Insider)
5. Why are people and businesses leaving California w/ Dan Mitchell, Centre for Freedom & Prosperity
(Gene Tunny)
6. Business Owner in California: A Dream or Nightmare?
(Catson Media)
Top Articles
Latest Posts
Article information

Author: Edwin Metz

Last Updated: 10/28/2022

Views: 6230

Rating: 4.8 / 5 (58 voted)

Reviews: 89% of readers found this page helpful

Author information

Name: Edwin Metz

Birthday: 1997-04-16

Address: 51593 Leanne Light, Kuphalmouth, DE 50012-5183

Phone: +639107620957

Job: Corporate Banking Technician

Hobby: Reading, scrapbook, role-playing games, Fishing, Fishing, Scuba diving, Beekeeping

Introduction: My name is Edwin Metz, I am a fair, energetic, helpful, brave, outstanding, nice, helpful person who loves writing and wants to share my knowledge and understanding with you.