California v. Texas: Which is Better for Business? [313]

NASIR: Today’s topic is Texas versus California.

MATT: A few different categories here. The first one, everyone’s favorite – taxes!

NASIR: Employment law, corporate governance, privacy. It’s not just enough about the law. There are some other things that may come into play as well.

MATT: No, there’s one more.

NASIR: I think this is going to be the nail-biter.

This is Legally Sound Smart Business where your hosts, Nasir Pasha and Matt Staub, cover business in the news and add their awesome legal twist. Legally Sound Smart Business is a podcast brought to you by Pasha Law PC – a law firm representing your business in California, Illinois, New York, and Texas. Here are your hosts, Nasir Pasha and Matt Staub.

MATT: All right.

NASIR: All right. Welcome to our podcast. This time, we are recording in person. COVID is officially over! That’s not true, but we are about six feet away or so. We’re both vaccinated, so not really an issue, but today’s topic is Texas versus California – or California versus Texas.

Welcome Matt to Houston!

MATT: Yeah, that’s one of the reasons I’m here. I’m representing California for this podcast. Nasir obviously Texas. I had to fly in in order to do so, but we’re really excited to discuss this topic.

NASIR: Well, we do have the homefield advantage, but I don’t think we’ll need it this time around. We’ll be talking about the major differences between California and Texas from the perspective of a business owner. We are a law firm that represents clients in many states – well, I should say California, Texas, Illinois, and New York – but I’ll tell you the businesses that we represent in California and Texas, it’s complete opposites on how we approach our representation, and the differences are pretty stark, wouldn’t you say, Matt?

MATT: Yeah, and it’s always the consideration, especially if you speak to a new business, one of the questions you have to ask are where they’re located. Are they based out of California? You know, obviously, they can be based in other states, too. But the analysis is completely different just based solely on where their actual headquarters are. We’re going to get into it in more detail, but it’s definitely a lot of different intricacies for each state.

NASIR: Well, obviously, Matt has been here for a few days. I’ve been introducing him to certain people, and I always introduce him as, well, he’s a business corporate attorney, but he’s in California, so basically, he’s an employment law attorney, and we’ll talk about that in a minute why because it’s so difficult to navigate that area of law where you’re in California versus Texas. It’s you’re your number one thought when it comes to risk management and so forth. If you’re listening at home or on a workout or at the office, keep score because we’re not going to do it for you. I already know who’s going to win, but we’ll see about that. We’ll leave it up in the air for that matter.

MATT: I think we’ll get into it – a few different categories here. The first one, everyone’s favorite – taxes!

NASIR: Ah, taxes! Well, that’s easy, right?

MATT: We didn’t say Texas. We said taxes. That is confusing.

NASIR: So, taxes, the interesting thing about it, there’s federal taxes – obviously, there’s going to be no differences there, but when we talk about taxes on a state level, there are all sorts of things besides just an income tax. There’s the franchise fee tax. There’s sales tax. There are property taxes. There’s even a fuel tax to consider which we even considered. “Fuel tax, what does that have to do with business?” Of course, when there’s an excise tax for fuel in your state, everything is now more expensive – transportation, supply, especially post-COVID. We’ve seen the kind of strain that this has played on our economy when it comes to this backlog of supplies, but let’s see. What tax should we talk about first?

MATT: So, the one that gets brought up the most from the perspective of a business is called the franchise tax in California. One of the questions we get asked a lot of times is why is there such a high annual fee every year? Again, called the franchise tax. I basically said it’s the price of doing business in California which, you know, is basically the case. It’s a minimum of $800 a year. It can go higher than that, depending on annual revenue, but that’s the threshold, and that’s whether you have a loss for the year or whether you do no business at all. That’s just the minimum amount that is owed every year if you do business in California. That’s not just for businesses formed in California. If you’re a foreign entity as well actually transacting business, or I guess the definition would be doing business in California, you’re also going to get hit with that fee. I’m pretty sure it’s the highest fee of any state in the US to my knowledge.

NASIR: It’s pretty horrible. The thing with this particular tax is it hurts the smallest of businesses, right? If you’re a good-sized business, you know, certain clients aren’t going to care that much about an $800 fee, especially if it’s on an annual basis, but if you’re a so-called mom-and-pop or if you want to set up a single-purpose entity – whether you want to hold a piece of property there or use some kind of department of the business – then now all of a sudden you have to add that to your P&L – $800 minimum every single year. I don’t know. That can add up, and it definitely dissuades some people from actually setting up an entity in itself which really defeats why you want to give this kind of protection to small businesses.

MATT: I’m glad you clarified that. It’s if you have an actual entity in California. If you’re a sole proprietor, it’s not going to apply in that case. Like you said, I think that’s what discourages people the most in actually setting up an entity. They don’t want to pay the $800 a year because there’s really no other downside to having an entity. I guess a little bit more formalities. The tax return might be different, depending on how you’re set up, but I think it’s that annual franchise tax that causes people not to end up going the entity route or holding off on it, too. It’s both things.

NASIR: Right. And so, that’s California. In Texas, here at home, there is a franchise tax, but the threshold that you actually start paying something is much higher. It is designed so that, if you’re a small business, you’re not going to be paying any franchise taxes. Now, there is an annual reporting requirement, but that is an administrative process. Typically, you can do it yourself or your CPA can do it – part of your tax reporting process. Very easy. Really honestly a non-issue. I think we may have mentioned this before in past podcasts. The Franchise Tax Board of California is also very aggressive. We’ll put up some links on how the stat Franchise Tax Board in California has made some incredible efforts to collect that $800 fee as much as they can.

MATT: Yeah. I mean, they’re worse than the IRS in my opinion. They’re more aggressive and obviously smaller, too. Maybe that’s why. Yeah, that’s the franchise tax. Probably the least advantageous tax for California is going to be the state income tax.

NASIR: Right.

MATT: Like Nasir was saying earlier, federally, that’s going to be the same across the board, but the state income tax in California is going to be roughly eight to nine percent – I think maybe even a little higher in some counties. In Texas, it’s not the case at all. A huge advantage here.

NASIR: Right. I mean, you’re literally looking at no tax versus some tax. Eight to nine percent of your income, most people are going to fall into that threshold, but I would say that I think that’s a lot of the movement from California to Texas. They do reference that, but we’ll see as we go on this list. Well, a lot of people talk about how you have income tax is higher, but Texas’ property tax is higher, and that is actually true, right? California’s average property tax is 0.72 percent. I would say most metro areas around about one percent. Is that right?

MATT: Yeah.

NASIR: But, in Texas, the average is 1.9 percent. However – and I think this is a big “however” – the median property value is about twice as high as it is in Texas. So, I don’t know. Who wins on that?

MATT: Yeah. Well, it depends if you own property or not.

NASIR: True.

MATT: I guess that’s one way. If you earn income, there’s no way around that in California, but if you don’t own a property, then maybe it’s a little bit more advantageous.

NASIR: Yeah, maybe it’s a non-issue.

MATT: Yeah.

NASIR: Right. Okay. So, franchise tax, state income tax, property tax, the next one is sales tax.

Now, sales tax is something that may indirectly affect businesses because usually that’s passed on to the consumers or retail and so forth, but it obviously affects business, right? What’s the difference here, Matt?

MATT: The sales tax in California is going to be higher.

NASIR: It’s about what? Two points higher or so.

MATT: Yes, it’s by locality again, so it depends on county and sometimes even city.

NASIR: Right.

MATT: It’s baseline 7.25 percent plus 1.5 in that range. Texas is…

NASIR: Texas is 6.25 at the state level plus about another two percent on the local level and that goes higher in the metro areas, of course. That’s typically how it is, but that’s a small difference. You know, I’m not moving to Texas because of the sales tax.

MATT: Right. If we’re looking at it from the business perspective, I mean, all that cost gets pushed to the customer, if you’re doing it correctly. I mean, it might be a little bit more difficult to figure out, but most of the time now, it’s all based off software payment processing, so it’s all handled outside of the business itself. I don’t think it’s going to deter any businesses away from California, but obviously you’re going to be living there, too. So, there’s a potential slight increase in sales tax.

NASIR: So, this next one, I tease it in the beginning here. I think it’s very surprising to many people which is this fuel tax to the extent that how much of that dollar per gallon that we get for our cars do we actually pay to the state for this tax? So, Texas does have an excise tax. That’s what they call it – excise taxes for fuel. It’s 20 cents per gallon. I mean, you can imagine, you see a $2.00 or $3.00 sum minus 20 cents, that’s about what you’re paying there. For California though, it is 50.5 cents. It’s 50 cents on the dollar going just on gas. When you see these crazy prices every once in a while, they shoot up, and that’s why they always reference California because the prices are always higher. It’s because you’re already starting at 50 cents. That’s pretty significant, and this is on top of other federal taxes, but of course that’s across the board.

MATT: Are people in California driving more?

NASIR: I was going to say yes but, I mean, California’s highways are pretty substantial, but Texas is so spread out, too.

MATT: I think the difference is – and this is partially assumptive based on Texas, but – in California, you might spend more time on the road but just going a shorter distance.

NASIR: Right.

MATT: Like you said, Texas is more spread out, so maybe your Point A to Point B is going to be longer.

NASIR: Right.

MATT: You’re not just sitting there. Depending on where you’re at in California, it can be pretty brutal.

NASIR: Well, yeah, it’s the same with Texas. Austin is known for its traffic problem right now because of the influx of population. Infrastructure can’t hold it, but I mean, it seems like every metro complains about their traffic, including Houston here, but I just think that the 30-cent difference between California and Texas has a significant impact on the infrastructure of transportation, trucking, and these kinds of things. It adds quite a bit of cost.

MATT: Yeah, and that gets shifted to the customer – you know, indirectly. People that are living there end up paying it because businesses have to raise their cost of everything. Out of all of these, I think that’s the most hidden tax, especially if you’re a business owner who might not consider it, but it definitely exists and doesn’t get talked about a lot. People in California just know the prices are high and that’s it.

NASIR: All right. So, California versus Texas taxes, who’s the winner here?

MATT: Are we tallying it? Are we going round by round to see like a boxing match?

NASIR: I think so. I mean, it seems obvious to me. I mean, everyone wants to pay more taxes, so California, right?

MATT: Yeah. If we’re scoring this, I’m going to go—

NASIR: Are you writing it down?

MATT: 9-8 Texas takes that one.

NASIR: You know, I don’t usually see you in person. I didn’t realize, like—

MATT: I’m not going to remember the scoring I’ve done through the whole time.

NASIR: So, what was the score that you gave?

MATT: I’m scoring it like boxing. It’s 9-8 in favor of Texas. You want to end up with the most points.

NASIR: But that means, like, if I understand boxing rules, 9-8 means basically both of them have been knocked down once, basically, right? Usually, it’s a 10-9.

MATT: I mean, I’m not great on the boxing scoring.

NASIR: I’m going to say 10-8 to Texas. I don’t have a pen to write it down. I’m actually going to remember.

MATT: Well, we’re two different scorers, so we’ll see how it works out at the end.

NASIR: That’s true. Okay.

MATT: Two different judges.

NASIR: So, 10-8. I won’t forget that.

All right. So, next up on “Texas versus California” is employment law. Now, I think we already teased this at the beginning of the episode. We already know what it is. I mean, from an employment perspective, Texas wins out dramatically, but why? Let’s go through that a little bit in more detail because I think, when you’re at home at the dinner table and you’re trying to explain to your family why we need to move to Texas, these are some of the points that you’re going to have to use.

MATT: Yeah, and from my perspective, a lot of business owners in California already know this. It’s probably because they’ve gone through it, I suppose, before. I mean, the summary is California is a very employee-friendly state as opposed to Texas which is an employer-friendly state. The business owners in California just understand they’re going to be pretty restricted on what they’re able to do, particularly post-termination or somebody leaving, and they just know that they’re probably going to get hit with some sort of wage claim or misclassification claim. It’s almost impossible if you do business for a few years that you’re not going to run into at least one of those, and that’s a very broad look at what the differences are and why it’s better to be an employer in Texas as opposed to California.

NASIR: Right. I do want to walk back a little bit because, you know, for those that know us and have been listening to us for the number of years we’ve been doing this, you know, we do believe in treating workers well and fairness and these kinds of things, and a lot of the things that California does as it applies to employee protections, they are a leader in employee rights. All the new stuff that comes in the nation comes from California and slowly gets adopted in other states.

Even the protections in Texas that’s encouraged in Texas and in other states and so forth, I mean, you can find it’s tracing out from states like New York and California, but – and it’s kind of a big “but” – in the sense that it also tends to disrupt business quite a bit, in the sense that we as lawyers see the worst of it. We’re representing the business, okay, yeah. We’re a little bit bias, but we also see the abuse of some of these laws as well, and that’s really what we’re talking about here – the frustration with that – because, by the way, even if Texas has better employment laws, Texas doesn’t inhibit you from being a good employer. It doesn’t prohibit you from treating your staff well and doing what’s right whereas in California, even if you have the best intentions, you can walk into trouble.

A good example is what you just mentioned. It’s like, “Hey, I need to terminate this employee, but it’s almost guaranteed – because of the circumstance – that I’m going to face some kind of repercussion from it even if it’s fully justified.”

MATT: Again, if you’re a business owner in California and you terminate an employee, at some point, you’re going to receive some sort of demand letter from a plaintiff’s firm and you’re going to know what the claims are on there already. It’s the same.

NASIR: Same form letter.

MATT: Yes, basically the same form letter every time. You know, there’s an exempt/nonexempt issue. If that’s in play…

NASIR: Overtime. Lunchbreaks.

MATT: Yeah, all that stuff.

NASIR: Unlawful termination.

MATT: There’s always a claim that they didn’t get paid on time. They didn’t get their last paycheck on time and that their paycheck wasn’t correctly formatted and all that stuff. You know, obviously, sometimes that is the case, and that falls on the business at that point. But, on the other side of the coin, there are many times where that’s not the case, and plaintiff’s attorneys know they can make these demands on behalf of the employee and the business is going to have to deal with it, which is just a pain, but that’s just the reality.

NASIR: So, in California, the biggest kind of shakeup in employment law which almost happens every year, but the latest one is AB5 – again, a topic that we’ve covered both in podcasts, articles, and so forth, and pretty much every employment law attorney in California has covered this too because it’s such a huge thing that’s happened to the state. I don’t know what they called it, but it was known to really address the rideshare contractors and so forth.

MATT: Gig economy.

NASIR: The gig economy of classifying all these people as contractors. Now, of course, with Proposition AB5 was backed out a little bit but, in general, it is very difficult now to actually hire an independent contractor in California without actually them being classified as an employee under California law.

MATT: Right. We’re talking about the misclassification issue and the main reason being the new law. Basically, if the individual provides a service that’s a central service or a core service to the actual business, it’s essentially impossible for them to not be considered an employee. To a lot of businesses’ credit, in California, they saw this coming. Or once it was passed and went through and became a law, a good amount actually shifted. You know, actually classified people the right way because they knew that these lawsuits were going to be coming down the pipeline. But, at the same time, businesses that were doing pretty much almost all their entire workforce is independent contractors were put in a real bind because they essentially had to change the way they do business.

Like Nasir was saying, a lot of this fell down from the Ubers and the Lyfts and all the pushback on that, but again, you can’t just make someone an independent contractor in California and feel good about it. You actually have to do an analysis and it’s just a tough test to overcome, and there are exceptions, but even if the position fills one of those exceptions, the fallback test is still pretty favorable to having someone be classified as an employee instead. Not as difficult, but still not ideal.

NASIR: And that fallback test is actually pretty similar to the Texas rule which emulates the federal rule, but it’s still an issue. In other words, this AB5 is a huge issue in California, but when it comes to classification, it’s still an issue in Texas. In fact, it’s one of our blunders. Like, one of the top blunders that we covered in our last episode was misclassification, and this is not only in California, but across the nation that this occurs. So, definitely a Texas win on this small bout here, but it’s still a concern for Texas employers.

MATT: Yeah, and I think that’s a good way to put it. That’s why the scoring is not going to be a ten for Texas this round.

NASIR: Well, maybe that particular mini-round. What about minimum wage? That’s also another easy slam dunk there.

MATT: Yeah, I think this is fairly well-known across the US, but California’s minimum wage is pretty high – mostly due to cost of living in certain areas like the Bay Area particularly Los Angeles and even San Diego. It’s a higher cost of living in general. Even compared to other parts in the state. But, yeah, for minimum wage, $14.00 for employers 25 or more, and then $13.00 if you’re under 25 employees, and that’s with a consistent growth of it every year. It’s supposed to increase.

NASIR: A dollar every year until $15.00 I think it is. Or $16.00? I think it’s $15.00 actually. And so, that’s on top. That’s at state level, and I think – Matt, you mentioned this – on a local level, many cities have their own minimum wage that is higher than the state. Pretty much all the major cities seem like it – San Francisco, I know does; San Diego does. Los Angeles as well?

MATT: I think so.

NASIR: I think they do as well. And so, Texas doesn’t have a minimum wage, so it falls back to the federal minimum wage is right now at $7.25, so literally half – well, not literally. I suppose half of $14.00 is $7.00.

MATT: Close enough.

NASIR: Close to half of the minimum wage is in Texas. Now, okay, here’s the thing. I mean, like you said, the cost of living in California is that much higher, so you kind of have to. Otherwise, you’re not going to be able to get those kinds of workers anyway. You know, when it comes to living in Texas, I mean, it is pretty inexpensive – depending on where you want to live. At $7.25 minimum wage, I think that’s tough to live anywhere in the nation at that point.

MATT: True.

NASIR: But, still, you know, it’s palatable

MATT: Yeah, and that kind of plays into one of the other considerations we call human capital.

NASIR: Right.

MATT: It’s what’s going to attract the talent – the individuals, you know, the employees that are going to be maybe the most talented ones. I’m trying to phrase this in a way that’s not coming off poorly for Texas employees versus California.

NASIR: Yeah, be careful.

MATT: I think the better way to put it is this – you have, well, you did. It’s slowly shifting, but some of these big companies, particularly in Silicon Valley, and Los Angeles too to some extent, but bringing in the top-tier talents. We’re talking about Google, Facebook, and companies like that. They’re going to attract the top-level talent. They can probably pull them from anywhere – any company. And so, that’s not the reason that minimum wage is like that, but you are going to get a different level.

Basically, I think the way to put it is California can attract maybe the top-level employees, particularly in the tech field where Texas might not be able, just strictly on what businesses are there.

NASIR: We can give so many examples of how human capital comes into play in real-world situations just from our clients. We have clients that do manufacturing, and they would rather do it in California – even Southern California – because that’s where some of the talent is for some high-tech manufacturing. They couldn’t get away with that in other Midwestern states. You even have a lot of times physicians. You know, we do a lot of healthcare, and you’ll see that, basically, the average salary for a physician in metro areas versus non-metro areas is a lot lower in metro areas or a lot lower in California versus Texas because, again, you know, everyone wants to live in California if they can.

Well, we’ll see after they listen to this episode, but this human capital aspect, you’ll see even with Tesla moving to Austin – did they move to Austin? I can’t remember, but Austin is a good example. They’re attracting a lot of talent that you would otherwise get in Silicon Valley. Now, people are more and more open to go to Texas for these kinds of things, and that’s a kind of shifting change. And so, even though human capital is a big component, it kind of depends on the industry, I think.

MATT: And one last thing I’ll say about it too which is something new in the last year and a half is companies that are allowing people to work remotely anywhere, it doesn’t even matter at all at that point because the old stories were people would go to work for Google and it was so expensive there. They would literally be living in a van – like, in the parking lot of the facility. Now, if everyone’s working remotely, you know, you could live in any state.

NASIR: You can still live in a van, but now it’s like anywhere!

MATT: It’s parked at a different spot, yeah.

NASIR: A different spot, yeah, and we’ve all heard the stories. A lot of these tech companies have decided not to reopen. They’re leaving their leases. New York City has gone through that. I think, you know, as we’re recording this episode, a lot of the banks are starting to require them to come back to the office in the city, and I think that’ll kind of revitalize that commercial space again, but there is definite post-COVID impacts that are going to affect this human capital issue when it comes to Texas versus California.

MATT: Sure.

NASIR: Okay. Last one.

MATT: Last one.

NASIR: This is an interesting one. Do you want to go? Do you want to take it?

MATT: I mean, mine’s not interesting. Yours…

NASIR: Well, okay. You start because you take the California perspective, and I’ll talk about Texas.

MATT: So, I mentioned earlier about how a lot of employers in California, they know they just can’t do certain things, and this falls under that category of non-competes. I don’t know how many times someone’s told me – and I guess employees have mentioned it, too – it’s like, in California, non-competes are essentially unenforceable, and that’s really the truth. I mean, there are some narrow exceptions, but any sort of restrictive covenant – non-compete, non-solicitation, non-poach, non-association of customers and employees. It’s evolving, too. It’s just becoming more and more difficult for any possibility for these to be held enforceable in California because they basically view everything as a restriction on trade, and most companies just can’t even do it.

NASIR: A lot of times, when we’re advising clients, it’s like, “Don’t even touch it.” They want to try and figure some way out, and this comes up more with non-California businesses that want to do business in California. You’ll see that more often because they’re used to having some kind of non-compete because, in Texas, like many other states – and California is probably the most restrictive that I know of in the nation – in Texas, you can have non-competes. Now, it’s not unlimited. There is some level of a line between enforceability and unenforceability.

MATT: Yeah.

NASIR: And the rule is this – so long as it’s reasonable in time, scope, and place, and these kinds of things, then it’s going to be enforceable. Now, what’s reasonable? It’s case by case. I mean, there are some kind of rules of thumb that lawyers tend to use and so forth. I don’t want to give them out here because it can be misconstrued very easily, and it may not fit your specific situation. It really is specific to the type of work that you do and so forth. But, in Texas, you can find some way. Even the lowest level of employees can have some kind of restrictive covenant that gives some protections to employers.

Now, personally, I think employers tend to go a little too far in Texas of how routine it is, but there’s an answer to that in the sense that, if employers just kind of rubberstamp a non-compete and they don’t enforce it, then it’s like “you don’t use it, you lose it” kind of thing. There are some defenses when it comes to employees, but overall, I mean, this is a non-compete. Protections are an obvious employer-friendly protection to have. So, from a business perspective, that’s a clear win from Texas.

MATT: Yeah, and the last thing I’ll say about that is that’s why, for California businesses, it’s so critical to keep top-level talent because they can just go.

NASIR: Yeah, they hop around, especially those kind of businesses in Silicon Valley and all.

MATT: I think, to me, the non-compete aspect – well, I guess it could fall under both because the one I’ve seen that’s the most damaging for California businesses is the non-solicitation of customers.

NASIR: Right.

MATT: Because, if somebody leaves, I guess technically they’d still be competing. If they take one or two of your biggest clients, then it becomes a huge problem, so you have to just keep employees happy. Or else, you’d face the consequences.

NASIR: And there are some, I would say, very limited protections for employers of what they can do in the sense that you can protect trade secrets.

MATT: Yeah.

NASIR: You can protect confidential information.

MATT: Right.

NASIR: But what is confidential and what’s a trade secret? That’s where the rubber meets the road sometimes when it comes to protecting it. Also, proving that someone used your trade secrets and so forth. It’s not the end of the world, but here we’re coming to the end of the employment section. I don’t know how you’re going to score this.

By the way, Texas is the home state in this game, right? So, do we say California versus Texas? Or Texas versus California? Because I think every sport has their different, like, who’s the home?

MATT: I think it’s right because the home team is usually second.

NASIR: Right, because it’s usually California at Texas.

MATT: Yeah.

NASIR: Okay. Well, you went first last time, so let me go first. I’m going to go, what did I do last time? 10-8?

MATT: Yes.

NASIR: I’m going to do 10-7. I think California has been knocked down two or three times. You know, in fact, they lost a point because of just the infraction of AB5 and the non-compete stuff.

MATT: Yeah, I think I’m going to go 10-8.

NASIR: Okay. All right. Well, that’s a clear lead for Texas. They should just give up.

MATT: Yeah, we can battle back. I’m not too concerned.

NASIR: Okay. Well, let’s go to the next round.

Okay. Our next topic is, I think, a little bit more subtle, and this is more for the lawyers in the room, but I think it’s still going to come into play when you’re deciding – as if most people have a choice – which state to start your business in. That is corporate governance. How do I start with this? I don’t even know. I want to make this interesting, but this is kind of an important part for us.

MATT: Yeah. Well, what I would say is probably, I mean, you can do a lot of things in California, but a lot of businesses don’t choose maybe the more complex or different number of entity options.

NASIR: Right.

MATT: One, for the franchise tax. Two, it’s not always as favorable in how you can operate in the formalities.

NASIR: Right. And so, it comes down to two things. I think you mentioned the franchise tax. So, as attorneys, it can get kind of crazy from our perspective of how many entities we can create in the sense. It’s not uncommon. You know, from an attorney’s perspective, it’s like, “Hey, let’s create a new entity for every single little thing.” You give a person a hammer, they’re going to hammer. Attorneys are just going to create entities because that’s what they do, and there’s some fun stuff that you can do with that. You can split off liabilities. You can have different ownership structures. From a regulatory perspective, it allows you to do a lot of different things, depending upon, like, if you’re in healthcare and these kinds of things.

In California, every single new entity has that $800 franchise fee, and that could be enough to just dissuade you from kind of adding to it even though each entity in general that you’re operating, and you have a bank account and you have to file taxes and these kinds of things, there’s an added administrative cost, but that $800 fee is one thing

MATT: Yeah, and I think that’s one of the biggest ones because there’s something called a series LLC where you can have the master LLC and all the sub-LLCs underneath it or all the series ones. In California, they will recognize it if you come from out of state and you have that setup.

NASIR: But…

MATT: Well, one, you have to pay the $800 per entity, but you can’t set it up in California either. Like I said, they’ll recognize it probably because they want to collect the $800 from every single series but, you know, it’s just not as favorable as in Texas or other states that have that real series LLC ability to form.

NASIR: I would love to have a whole episode on series LLCs because I think they’re fascinating. So, let me give you some background on this to kind of demonstrate the difference between the two states.

LLCs in general are a newer kind of entity. Everyone understands there’s a corporation, and most people know that there’s LLC, but LLCs didn’t exist not that long ago when it comes to law – you know, from a legal history perspective. LLCs were kind of a construct out of thin air. People started kind of formulating using different types of agreements.

Series LLCs are something similar in the sense. What’s a series LLC? How you can think about it is you have one LLC, but within the LLC, you have different cells, and each cell can have its own tax ID, can do its own business, and everything is separated. It can have different ownership than every cell, and each cell is typically called a series. Each series is part of the LLC series.

The advantage of having this, really, one of the advantages of having an LLC versus a corporation is the formalities. In order to create separate cells within the LLC, you could just have literally a piece of document. Nothing to file necessarily. There are some recommended ways to formulate it, but technically you don’t need to file anything. It’s just another series that you’re adding. And so, this becomes really advantageous in certain lines of businesses and business structures – whether it’s in real estate or even in things like healthcare. There’s something called – again, this is really in the weeds, but some people may know what I’m talking about here – the practice without walls. The idea that you have different physicians that come together, you can do that through a series LLC, and so that way every physician owner has different kinds of ownership, and you can place some interesting things with contracting with payers and so forth, and also bill under one tax ID. In a way, it allows attorneys to act a little creatively when it comes to certain unintended regulations and laws and so forth that still meets the spirit of it.

In California, you can’t even contemplate doing something like that. All the advantages of a series LLC goes away once you start doing that in California.

MATT: Right. I mean, I would say a lot of businesses in California just set up one LLC because it’s easy from a formality perspective, and the ones that want to do corporations, I mean, they’re definitely – piecing them out, but – a lot of them go to another state. You know, they go to Delaware to do that.

NASIR: Yeah.

MATT: So, there are a lot of just regular one-entity LLCs. Just a lot of people do business that way.

NASIR: And I noticed too, like, limited partnerships are not as common in Texas because, typically, you need two entities.

MATT: California.

NASIR: Sorry, California. Typically, you need two entities – one for the general partner and one for the limited partnership itself. Limited partnerships are a great entity structure for certain types of businesses and vehicles and good for investment vehicles, good for dynamics. We have a lot of passive investors coming in and limited partners and you have one or two general partners, et cetera. But, in California, you just don’t see that kind of culture of legal entities. There’s plenty of limited partnerships. I’m not saying that you can’t do that. It’s just not part of the culture there a lot of times, but that’s also a lot of different things.

If you’re starting a startup in Silicon Valley, you’re going to be asked to do a C-corp in Delaware because that’s what sometimes VCs require.

MATT: Right. So, yeah, it is case by case. It wasn’t even that bad of a showing for California, I don’t think.

NASIR: Yeah, not too bad. I mean, look, If we’re going the boxing analogy, I’m always surprised at the scorecard sometimes, and it’s like you think one guy wins, and some guy will be tied up 9-9 or something like that.

MATT: Well, it’s because it’s corrupt, probably

NASIR: I’ve heard that. I don’t understand how that works. Well, it’s your turn. What do you say?

MATT: Yeah, I think this was 10-9 just because of the—

NASIR: 10-9 to?

MATT: Texas – just because of the series LLC component.

NASIR: See, I don’t want to play the taxes part in this, but I feel like that’s the only thing. That’s the only difference. It’s like, okay, Texas got in a few other punches because I’ll tell you series LLCs, even in Texas, it’s available, but you only use it in certain circumstances. To be frank, a lot of things you can do in a series LLC, you can do in another structure. So, I’m actually going to call it 10-10. I think it’s a tie.

MATT: All right. I’ m fine with that.

NASIR: Why aren’t you writing my scores down?

MATT: I didn’t know. I forgot to write your scores down. Okay.

NASIR: Well, we’ll go back. Okay.

MATT: You can remember.

NASIR: All right. This next component of Texas versus California is on privacy. Now, privacy protections are an interesting thing as far as, well, if there’s more laws in one state, how is that going to benefit businesses or not? Well, I think this is really going to be about California, so you have to talk about this.

MATT: Yeah, and it depends what side you’re coming from because, I think, if you’re just a resident of California, you probably are all about the privacy laws, but if you’re a business, it’s just another consideration you have to go through, specifically talking about the CCPA or California Consumer Privacy Act. I think we’ve talked about this before, right? Probably at some point.

NASIR: I mean, you and I have talked about it. Is that what you mean?

MATT: Well, maybe we haven’t talked about it on the podcast. I don’t know. Basically, if you’re familiar with the GDPR which is the European Union version of this, it’s akin to that. It basically gives residents of California many rights – a lot of which the right to do certain things or opt out of certain things that, if a business, they don’t have to physically be in California. I’ll go through the requirements but, if a California resident falls under that and the business falls under the coverage of the CCPA, any California resident has these rights. Not only does the business have to disclose these rights; they obviously have to follow them, too. There are very strict guidelines and response times and all of that.

Let’s take a step back. What kind of businesses fall under the CCPA? It’s one of three different categories – annual revenue 25 million; 50,000 or more consumers, or you collect the personal information of 50,000 or more consumers in California which is kind of a grey area in and of itself; the third one probably isn’t going to be a lot of businesses, but 50 percent of your revenue is derived from selling the personal information of consumers.

A lot of people, as you can imagine, a lot of businesses fall into that second category where, if you collect the personal information of 50,000 or more consumers in California, you’re going to fall under the CCPA. If that happens, like a said, there’s a whole category of rights that the consumers have. Again, you have to disclose it, and then you have to follow it. Really briefly, you have to disclose the categories of information that are collected, how it’s being used, and what third parties it’s being shared with. The consumers have the right to request the deletion of their personal information.

NASIR: Just like the GDPR, right?

MATT: Right. And then, request to opt out of collection. And then, there are some other smaller things too, but basically, if the business falls under the CCPA, and a California resident doesn’t want the business to essentially use their personal information, they have the ability to say you can’t, and you have to stop doing that. Like I said, there are certain response times, but in a nutshell, that’s how the CCPA applies to residents in California.

NASIR: I’m not doing business in California anymore. That’s too much.

MATT: I guess I should say – and I think I did – businesses don’t have to be in California for that to be the case.

NASIR: You just have to be collecting information from California consumers.

MATT: Yeah, particularly that second category. It can be anywhere. I think it’s an advantage if you’re located in California because at least you’re probably aware of it.

NASIR: That’s right. I mean, if you’re not, you may not be aware.

MATT: Yeah, if you’re a business in another state, it’s possible you have no idea it even exists.

NASIR: California is for sure going to start reaching out to those businesses that are doing that, if they haven’t already. In California, they actually have a right to privacy in the state constitution. And so, from an individual perspective, of course, this privacy is a great thing, and it’s an individual protection. From a business perspective, it can be very onerous and very difficult, in fact. We’ve advised a lot of different companies going through this, especially when they’re going through California. You know, sometimes, we’re the bearer of bad news, and we get a lot of pushbacks. It’s like, “This is the rule. This is what you have to do.” Sometimes, there are technical challenges, and that costs money. But, again, that is the cost of doing business specifically in California.

MATT: Right. It’s also the response times which I’ve mentioned a few times now and actually following through with it. You have to have agreements with what’s called service providers – basically, third parties or vendors. You know, if they’re processing personal information too, it has to be covered. It’s not just as easy as posting what information you collect on your privacy policy. There’s a lot more that goes into it.

NASIR: Right.

MATT: And then, we won’t get too deep into this part, but in a couple of years, we’re going to see the CPRA or California Privacy Rights Act, and it’s going to be even more onerous for these companies to follow this because it’s going to add a different category of personal information called sensitive personal information, and it’s going to make, well, it’s to be determined, but people seem to think it’s going to have more businesses that are then going to fall under that umbrella. Who’s covered under this? More opt-out out of certain advertising, and we didn’t even talk about that. I mean, from a logistical perspective, if somebody wants to opt out of advertising, I’m sure it’ll be easier down the road, but it’s a challenge in and of itself to remove that one individual or make sure that their personal information is not getting used anymore. It’s a pretty challenging thing for these businesses.

NASIR: Absolutely. I mean, I’m trying to think what else there is in Texas. In California, they have this too. Like, if you have some kind of data breach, you have to notify customers and so forth, but even then, compared to California, Texas is a lot more liberal of when that threshold of reporting is required and things of that nature. Man, I would say, 10-8 on that one.

MATT: I’m going to say 10-9 to Texas because I just don’t think that many businesses, I mean—

NASIR: That’s true. There’s not as many businesses as you would think.

MATT: Right.

NASIR: It’s mostly bigger businesses. If you’re a small business, you’re not going to have to comply. I don’t know if that changes with CPRA.

MATT: Not to the level of it’s going to—

NASIR: Got it. Okay. I don’t think I can change my vote. Or can I? Maybe if someone pays me a little bit.

MATT: Yeah, I don’t know if they’re locked in after every round. They probably are, so you can’t go back and change them.

NASIR: Okay. Well, it’s locked in. 10-8. All right.

Okay. So, this next category of Texas versus California – or California at Texas – I think this is going to be the nail-biter. I mean, if the first four rounds were not just already like a landslide of Texas, then maybe it’d be like, “Okay. Let’s just reset 0-0. We can come down to this fifth round,” then maybe there’d be some question here, but this is the stuff. We had to talk about this because it’s not just enough about the law and from a business perspective of why you would want to do business in Texas versus California. There are some other things that may come into play as well – like, the weather. So, you’ve been in Houston for a number of days now.

MATT: Yeah.

NASIR: You’ve experienced in the dead of summer, the humidity. Not all of Texas is like that, and not all of California is nice either, but how do you compare that to San Diego?

MATT: Well, I was going to do more than just San Diego. I think the locations – the bigger cities in California – a lot of them aren’t going to have anything close to what Houston has. I assume Dallas is also like that. Or Austin.

NASIR: All I know about Dallas is people from Houston bash Dallas and vice versa, so I can’t speak much about the weather there.

MATT: Well, if we’re only going to do San Diego, then that’s an easy one.

NASIR: Right. I mean, that’s one of the best cities in the world.

MATT: Yes, 70 degrees basically every day of the year. We’re not going to get snow. It’s not going to get too hot from the most part. It’s not going to get too cold. You know, I personally like rain, so I’d like to see more rain, but also the nice thing is obviously you can plan something for outside and feel pretty confident that it’s going to be fine.

NASIR: Yeah, exactly. Right. Well in advance. Months in advance. In the winter too, you can drive up to Julian or something and see the snow.

MATT: Yeah, if you want to see the snow. Sure.

NASIR: But you’re right. Los Angeles, Santa Barbara, San Francisco, and so forth – I mean, these are all cities with great weather. San Francisco, I mean, some people may complain about it, but it’s a different taste.

MATT: Yeah, it is colder, but it’s not bad.

NASIR: But it doesn’t snow for, like, three months of the year or something like that like the Midwestern states. Texas – it’s funny that we’re talking about the weather, but it’s great. The next topic though, stricter enforcement of the law. This is something we had to talk about because, I’ll tell you, Texas tends to be a little bit hands-off, and I think we saw that with the pandemic. I know that our office, we were home for two weeks, and then came back voluntarily. Everyone just kind of came back when I gave the option and so forth, but that wasn’t much of an issue. California just opened up – like, two days ago.

MATT: Yeah, basically. Well, I don’t know when this will come out but, yeah, June 15 was basically – well, it’s not even full reopening, but more people, I think, June was when we started really seeing businesses kind of fully open up. But, yeah, COVID is not even a comparison, particularly San Francisco and LA also, just because San Francisco is just very condensed, and LA just had some issues with rates and everything.

NASIR: Right.

MATT: Yeah, but I’d say, on the other side, I mean, I don’t know how it is in Texas necessarily, but certain areas in California, you have those beach towns, so I think those can be much—a

NASIR: Laidback?

MATT: Yeah, much more laidback.

NASIR: Yeah, that’s true. Also, the opposite is true here in Texas because, like, for example, early on, Harris County had mask mandates and so forth where the rest of Texas did not. So, there is some city local level differences as well. Yeah, that’s a toss-up. I don’t know.

MATT: Yeah.

NASIR: Okay. This is a good one – natural beauty. Now, I would say, if you were to ask me about Texas about three years ago, I would have said California is by far the natural beauty. I mean, obviously, they have the beaches, they have mountains, they have the forest, and redwoods and all that. The deserts are even beautiful, right? You have the Joshua Tree. I don’t know if you’ve ever been there. But, in Texas, I mean, there’s some charm to it. You have to kind of travel a little bit, but I’ll tell you, you know, places like West Texas. It’s kind of dry land, but I kind of like it. It has a neat look to it. In West Texas, there’s the Big Ben National Park. Of course, Austin has its own charm and natural beauty there. The hill country is just phenomenal, and that’s about as far as I’ve been. Northern Texas, I don’t know what’s there – the panhandle.

MATT: Yeah, I don’t think that’s going to be a winning argument.

NASIR: You haven’t been…

MATT: You have the whole coast in California.

NASIR: Look, I’ll give it to you. We have some coast too, but it’s definitely not the same. Galveston Beach is definitely not comparable to most of the beaches in California, but I do think the natural beauty of Texas is underrated.

MATT: Okay. Well, that’s fine.

NASIR: And I think most people watching or listening in will agree.

MATT: Well, that kind of plays into the next thing. We call it, I guess, activities or things to do.

NASIR: Oh, yeah. This plays into the weather, too.

MATT: Yeah, that’s correct. I mean, there are people that can go. You can go surfing in the morning and then skiing in the afternoon if you live in certain parts of the state. I don’t know how many places in the world you can do that.

NASIR: Uh, 16.

MATT: 16? Okay.

NASIR: No, I don’t know.

MATT: Well, not in Texas.

NASIR: None of them are in Texas. Okay. So, this is my favorite – sports teams.

MATT: Okay.

NASIR: I’m just curious if you can name all sports teams in California and Texas.

MATT: Yeah.

NASIR: For sure?

MATT: Yeah, easily.

NASIR: Oh, really? I’m not going to ask you to do it.

MATT: Not even close.

NASIR: Really?

MATT: Yeah, it’s easy.

NASIR: All the professional sports? Really?

MATT: Yeah.

NASIR: I probably could too then. Not really. I don’t think so. Baseball? I don’t know. I’m trying to think. But, sports teams, well, you have to speak to this. I don’t know if I can.

MATT: Well, I’m trying to think.

NASIR: We have a lot of great sports teams.

MATT: Well, I’m thinking from the fanbases. If I’m working south to north, San Diego, they obviously lost to the Chargers, but the [UNCLEAR 0:55:46] City, LA is basically a Lakers town.

NASIR: Right.

MATT: Dodgers, if they’re good, people follow them. You work your way up. Bay Area, the Warriors are pretty popular, and then the San Francisco Giants. I’m just naming the big followings.

NASIR: Got it.

MATT: And then, in Texas you have…

NASIR: Well, everyone’s a Raiders fan, too. Right?

MATT: They’re in Las Vegas.

NASIR: Oh, yeah, they’re not even in California. If you had asked me to name the California teams, the first one I would have said was the Raiders, the San Diego Chargers.

MATT: You’d be right. I mean, when they were in Oakland, they were pretty big.

NASIR: They were pretty big. Okay.

MATT: In Texas, we have the known cheaters of the Houston Astros.

NASIR: Oh. I guess I’m offended by that, but I don’t know.

MATT: I mean, Texas obviously has the Cowboys which, I think, are pretty big.

NASIR: They’re a legacy.

MATT: Yeah. Well, history-wise, I would say, you know, the Lakers and the Dodgers and the Giants. Those three are the more historic teams.

NASIR: So, who’s the winner? This one, I need a score.

MATT: Well, I think, if we had the best team in each sport play, let’s see.

NASIR: This is probably the most controversial section, right?

MATT: Baseball – the Dodgers won the World Series last year, so I would take them. The Lakers won the NBA Championship last year, so I’d take them. Hockey – I don’t know too much about that. Texas has the Stars.

NASIR: So, you can’t name every…

MATT: No, I think it’s just the Stars, right?

NASIR: Okay. I don’t know.

MATT: And then, the Sharks and the Kings and the Ducks in California. I don’t know enough about hockey to know who’s good. And then, what did I miss? Football? The Rams, they’re pretty good. The Cowboys have been okay. Texans have been not great. And then, yeah, it’s just those two, I think. See, that’s California.

NASIR: Really? I’m going to say Texas. I don’t know. I have no idea if that’s true or not.

MATT: I mean, what plays in it too is the venues. I think some of the venues and the sports teams in California are pretty nice as well.

NASIR: That’s true. I mean, Houston has pretty much every team though, right? They have every sport.

MATT: So does Los Angeles.

NASIR: Well, okay, anyway… Well, that’s our intangibles, right? What’s that?

MATT: I didn’t discuss it with you beforehand, but people have to understand that Nasir is very adamant about the fact that he’s right about this, and he thinks—

NASIR: About this? Or everything?

MATT: No. Well, this in particular. He will never stop talking about how the fish tacos in Texas are better than the fish tacos in California.

NASIR: Wait. No, I never said that.

MATT: Yeah.

NASIR: I said that?

MATT: You said San Diego’s fish tacos are terrible.

NASIR: I never said that.

MATT: You said, “I want the beer-battered fish covered in the cheese, not the fresh-grilled fish that you can get in…”

NASIR: That’s the total opposite.

MATT: it’s not even just in San Diego. There’s a lot of areas in California that sell it. I think it’s a terrible take.

NASIR: This is not true. I can’t find a good fish taco in San Diego. Well, we did go to… Sorry! I misspoke. I can’t find a good fish taco in Houston.

MATT: See? I knew it.

NASIR: We did go to Velvet Taco though. That was decent.

MATT: Yeah, it’s not bad. It is definitely at least unique.

NASIR: That’s probably the only fish taco I’ll eat in Houston.

MATT: But, yeah, that’s going to be a big—

NASIR: A point for them.

MATT: A big favor.

NASIR: I better get a whole, like, bag of fish tacos.

MATT: One, two, three, four, five – okay! Well, you know what?

NASIR: We won that one.

MATT: So, there were six subtopics, and I think California took all six. I’m going to score 10 to 4. California.

NASIR: That’s not how it works, especially when it’s like, okay, 10 to 6? Okay.

MATT: No, 10 to 4.

NASIR: 10 to 4? Does that make up for the rest?

MATT: Yeah, it did, actually.

NASIR: Well, I don’t know about that. Well, it depends on the perspective. If you’re a business thinking about moving from California to Texas – that’s where this trend is going.

MATT: Yeah. I mean, you’re going to spend more hours not working than you are working.

NASIR: True, and most of it is sleeping – not working.

MATT: Well, it depends how much you sleep.

NASIR: In California, there are houses without air conditioning.

MATT: That’s true. My house has no air conditioning.

NASIR: To be fair, in Houston, you can’t have a house without air conditioning.

MATT: Yeah, I don’t think you would survive.

NASIR: I think you would die.

All right. So, that is our episode. We covered taxes. We covered what else?

MATT: Employment.

NASIR: Employment law. I mean, this is what I would say, we’ve done business both in Texas and California. We have clients in both.

MATT: Right.

NASIR: It’s definitely easier in Texas. But, at the same time, it’s also very just different because even though, for the most part – from an advantage versus disadvantage – there’s also opportunity in California and there’s a vibe in California that’s just not in Texas, but you can find things in Texas. Like, in Houston, the vibe in Houston in particular when it comes to business and the pace of it – compared to San Diego, for example, which I always joke around that I don’t think anyone works in San Diego. You go to the malls, they’re packed 24/7 in the middle of a workday whereas, in Houston, it’s a bustling town, you know, and I think you can say the same for a lot of cities like that in Texas in particular, but they’re very different.

MATT: Yeah, I’ll agree with that. It’s easier to do business in Texas. It’s kind of what lifestyle you want and the type of people you want to have working for you as well. I think that’s what you were kind of getting at.

NASIR: Absolutely.

MATT: It’s a different mentality, but it’s also industry-specific too, but the important thing is that, when we tallied the points, California won by two.

NASIR: By two?

MATT: Yeah.

NASIR: I don’t know how that happened, but we’ll take that. Okay.

So, if you guys want to complain about Matt’s scores, or if you want to complain about specifically his criticism of certain sports teams, you can always send us your comments and questions. You can go to our website. Of course, we’re active in social media @pashalaw pretty much I think on all the social media outlets. Check out our new brand. We just launched a new brand, a new look, new cover art for our podcast. We’re really excited about that. Until next time, thank you!

MATT: Keep it sound and keep it smart!