OCTOBER 20, 2026 14:08

California's ballot measure Proposition 40 has intensified an established tax strategy query for owners of substantial private firms: When departing the state, should the business stay incorporated there?

The issues connect yet remain distinct. Proposition 40, set for the November 3, 2026 ballot, would apply a one-time wealth levy to select persons and trusts. The Legislative Analyst outlines it as a 5 percent charge on net worth for billionaires who held California residency on January 1, 2026. The Attorney General summary notes covered holdings include business stakes, securities, art, collectibles, and intellectual property, while real estate and select retirement holdings stay exempt.

Entity filings do not fix personal residency status. Entity relocation can, however, form part of the evidence showing where an owner has centered business operations after exiting California.

The proposed levy includes private business values

For founders, a key aspect of Proposition 40 is that a private firm stake falls inside the tax base even without a public market valuation.

The measure sets valuation guidelines for entity interests. It requires disclosure of ownership share, book value, and book profits, establishes valuation assumptions, and allows certified appraisals under certain conditions. A founder may therefore possess sizable taxable wealth within an operating firm without matching current cash flow.

The core challenge involves liquidity. A high-value business interest can generate a large tax base while the owner holds an asset that resists piecemeal sale without disrupting control or funding. The measure allows payment spread over five years at added total expense, yet the valuation question persists.

Entity relocation does not remove Proposition 40 exposure

A business owner exploring transfer of a company to Florida should recognize that entity relocation represents one factor, albeit important, but not the full picture.

The measure focuses on personal residency as of January 1, 2026. An owner who held California residency on that date cannot alter that prior fact by shifting the company later. If Proposition 40 takes effect as drafted, the key residency date has already passed.

Company domicile and individual domicile stand apart. A California corporation can feature a shareholder residing in Texas. A Nevada LLC can include a member who stays a California resident. Altering the governing state law for the entity differs from changing the owner's tax residence.

Advisers should therefore identify which tax matters are set by prior events and which remain open to future adjustments. Merging them under a broad exit concept can yield an incomplete result.

California residency hinges on the owner's real ties

California's standard residency standards heighten the distinction. Revenue and Taxation Code section 17014 and related rules center on whether a person is present in or absent from California for a temporary or transitory purpose. FTB Publication 1031 frames residency around the location of the taxpayer's strongest connections.

The Franchise Tax Board's residency manual lists business and employment links among factors that can carry significant weight. The Appeal of Bragg, 2003-SBE-002, also treats business interests as part of the objective evidence used in residency determinations.

A recent POLITICO report on Proposition 40 described tax advisers readying for detailed residency challenges and observed that California investigators may review business interest locations along with the taxpayer's home, family, professional ties, and daily activities.

Entity relocation can influence one element of that record. It cannot provide the remainder.

Shifting the company can align business facts with the personal move

Imagine a founder who relocates from California to Florida yet retains the operating corporation in California, maintains its main office there, conducts board meetings there, and continues overseeing senior staff from that site. The founder may have updated a driver's license and acquired a Florida residence, but the business details still point to California.

Contrast that with another set of facts. The owner shifts principal management duties, corporate records, and operational headquarters to the new state. The company redomesticates where allowed and retains only the California operations essential to the business.

The second pattern does not ensure nonresidency. It does render the company's legal and operational records more aligned with the claimed relocation.

The distinction counts because California does not view voter registration or a new driver's license as decisive. FTB guidance indicates no single residency element controls and that the overall strength of connections outweighs a mere tally of contacts.

California tax exposure may persist after relocation

A business should not equate domicile change with termination of California nexus. When moving a business to a new state, multi-state tax nexus review should involve qualified tax counsel.

California deems an entity to be doing business in the state under multiple tests, including activity for financial gain and thresholds tied to California sales, property, or payroll. A firm that changes legal domicile but keeps employees, inventory, offices, or substantial California activity can remain subject to California registration and tax duties.

The owner may therefore face two distinct post-move records. One addresses personal residency. The other addresses the company's California-source activity and entity-level filing duties.

The stronger planning record addresses both. It does not assert that a relocated company stopped doing business in California when facts show ongoing California operations.

The November vote leaves room for contingency planning

Proposition 40 is not yet law. It remains a ballot measure as of October 2026. The Legislative Analyst also flags possible overlap with Propositions 41 and 42. Proposition 42 would bar new state taxes on personal property and certain retroactive taxes, and any conflict could affect Proposition 40 based on vote counts and later legal review.

That uncertainty supports separating reversible steps from irreversible actions. A company should not relocate merely due to a ballot measure. The choice should stand on independent business grounds involving governance, recurring taxes, regulatory duties, and management location.

For an owner who has already chosen to move the enterprise, however, leaving the entity in place can create an avoidable gap between personal and business facts.

Redomestication forms one element of a solid exit record

The California wealth-tax discussion highlights a wider principle. Tax residency is established through actions, documentation, and economic links. Entity domicile is only one factor, yet for founders whose main asset is their company, it can carry weight.

A carefully planned departure should avoid two contrasting errors. The first assumes that relocating the company automatically relocates the owner. The second moves the owner while leaving core business facts fixed in California without a business justification.

Proposition 40 may pass, fail, or become linked to rival ballot measures and litigation. Those results do not alter the planning principle. When a business owner completes a genuine interstate move, the legal domicile of the company should be considered together with the owner's residence, the company's operating presence, and the tax obligations that continue in California.

This article was prepared in cooperation with Cummings and Cummings Law