Legal Question in Business Law in California

You're kidding, right? You're expecting a free answer to this kind of question? Without a review of all the details of what you intend regarding the business structure and operations? Are you stupid, or do you just think we are?

Nevada and Delaware are havens for large corporations that are listed on major exchanges or hope to be, that have outside directors, accounting departments, and substantial operations and cash flow. It is pretentious and silly for a start-up to be formed under the laws of any state other than where it will conduct its business. If you live in California and your associate lives in Massachusetts, you business should be formed in one or the other.

There is no such thing as a business that is operated entirely on the Internet. Your proposed business will be deemed to be conducted somewhere in the real world, probably in the state or states where the hand that guides the mouse is to be found, or where the main bank account is opened, or possibly the state given as an address in registering the Web site.

If both the MA co-owner and the CA co-owner are active in the business, it will probably, but not necessarily, be deemed to be doing business in both of those states........and thus will end up having to pay franchise taxes and file tax returns in both states, plus the state of its formation. That's three sets of returns. (Yes, I know NV doesn't have a corporate income tax at present, but it does require entities such as LLCs and corporations to file annually.....I have formed and operated three Nevada corporations, all headquartered and operated entirely within the state.)

The convoluted structure proposed in Part 2 of your question also sounds way too "high finance" for a start-up. I know lawyers and accountants sometime structure business enterprises using an LLC or corporation controlled by the limited partners as the sole general partner of an LP, this is complex and probably unwarranted for a new small business. You'd spend all your time manipulating multiple sets of QuickBooks instead of running the core business activity.

I vote for simple. Choose CA or MA and form one LLC. Register in the other state if and when necessary. Have one set of books. Keep them professional and current. Negotiate, write up and sign a heads-up Operating Agreement, preferably using a lawyer licensed in the state of formation. Buy insurance. Don't commingle personal and business assets.

Finally, it is probably better to refer to yourselves as co-promoters, co-owners, members, managers, associates, etc. rather than as partners, unless you really have a partnership -- it can result in undesired confusion among third parties.