Legal Question in Business Law in California

I believe that if you are doing business in California then you should form your entity here. I have heard other theories pertaining to online businesses, but subscribing to that point of view (i.e. people suggest that you can avoid California taxes by registering in Delaware) involves a touch of being dishonest because a legitimate business that registers in Delaware and does business in California is technically required to register in California as a foreign entity, which triggers the same tax laws.

While Delaware used to be the preferred state in which to incorporate, California has updated many of its laws that pertain to business, making arguably just as good as Delaware. Also, if you are doing business in California, you will have to pay state taxes here, so the benefits are fewer for out-of-state incorporation. We regularly set up corporations and LLCs, so please feel free to contact me at 949 436 5212 or [email protected] if you would like any information.

It is sometimes thought that because a business is not bricks-and-mortar, but merely a guy sitting at home clicking a mouse, that it isn't "doing business." This point of view would not get much traction in court. A person is "doing business" by conducting operations of any regular and substantial kind that contribute to a venture intended to make a profit.

Delaware is a suitable state for incorporation of a business that is (a) listed on an exchange, and/or (b) conducts business in all, or many, states. If neither of these factors is present, it's hard to find any reason to domicile a business entity there.

California's business francise taxes may be a reason not to incorporate or form an LLC, but if you do form one, and it will conduct any kind of business here (like receive payments, make policy, hold meetings, make decisions, keep the records) you are going to be paying those taxes anyway, plus taxes to Delaware or wherever. Perhaps even more a nuisance, you'll be keeping records and filing reports in all states where you do business, or are domiciled.

You really need to consult with a business attorney to determine if you even "need" to incorporate. Many clients that think they should, shouldn't, and others that don't think they should incorporate, should do so. There are many factors to consider, and cost, including California $800 annual minimum franchise tax, is one of them.

Deleware incorporation provides no tax advantages. Taxes are paid on income where earned, not in the state of incorporation. And DE taxes aren't that great anyway. The advantages of DE incorporation is that DE has by far the most Board of Directors/Management Team favored, shareholder disfavored, corporate management laws in the country. You want to be incorporated in DE if you want to go public and then play Gordon Gecko. Otherwise, incorporate at home.