Legal Question in Business Law in California

I will try to comment on a few aspects of your proposed business start-up.

First, as to incorporating in Delaware. If you are going to be running your business from Sunnyvale, California, there is little to be gained and something to be lost by incorporating anywhere but in California. If you formed a Delaware corporation, you'd have to pay taxes to both states and file annual tax returns in both states, probably requiring more complicated bookkeeping. There are some advantages to being a Delaware corporation, but the advantages redound to very large, publicly-traded corporations. I don't see any practical reason for a startup to incorporate anywhere except where it is going to be conducting its operations.

Your corporation will be subject to California's corporate franchise tax if "the hand that guides the mouse" is situated in California.

Second, to be technically accurate, one doesn't "incorporate as an S-corp." "S" status is obtained, after incorporation, by filing a simple application with the Internal Revenue Service.

S corporations may have non-citizens as shareholders, but they cannot have non-resident aliens as shareholders.

S corporations can have but one class of stock, e.g., they cannot issue both common and preferred stock; but there is some flexibility in the regulations, potentially allowing options, differences in voting privileges, etc.

Expenses of a company founder in forming a corporation are not necessarily going to be deductible as a consequence of the corporation electing "S" tax status, or any other way. The IRS takes the position that many startup costs, e.g. researching and developing business ideas and plans, often are not chargeable to the business. Other startup costs need to be capitalized and depreciated or amortized over time, and not written off in the year incurred. The IRS publishes good business-startup guides. For example, look at:

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Starting-a-Business

Converting from an "S" to a "C" corp. is indeed pretty easy, and there are time-of-year restrictions for doing so without tax penalty ......... but if/when that large-posterior VC comes along, be sure to consult with both the VC and your own team of highly-paid accountants and attorneys before making any changes. Oftentimes, investors in or acquirers of smaller businesses have their own thoughts on such matters, including re-incorporation, sale of assets, etc. that may suggest other strategies.

Additional advice would be to rely upon "print" sources as well as on-line sites for guidance in forming and operating a new business venture. Paperback self-help books of the Nolo Press genre are recommended. Be sure to focus on books emphasizing California laws.