Forming a New Business: California vs. Delaware/Nevada

4 08 2011

Business clients often come to us after forming their Corporations or Limited Liability Companies in other states. Often, the client made this decision because someone told them that another state (usually Delaware or Nevada), is more business friendly than California. Although we agree with this statement, incorporating in a business friendly state rarely gives our clients, who hire us because they do business in California, any advantage.

If your corporation enters into repeated and successive transactions of business in California, it must qualify to do business in California no matter where it is incorporated. If the owners/managers of your business are located in California and do business form California, you must qualify to do business in California. You will be subject to California’s franchise tax on net income for business done in California which requires a yearly minimum payment of $800, whether or not your business makes any money. You may also be subject to jurisdiction in California courts, if your business satisfies the “minimum contacts test” in its dealings within California. This negates many of the benefits you get from out-of-state organization (low taxes, or, in the case of Delaware, specialized business courts).

There are some situations in which out of state incorporation could be beneficial for a California business. If you intend to go public at some point, you may have to reincorporate in Delaware at that time, and initial incorporation in Delaware will save you some time and expense. If your CA business will be one of a number of subsidiaries of a parent corporation located somewhere else, or if you plan to locate your corporation’s principal place of business outside CA, you may be able to gain an advantage through out-of-state incorporation.

If your business will have a substantial connection to California, you should consult a California attorney before choosing to organize your business in another state.


Writing An Operating Agreement That Works For You

28 06 2011

When you form a Limited Liability Company, your attorney should prepare an Operating Agreement. Your Operating Agreement is the contract that governs your company, and it is very important, especially if your LLC has more than one member. You should discuss the following issues with the other members of your LLC and your attorney before your Operating Agreement is prepared. If you already have an Operating Agreement that does not adequately deal with these issues, you should amend it.

1. Management/Control of LLC: Who will be responsible for managing the LLC? If more than one person will have management responsibilities, will you have to agree in order to make decisions? If you can’t agree, what happens? Will there be any compensation to members who take on a management role? Is there a non-managing member who will get a percentage of the profits? Think about how you will hire employees, take care of expenses, and who will be responsible for accounting issues.

2. Distributions: How will the income of the LLC be distributed?

3. Bringing in others: Can other investors be brought into the LLC, and if so, is agreement required? Will there be criteria for new members, or a process for approval?

4. Separation/if someone wants to leave/if someone dies or is incapacitated: What happens if a member of the LLC wants or has to leave? Is that partner entitled to transfer his interest?

5. Exit Strategy: Are you planning to go public or be acquired?

6. Capital: How much money is going into the LLC, and where is it coming from? Will more money be put in later? If the LLC needs more money, what will you do?

7. Dissolution: Process? Is there a time or event that should trigger dissolution of the LLC?

8. Death/Incapacity: If a member dies or becomes incapacitated what happens?