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.