Wednesday, February 23, 2005

Reasons to Incorporate in California

Disclaimer: The information contained in this article is provided for general information purposes only and is not intended to be a legal opinion, legal advice or a complete discussion of the issues related to the area of incorporating a business. Every individual's factual situation is different and you should seek independent legal advice from an attorney familiar with the laws of your state regarding specific information.

Reasons to Incorporate in California

A number of clients have asked me about the advantages of incorporating in other states like Nevada or Delaware. After all, AM talk radio stations often run advertisements about the advantages of incorporating in other states. For most small businesses based in California, however, incorporating in California is generally the best option.

INITIAL INCORPORATION IS CHEAPER: Since January 1, 2000, qualified newly formed California corporations will not be subject to the minimum California franchise tax for the corporation's first taxable year. Previously, corporations had to prepay a minimum franchise tax of $800 along with the filing fees for Articles of Incorporation. This fee has been eliminated for most new corporations' first year. This means you pay $115 to incorporate instead of $915.

REDUCED PAPERWORK: Under prior law, corporations doing business in California were required to file a statement of officers and directors every year. Now this form can be filed online and is filed every two years.

THERE IS NO TAX BENEFIT FOR INCORPORATING IN ANOTHER STATE: Corporations doing business in California -- even if incorporated in another state -- are required to file a California corporation tax return. California law imposes heavy penalties on corporations doing business in California that fail to file. All corporations doing business in California pay the same taxes, regardless of where they are incorporated.

Any corporation 'doing business' in California is also subject to the minimum franchise tax. 'Doing Business' means actively engaging in any transaction for the purpose of financial gain. The minimum franchise tax was eliminated for most new corporations filed after January 1, 2000 but ONLY for the first year. The minimum franchise tax still exists thereafter for corporations.

OUT-OF-STATE CORPORATIONS SUBJECT TO CALIFORNIA LAW: Under California law, if an out-of-state corporation has more than 50 percent of its property, payroll and sales in California, the corporation must comply with California corporate law. The same is true if more than 50 percent of its voting stock is held by persons with addresses in California.

OUT-OF-STATE CORPORATIONS MUST QUALIFY TO DO BUSINESS IN CALIFORNIA: According to California law, if an out-of-state corporation does business in California without obtaining permission to do so (also known as "qualifying to do business" in California), that corporation may be disqualified from answering any claim or defending any lawsuit filed in the State of California. The company’s failure to be able to answer such complaints may result in a default judgment being filed against the company.

A foreign (out-of-state) corporation transacting intrastate business in the State of California must qualify to do so with the Secretary of State's Office. 'Transacting intrastate business" is defined as entering into repeated and successive transactions of a corporation's business in this state, other than interstate or foreign commerce.

If you are planning to do business in California, it will be more cost effective in the long to incorporate in California in most cases. If you wish to schedule a free appointment for a consultation, please contact us at (619) 448-2129.

About the Author
Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

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