Business Formations, Where to Start?
- Posted on: Feb 11 2020
You may have heard that Delaware is the best place to form your business entity. This is because the state has laws that favor business formations. Such laws have included:
- Most favorable franchise tax rules;
- Most pro-management from a legislative and judicial standpoint;
- Broader protection for board members against lawsuits initiated by shareholders on behalf of the company;
- Less legal protection than that in California for minority shareholders; and
- Limited statutory protection against hostile takeovers.
Prior to incorporating your business in Delaware though, it is important for California business owners – particularly those with small businesses – to consider specific factors regarding incorporation in California.
Associated Costs With Business Formations
In the state of Delaware, it costs $89 to file articles of incorporation. The mandatory annual report-filing fee for non-exempt domestic corporations is $50 along with taxes. In Delaware the minimum corporate tax that a corporation using the Authorized Shares method is $175, while those corporations using the Assumed Par Value Capital method are on the hook for $350.
Meanwhile, the fee for filing these articles of incorporation is $100. However, there is also a requirement for a business owner to file an initial report within 90 days of incorporation along with a fee of $25.
The state also requires that the corporations file an annual report along with a filing fee of $25. Most of the corporations in California will pay a minimum annual franchise tax of $800 to the California Franchise Tax Board. (The costs of forming an LLC are different.)
Although Delaware may seem like the better place to form your business, if your company conducts business in or from California it must be registered in California – regardless of whether or not it was formed anywhere else. In other words, you would remain subject to California filing fees and would owe a minimum franchise tax of $800.
Additionally, if a Delaware corporation is operating in California, it must still maintain a registered agent in Delaware (as well as California), which will at least $100 annually. A California business incorporating in Delaware leads to increased costs of formation and annual reporting.
When deciding where to form your business it is extremely important to look at the following factors:
- How will the business be structured (Inc.; LLC; etc.);
- Business goals
- Where you will conduct business
- Where you will be banking
It is also key to note that if your business is incorporated in Delaware, you will be subject to litigation in Delaware. This may lead to added expenses, such as traveling to and from Delaware, which may overshadow any benefits you may be receiving by incorporating there.
The good news is that California has now adopted much of the Delaware General Corporations Law into its own statutes and regulations, which allows California businesses to receive many of the same benefits as if it was incorporated in Delaware.
There is much to consider when starting a business. If you are looking to incorporate a business and make other related decisions, the best thing that you can do is to consult with a knowledgeable and experienced California business attorney.
The Law Offices of Brian L. Fox, APLC Can Help Incorporate Your Small Business
At the Law Offices of Brian L. Fox, APLC, we know how important it is to protect your business and yourself. We will help you to figure out how to establish a business that makes the most sense for you and your wallet. To learn more or to schedule a free consultation, contact us today!
Brian L. Fox helps his clients with business litigation matters throughout California including the areas of Santa Barbara County and Ventura County.
Posted in: Business Law