The process to incorporate your business is easy, however, if done incorrectly could cost your business suspension and/or penalties. Hiring a paralegal with years of experience, specifically in corporate business, can save you many headaches in the future.
The process is simple:
1. Choose a business name
2. File Articles of Incorporation
3. Appoint Registered Agent
4. Prepare Corporate Bylaws
5. Appoint Directors & Hold Board Meeting
6. Issue Stock
7. File Statement of Information
8. Comply with Tax Requirements
The main reason why someone wants to incorporate a business is to separate personal assets from business liabilities.
What are the benefits to incorporate a business in California?
There are several benefits that come with incorporating a business. For example, most business owners can protect themselves from personal liability and build credibility by having Inc. or LLC after their company name. Here are some more benefits:
- Liability – Incorporating a business allows owners to segregate and protect their personal assets. Starting a business gives owners limited liability for business debts and obligations. If a company is unable to pay a debt, the creditor can require the owner to pay the outstanding debt. When a company is incorporated, a creditor can only attack the company to the extent that the shareholder has invested in the company (unless fraud is involved). Inclusion allows companies to make business decisions without taking a huge risk.
- Taxes – There are several tax advantages to starting a small business. A corporation can avoid double taxation by choosing the tax status of Subchapter S. Incorporation also reduces a company’s chance of being audited by the IRS. Sole proprietors tend to understate their income and are subject to strict scrutiny by the IRS.
- Credibility – By getting your company involved, you can build credibility in your industry. Starting a small business can help build a professional identity.
Disadvantages to incorporate a California corporation in another state
- Additional Fees – If a California corporation is formed in another state, there are double filing fees. A corporation must pay filing fees to the Secretary of State where it does business and pay Secretary of State fees where it is incorporated. If a California corporation is incorporated in another state, it must still register as a foreign corporation in California. In addition, a company also incurs the additional annual fees for a registered agent in the state of incorporation if it does not have a physical location there. These fees are typically several hundred dollars per year. Read more about the purpose of a registered agent in a previous blog dedicated to this important topic.
- Additional Franchise Taxes – When a company is incorporated in another state like Nevada or Delaware, the company must pay annual franchise taxes in both states – the state where it actually does business, such as California, and the founding state. For example, if your business is located in California but you are incorporated in Nevada, you must pay the California annual franchise tax of at least $800 plus the annual Nevada franchise tax.
- Additional Reporting Requirements – If you reside in another state, you have two levels of reporting requirements and must meet reporting requirements for both states. For example, if you incorporated your company in Nevada but are physically located in California, your company would need to comply with both Nevada and California reporting requirements.
Clearly, incorporating into another state may not be beneficial for your California business. You should ensure that the benefits of incorporating in another state outweigh the additional costs of incorporating in California, where your company is headquartered.
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1 thought on “Should You Incorporate Your Business In California?”
Thank you for providing such good information on your paralegal blogs!