• Benefits of Incorporating in California

Benefits of Incorporating in California

Are you considering incorporating your small business in California? There are several benefits of incorporating in California. From reducing legal liability to paying less in taxes, forming a California corporation helps most businesses prosper. Read on to learn more about the small business benefits of incorporating in California, the pitfalls of incorporating in another state, and how you can get help setting up your California corporation.

What are Small Business Benefits of Incorporating?

There are several benefits associated with a small business incorporation. For example, most business owners are able to shield themselves from personal liability and build credibility by having Inc. or LLC behind their business name. Here are some other benefits:

  1. LiabilityBy incorporating a small business, owners can separate and protect their personal assets. Incorporating a business allows owners to have limited liability regarding business debts and obligations. If a business is unable to pay a debt, the creditor can require the owner to pay the outstanding debt. If a business is incorporated, a creditor can only attack the business to the extent the shareholder invested into the corporation (unless fraud occurred). Incorporating allows corporations to make business decisions without taking great risk.
  2. Taxes  There are several tax benefits of incorporating small businesses. A corporation can avoid double taxation by electing subchapter S tax status. By incorporating, a business also reduces the chance of being audited by the IRS. Sole proprietors tend to under report their income and are highly audited by the IRS.
  3. Credibility  By incorporating your business, you can build credibility within your industry. Incorporating a small business can help establish a professional identity.

How Small is Too Small to Incorporate?

At A People’s Choice, some of our clients at times feel that they may be too small to incorporate. How small is too small to incorporate? No business is “too small” to incorporate. However, if you work in an industry that is prone to legal disputes, or you have a high net worth that could be jeopardized in a bad business transaction, you may want to consider incorporating your small business.

Should a California Business Incorporate in Another State?

This depends on the nature of the business. Some states require corporate entities to incorporate within their state if the business conducts a large amount of business within its borders. This is often referred to as “foreign qualification.”  If your corporation has a physical presence, generates a significant amount of revenue, and has a significant amount of employees working in another state, the business should register as a corporation in the state where it conducts its business. If you conduct a significant amount of business in a state other than California, you may want to register as a foreign corporation in that other state.

The Delaware Corporation “Buzz”

It is no surprise that more companies have incorporated in Delaware than in any other state.  The common misconception is that incorporating in Delaware offers a business added benefits not available in California.  The following information will show some of the drawbacks of incorporating in another state and explain why incorporating in California may be a better choice for your business.

Drawbacks When a California Business Incorporates in Another State

Extra fees – When a California business incorporates in another state, they incur double filing fees. A corporation is required to pay filing fees to the Secretary of State in which it is transacting business and pay the Secretary of State fees where it is incorporated. If a California business has incorporated in another state, they will still need to register as a foreign corporation in California.  In addition, a business will also incur the extra annual fees for a registered agent in the state of incorporation if they do not have a physical location there. These fees are typically several hundred dollars each year. Read more about the purpose of a registered agent in an earlier blog devoted to this important topic.

Extra Franchise Taxes – When a business incorporates in another state such as Delaware, the company will be required to pay annual franchise taxes in both states — the state they are actually doing business in such as California, and the state of incorporation. For example, if your company is located in California, but you incorporated in Delaware,  you will be required to pay California’s minimum $800 annual franchise tax as well as the annual franchise tax due for Delaware.

Extra Reporting Requirements -If you incorporate in another state, you will have two layers of reporting requirements and will need to comply with the reporting requirements for both states. For example, if you incorporated your company in Delaware, but are physically located in California,  your corporation would have to comply with the reporting requirements of both Delaware and California.

As you can see, it may not be advantageous for your California business to incorporate in another state.  You should make sure that the benefits of incorporating in another state outweigh the extra costs of merely being incorporated in California where your company is headquartered.

Tax Benefits of Incorporating in California

There are many benefits of incorporating in California. California corporation taxes are only 9%. A California corporation can elect S corporation status if certain requirements are met. S corporation status allows a business to be taxed similar to a partnership. In addition, California offers certain tax credits to corporations to encourage them to stay and grow in-state. For example, California corporations may be eligible to claim new employment hiring tax credits, California competes tax credits, or California research and development tax credits.  Corporations can also allow the owner-employee to maximize retirement savings through deferred compensation plans such as through a solo 401K Plan or other retirement vehicle.

Contact A People’s Choice for more information about how to incorporate your small business in California. We have helped several business owners incorporate. 

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By |2018-01-18T15:47:14+00:00November 24th, 2015|Business|0 Comments

About the Author:

Sandra M. McCarthy, founder of A People’s Choice Inc., has worked exclusively in the legal field since 1976. She served as the 2004-2005 President of CALDA (California Association of Legal Document Assistants). She obtained a Paralegal Certificate from the University of California, Santa Barbara. During her career in the legal field, she has worked as a freelance paralegal, law office manager and paralegal studies teacher, and has co-authored numerous legal publications and written hundreds of self-help legal articles. As a registered Legal Document Assistant, Sandy is dedicated to providing affordable, low-cost, self-help document preparation services for California consumers in all 58 counties.

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