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Incorporating in CA or NV or anywhere

Rick Bigelow's Profile

Proformative Members,

I am starting a distributorship of green goods and service provider of such goods. The initial target area is CA and NV, but will be nationwide within a year.  The headquarters will be in CA.  I am partnering with two other people with investment from several sources.  The initial thought is to incorporate as a C Corp in CA, but I wanted to know peoples pros and cons.

Thank you in advance.

Rick

Answers

Jeff Taylor
Title: CFO
Company: Communications Co.
(CFO, Communications Co.) |

I'm no lawyer, but here's what I know from my counsel in many past discussions.

Delaware has very corporation-friendly laws and legal infrastructure. That is why most big U.S. companies are incorporated there. Although, according to a very recent conversation with counsel on the very topic, he said CA is right up there with Delaware on corporate "friendliness" (read: protections under state laws and in their courts).

Having done some CA to DE transitions of going concerns I can tell you that DE is more expensive in general as it tends to have more required filings and they charge some fees based on your equity base and number of shares. When you do the math it typically ends up costing the company more.

But, as with any question like this, check with counsel b/c the laws are constantly changing, especially now that the states are in such dire financial straits.

Hillari Selby
Title: Internal Recruiter
Company: Gemological Institute of America
LinkedIn Profile
(Internal Recruiter, Gemological Institute of America) |

Sorry to hijack your post, Rick, but I am very interested in this post...going through a similar situation....We distribute and are a service provider of audio/visual and home automation products. We are just 3 people and strapped for cash...we did an LLC in DE 2 years ago, but I am new to the company and am wondering if I should switch it to CA because we really only have operations in CA right now and I don’t want to have to pay double taxes for both states...(do I?)... We are not a corporation, we are an LLC, so maybe this is different, but I recently got us a reseller’s license in CA and have to pay quarterly taxes for that in CA, so do I now also have to pay them in DE? I am stressed that I am missing something I have to do with being legally attached to DE. So, out of simplicity AND potential cost savings, want to cancel the DE LLC and open on e in CA...does anyone know if this makes sense?

Jeff Taylor
Title: CFO
Company: Communications Co.
(CFO, Communications Co.) |

You certainly don't have to pay double taxes. You should only pay state taxes in the jurisdictions in which you have nexus and you would either not have to pay any other state income tax on those earnings or you may have to pay the difference between what your nexus state and your incorporated state levy in taxes if your incorporated state has a higher rate. But all that said, you should be able to determine your optimum move with a one hour meeting with a decent tax adviser. Don't leave something like this to chance.

Hillari Selby
Title: Internal Recruiter
Company: Gemological Institute of America
LinkedIn Profile
(Internal Recruiter, Gemological Institute of America) |

thanks. Appreciate the reply, but actually you do have to pay taxes in the states you do business in, many websites state this. See the bottom in the COMMENT SECTION of this posting for one of many references to this issue: http://thestartuplawyer.com/incorporation/top-5-reasons-to-incorporate-in-delaware

Jeff Taylor
Title: CFO
Company: Communications Co.
(CFO, Communications Co.) |

Sorry, I thought you meant income tax, but you were talking about franchise tax. If you make income, the franchise tax becomes a tiny issue, but yes, you do have to pay a minimum franchise tax in most jurisdictions in which you have nexus.

Tony Verdino
Title: Tax Projects
Company: Interim Tax Management
(Tax Projects, Interim Tax Management) |

Suggest you keep it simple for now as your firm is based only in CA. No additional resellers tax concerns in DE. Confired that DE is preferred State of Incorporation or LLC form but mainly for national tax and international planning which include business activities in multi-state jurisdictions.
Unfortunately, CA is the highest taxing State to do business in. One idea if not too distant is Nevada? Good tax climate and access to CA markets from which to base inventories etc.
Good luck
Tony

Topic Expert
Paul Benedetto
Title: CFO, Director of Finance, Consultant
Company: Nextwave Software, Rethink Fabrics
(CFO, Director of Finance, Consultant, Nextwave Software, Rethink Fabrics) |

As a follow up to this thread and applicable comments that are all valid; I emphasize to focus on the "Nexus" issue. Any jurisdiction where you have either a physical presence (e.g. office), employees (either living, working, or traveling to for jobs), or some other kind of lease (e.g. storage units in the name of a company); is going to look for their fair share of tax revenue from you. These taxes can be income tax, franchise, sales and use, payroll, property, etc. That's the general gist, but you can do research for more details and nuances that a particular state may have on Nexus definition. Once you have established nexus, the next step is to register the company in that state/jurisdiction, then pay tax. If not in your home state, then you will be registering as a "foreign corporation" in the other areas. Same general process and you give them a copy of your "certificate of existance" from home state, pay them a few bucks, etc.

To avoid the "double taxation" issue, you will want to "apportion" your revenue or income, depending on each state's or local jurisdictional requirements. Sometimes the approach formula should be based on your expenses (categorizing your costs by location, then applying the ratio to your revenue).

I will be first to say that dealing with this is not the funnest thing to be doing, and sometimes the government gets very agressive on the issue. Do not take their assessments as "gospel", as their first take is say 100% of your business is in their state... It should instead be a negotiation, after you lay out the facts. If they see the process, they normally take such reasoning and are happy. Just be sure that your approach is reasonable and follows most of their state requirements. If you do, then you will pay each jurisdiction their fair share and nothing more. If you need some points when the time comes (anyone) feel free to reach out via my e-mail. I've been working with a number of companies over the years with intra/interstate/international operations and have dealt with this issue frequently and at times have even gone head to head using additional legal representation to force agreement, as well as refunds on prior reported taxes. Thanks. -Paul

Topic Expert
Randy Miller
Title: Partner
Company: CFO Edge
(Partner, CFO Edge) |

Paul is right on regarding the "Nexus" issue. If your operations are only in CA than you are probably best off incorporating in CA rather than NV or DE. CA is going to tax you on all your operations within the state, regardless of where you are incorporated. I went through the same issues awhile back and we determined that becuase our warehouses, most of our sales and our headquarters were in CA, there was not a lot of point in moving the incorporation to another state.

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