Ram- Choice of entity and jurisdiction of organization largely depend, among other things,on whether the enterprise is selling or plans to sella product or service; whether the product is downloaded or delivered via its own trucks or intermodal transportation; whether the company engages in intrastate, multi-state orinternational sales; whether you will have employees in CA or other states/countries; where the company'semployees are domiciled; whether you will enter into joint ventures,or have a non-us person as an investor; and what the future holds for funding (theinvestor primarily determines the jurisdiction and form of ownership).
If the plan is to seek funding in the near term (pre-sales), I usually suggest the least expensive and simple initial organization with maximum flexibility because it can and will change when and if the money says it should.The investor will amend/rewrite the operating agreement or articles of incorporation to meet the terms of their deal.
Contrary to others' advice above, this is absolutely a tax issue. Both sales/use tax and income tax need to be analyzed based upon the company's business plan, not the current situation. Of course, when the company obtains sales, property and employees in a jurisdiction, the tax exposure will become material and apportionment formulas will apply. My advice: Do the planning now, because now is when you can make your own facts. Good luck.
Ram- It depends on all the facts. If you were opening a Ben & Jerry's, it's generally simple. However, I doubt your venture is that simple. I don't know what your selling, how it's delivered, whether there is strict liability associated with that deliverable, or any thing else about your enterprise, such as how many partners, are there service partners being compensated with equity? That is a huge issue that has tremendous tax implications. Is a partner creating or contributing IP, what is being exchanged for the IP, equity? I encourage you to engage a California attorney and share your business plan with her. I would be happy to spend a few minutes on the phone if you think it will help frame your issues a bit so you can have a meaningful conversation with a CA tax geek (lawyer).
Do it right. "You cannot build a great company on a flawed foundation." That's Peter Thiel's (PayPal) thought, not mine. His advice is better than anything I can post here of the top of my head. :) Email me privately if you wish to chat: firstname.lastname@example.org