Incorporation · S-corp

Incorporating in Delaware?

RAM SHARMA

January 25th, 2015

Can anyone advise if it makes sense to Incorp in Delaware while doing business in CA? I am not sure if there is any benefit while paying taxes in CA

John CPA Owner at Gillingham CPA

January 25th, 2015

Hi Ram,

Tech businesses that are a Delaware corp typically are structured that way for legal / business reasons - not tax reasons. C-corps and on top of that, doing business in two states legally or otherwise, is more cost. If you operate at all in CA, CA wants franchise tax - about $800 a year minimum, first year likely free. Then you also pay Delaware. I have heard attorneys advising to not register in CA even if you actually have business presence in the state, however, that is sketchy advice at best. 

Part of paying an attorney and CPA in this space is valuable - unless the company does not make it, like most don't. In that case all of this compliance stuff generally becomes a mute point. Of course this is not advice either, just some educational information to get you in a right direction. Depending on what you are trying to accomplish the Delaware C-Corp might be a poor decision.

Lay out your fact pattern, goals, funding, etc... then present to a few qualified people and go from there. Great to read up ahead of time. That will allow you to get the most value from your advisors. -John

Doug Bend Legal Counsel For Entrepreneurs @DougBend • Real Estate Broker @BLGProperties

January 25th, 2015

Hi Ram,

I am happy to chat with you more on the phone about your particular situation, but you might find this article I wrote on the top 10 Reasons To Incorporate In Delaware helpful.

Thanks,
Doug

Donald Katz Counsel and Advisor for Closely Held Businesses

January 28th, 2015

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.

Mark Tuttle co founder and CEO at Cryptografx Security Solutions

January 28th, 2015

as a follow up, if you are doing business in California, then California laws will be in effect.  For tax purposes, many people have their holding companies registered in Nevada...

Justin Savage Founder & CEO at EveryBill

January 29th, 2015

Here are my notes on what makes Delaware unique:
- Popular for Corporations because the case law does a lot to protect board members from personal liability.
- Court of Chancery (a business-specific court) means that Delaware is cheaper to litigate in and more predictable.
- Delaware is a good idea for single-member LLCs because personal bankruptcy or divorce wont push into the LLC. IE if you own an apartment building, have it in a Delaware LLC, and file for divorce, they don't count the building as an asset. You get the same LLC protections that you would get with a multiple member LLC, where the assets are protected due to the rights of the other members. That is not the case in many states and important if you have serious assets in the LLC (most people think about limited liability in the other direction, from company to personal).
- Most of all, they care a lot about customer service! They even have a $1k express service where you can have a Delaware corporation in **one hour**.

I use HBS as my registered agent for two LLCs and am very happy with them.

This is not legal advice, please consult a lawyer when it comes to state filing requirements, which may exist even if you file in Delaware. Also, if you go with an LLC, your operating agreement could be much more important than where you file, so focus on it if you have partners!

RAM SHARMA

January 25th, 2015

Hi Doug, nice information as per your article. We plan to use Harvard Business Services, Inc. as our Delaware Registered Agent and they charge $50/year fixed for life of business. 

If I have any questions, will call you.  Thanks again.

Mark Tuttle co founder and CEO at Cryptografx Security Solutions

January 28th, 2015

From personal experience.  Deleware has the most amount of c-corp cases tried and decided, this give a more reliable bases to predict legal outcomes, so Investors like this.  On the reverse side, my company was taken away from me with a reverse triangular merger, a legal way to get rid of dissenting share holders...  even with just barely a majority by the attackers...  so be careful...

RAM SHARMA

January 29th, 2015

Hi Don, business based on B2C, with initial launch in CA and if it works, then moving slowly to other states/cities.  
Any comment?

Donald Katz Counsel and Advisor for Closely Held Businesses

January 29th, 2015

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:  dkatz@donaldkatzlaw.com 

Jessica Alter Entrepreneur & Advisor

January 25th, 2015

There are already tons of discussions on this topic - good to do a search before you post. 
http://members.founderdating.com/discuss/topic/Incorporation