A great small business always starts out as an idea, but you have to transform that idea into action. That is where many individuals can start to feel overwhelmed and why business incorporation may be a necessary next step.
For instance, entrepreneurs often ask whether they should be incorporating in California or if they are better protected by incorporating in Delaware or some other jurisdiction. Their concerns are often focused on taxes, limitations on personal liability and governance of the corporation.
First, you are not likely to save any money in taxes by incorporating in another state (other than your home state). If your business makes money from operations in your home state, you still must pay your own state’s income taxes on this income.
Second, while incorporation fees may be lower in Delaware than they are in your home state, you will have to qualify to do business in your state in addition to incorporating in Delaware. This process takes as much time and costs as much money as filing incorporation papers in your own state. And you would also need to appoint a corporate agent to receive official notices in the other state — another cost you would have to bear.
However, the one major significant benefit to being incorporated in Delaware is that Delaware has a highly-developed body of corporate law. The Delaware General Corporation Law is considered to be well-designed and flexible. In addition, Delaware has established its own court system (called the Court of Chancery), which only hears corporate cases and is considered to be highly sophisticated and efficient. As a result of the depth of Delaware’s body of corporate law decisions, boards of directors are able to better predict and understand their fiduciary duties to shareholders. Delaware also has a reputation of being “management friendly” when it comes to disputes between owners and the company’s management, though whether this is actually true is subject to some debate.
One category of small business that should consider incorporating in Delaware is those businesses that anticipate unusually fast upward trajectories in their growth.
However, for most small businesses, you will probably be better served to stay where you are and incorporate in your home state.
If you are considering business incorporation as a nex step in California and need legal advice to limit your liabilities, please contact JV LAW GROUP at 714-752-3270 or via email info@jvlawgroup.com.
