Should You Incorporate Your New Business In California Or Another State?

By April 8, 2015Blog

If you are starting a new business venture, it is likely you are going to incorporate as an LLC, corporation, or some type of partnership. It’s important that you understand why incorporation is crucial to starting a new business and generally advisable for all types of business ventures.

One of the first questions that arise is, “Which is the ‘best state’ to incorporate my new business entity?” Unfortunately, there is no such thing as the “best state.” Generally speaking, if your business is going to be located in California, it should be incorporated in California. There are reasons for this. While states like Nevada, Wyoming, and Delaware may offer tax and privacy advantages, if you are doing business in California you will have to register your business entity in California—regardless of which state you incorporate in. Thus, if you are located in California or doing business in California, you will have to pay all the filing fees and taxes associated with California—as well as the filing fees, registration fees, and any other applicable fees that are required by the state in which your business was incorporated. Consequently, as corporate and business attorneys practicing throughout the state of California, we at Beverly Hills Law Corp., PC advise our clients that it is in their best interest to incorporate in California if they are based and doing business here.

The next question you may have is, “What constitutes ’doing business’ in California?” California law defines it as follows:

  • If the business engages in any transaction in California for the purpose of financial gain or profit.
  • If the business is incorporated or organized in California.
  • If the business has qualified or registered to do business in California.
  • If the business is “doing business” in California, whether or not it is incorporated, organized, qualified or registered under California law.

Under the Franchise Tax Board’s regulations, “doing business” in California occurs when your business entity:

  • Has a member of an LLC that does business in California.
  • Has a general partner in a partnership that does business in California.
  • Has any of the LLC’s or corporation’s members, managers, shareholders or officers or other agents conducting business in California on behalf of the LLC or corporation.

Regarding a LLC, it is “doing business” in California if:

  • The LLC is commercially domiciled in California (i.e., California is the place where realistic control of the LLC’s functions is centered).
  • Sales, including sales by the LLC’s agents and independent contractors, in California exceed the lesser of $500,000 or 25% of the LLC’s total sales.
  • Real or tangible property of the LLC in California exceeds the lesser of $50,000 or 25% of the LLC’s total real and tangible property.
  • The amount paid in California by the LLC for compensation exceeds the lesser of $50,000 or 25% of the total compensation paid by the LLC.

If you are a “foreign business entity” (an out-of-state business entity) not registered in California but doing business in California, it is imperative that you register in California. Failure to do so can lead to the imposition of penalties, fines, back taxes, and registration fees.

We can help you register your business entity, answer any questions you may have about the incorporation or registration process, assist you with filing your corporate paperwork, or help you deal with the Franchise Tax Board and Secretary of State. Contact us today for a free consultation with your business or corporate legal matters. As business owners in our own right, we pride ourselves in representing small business owners throughout Los Angeles, Beverly Hills, Santa Monica, Pasadena, Glendale, West Hollywood—and the rest of California.