Sometimes the owner of a business in California believes that forming a business entity (such as a corporation or limited liability company) to do business in California is best done under Delaware law or Nevada law. While this may at times be a good idea, more often it is a misguided notion, brought about by claims that the law of another state is more favorable than California’s or that greater privacy is afforded the business by forming under the law of another state. In most cases, there is no benefit at all in forming a business entity out-of-state, but there is a definite cost, which is often overlooked.
When an LLC is formed under the law of another state, it is referred to as a “foreign LLC.” Thus, in California, an LLC formed under Delaware law or Nevada law is considered to be a foreign LLC. And a corporation formed under Delaware law or Nevada law is considered to be a “foreign corporation” in California.
When a out-of-state business entity does business in California, it must register with the Secretary of State and file tax returns with the Franchise Tax Board. The foreign business entity must pay the $800 minimum tax without regard to whether it has any net income in California.
So forming an LLC or corporation under the law of another state to do business in California automatically increases the costs because the business entity must comply with both the reporting and tax regime of the other state as well as California’s. But there are times when choosing another state in which to form the business entity would be advisable.
Rather than picking a state to incorporate in (or to set up an LLC) based on cocktail-party chatter, a founder or entrepreneur would be well-served to make that choice based on competent legal advice. As part of the service of organizing a corporation or forming an LLC, I provide clients with advice on the choice of jurisdiction in which to form the business entity.
If you need assistance with arbitration, buy-sell agreements, or outside general counsel, contact Attorney Richard Burt. Serving San Jose, CA and all of the San Francisco Bay area, Mr. Burt can be reached at (408) 286-7333 or by filling out the online contact form.