California Incorporation - A Good Choice?

Considering California incorporation? If you do,

you
probably live in California or do business here. In previous years, "The Sunshine State" had somewhat of a bad reputation among business owners. This was largely due to the red tape and taxation it imposed on small businesses.

In fact, many small business owners voted with their feet; they packed their belongings and moved to other, more business-friendly states. However, it looks like the legislators eventually got the message. In recent years the state legislature have passed legizlation to encourage California incorporation.

Since January 1, 2000, small businesses that do a California incorporation or qualify to do business in the state do not have to pay the minumum Franchise tax for the first two years.

Now, a business that incorporate in California rather pays taxes on its taxable income for the first two years. Prior to this legislation, all corporations had to pay the minimum Franchise tax of $800. This was true, even if your corporation operated at a loss.

For example, say that you incorporate in California or qualify to do business in California after January 1, 2000 and your corporation operates at a loss during the first two years.

Under the old rules, you would still have to pay the minimum Franchise tax of $800 for each of the two years following California incorporation.

Under the new rules, your corporation owes no tax for the first two years. If the corporation is profitable during the first two years, it would pay taxes on its net income. The tax rate, as of 2003, is 8.84% for C Corporations and 1.5% for S Corporations.

So, under the current rules, you could save up to $1,600 during the first two years after you incorporate in California. Of course, in the years following the two years after incorporating in California, you will be subject to the greater of your corporate tax or minimum Franchise tax. Keep in mind that many corporations pay only the minimum tax. This is because owners of small corporations prefer to pay out wages or bonuses rather than having to be subject to corporate tax. This is probably legal, as long as the wages and bonuses paid out are considered reasonable by the IRS and the California Franchise Tax Board.

Still, there is really no way around the $800 minimum Franchise tax after the two first years after you incorporate in California.

For this reason, California Incorporation really doesn't make a lot of sense unless you live in the state and/or or do business here. There are other states, such as Nevada and Delaware, that do not impose a minimum tax on corporations.

However, California Incorporation makes complete sense if you live in California or do business her. Why? What about all the services touting the advantages of incorporating in Nevada or Delaware?

Before signing up for such services, you should carefully weigh the implications for your business. Go to the Calfornia State Business Portal and review their information.

You'll find that your corporation would still be subject to the minimum Franchise tax if it does business in the state.

Still, for certain start-ups, for example those considering to take their company public in the near future, there can be certain legal advantages of incorporating in another state.

For more information on whether California Incorporation is right for you, check out the following link:

It has more information on the benefits and drawbacks of incorporating in California:

California Incorporation with Mycorporation.com
If you are operating your business in California and are considering incorporation in another state, you should carefully review the information on the CA Business portal before making a descision:

Incorporate in California: CA State Business Portal
When you consider the taxes and filing requirements the California State imposes on any corporation doing business in California, you may conclude that incorporating in another state is more hazzle than what it is worth. However; make sure you do your research before making this important descision! Thanks for stopping by; I hope you found this information helpful.