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Startup incorporation checklist

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Re: Startup incorporation checklist

#71

Post by swampthing »

gjkood wrote: post #62

Setting up a corporate entity (any kind) in California gives you a mandatory minimum $800/yr bill from the CA Franchise Tax Board. So if you are planning to incorporate in CA, be sure you are serious and don't mind an automatic $800 on the expense side without anything on the revenue side. Please correct me if I am wrong on this. Also, does anyone know why this is the case? I haven't seen this in a few other states w…

Yes, that's correct - although for corporations, you typically don't have to pay it for the first year (as long as you foreign qualify in CA for that year). So at least you get a small reprieve there :)

Re: Startup incorporation checklist

#72

Post by ryandrake »

_RPM wrote: post #67
ryandrake wrote: post #59

Earlier quoted context omitted.

It's worth pointing out that California imposes a MINIMUM tax of $800/yr on LLCs (even if you have zero revenue). This disincentives you from going and forming an LLC "just because".

This would for a corporation in Delaware.

The sub-title is: "How to bootstrap a Delaware C-corp (or S-corp) with employee(s) in California"

If you have a 'nexus' in California, you are subject to that tax. Ask me how I came to find that out :)

Re: Startup incorporation checklist

#73

Post by ryandrake »

_RPM wrote: post #70
ryandrake wrote: post #55

Earlier quoted context omitted.

Yes, please take this advice. It's worth noting that California imposes a MINIMUM tax of $800/yr on LLCs (even if you have zero revenue), which, if you're on a true shoestring budget or are only half-serious about the business, is significant. This effectively encourages you to not form a company in CA if it's only expected to produce a tiny amount of income.

The company would be started in Delaware, not CA.

See my other comment about having a 'nexus' in California (which is the topic here).

Re: Startup incorporation checklist

#74

Post by snerbles »

g10r wrote: post #17
_RPM wrote: post #11

If my company won't be making money or revenue for quite some time, what does that mean for me in terms of the IRS? Will we get penalized for NOT having revenue?

In the United States you will not be penalized for having no revenue.

You are effectively penalized in California for zero revenue, see all the comments in this thread about the $800/yr minimum tax.

Re: Startup incorporation checklist

#75

Post by optimuspaul »

archagon wrote: post #29

I've heard that for small businesses in California, incorporating in Delaware for tax reasons doesn't legally make a whole lot of sense because California will want to tax you anyway. Is that the case? If so, why are so many people still set on incorporating in Delaware?

Being that I'm not in California I can't think of any good reason to incorporate in Delaware. Many other states are just as friendly to corporations if not better.

Re: Startup incorporation checklist

#76

Post by curtisz »

gjkood wrote: post #69
curtisz wrote: post #66

Earlier quoted context omitted.

That California business AMT ("franchise tax" of $800 a year, even if your business earns $0, or negative dollars, even if your business is a nonprofit) is a small business assassination program. I moved to California unaware of it, and was unable to migrate my non-profit to help fellow combat veterans with civilian reintegration, because the AMT was around my operating budget for the year. That's not a lot, but I ca…

"small business assassination program"... Thank you. Thats exactly what I would classify it as. Drown the startup in a bathtub (using a bit of Grover Norquist rhetorical flourish there). I am just not bright enough to see what the upside of this fee is, especially in CA which I thought was a business/startup friendly state.

The "upside" of the fee is nothing more than feeding the voracious appetite of the state of California. The explanation for this AMT franchise tax literally uses the phrase "for the privilege of doing business in California". The state tax board knows what it's doing, and it doesn't care, because the truth is that loads of people want to start a business in California or run a business from within California as a resident, and have no other choice but to pay the AMT franchise tax (even if the business is incorporated in Nevada or Delaware, if most of the business occurs in the state of California, the tax man still cometh).

It is greed. Plain and simple.

Re: Startup incorporation checklist

#77

Post by gk1 »

_RPM wrote: post #70
ryandrake wrote: post #55

Earlier quoted context omitted.

Yes, please take this advice. It's worth noting that California imposes a MINIMUM tax of $800/yr on LLCs (even if you have zero revenue), which, if you're on a true shoestring budget or are only half-serious about the business, is significant. This effectively encourages you to not form a company in CA if it's only expected to produce a tiny amount of income.

The company would be started in Delaware, not CA.

It doesn't matter where the company is incorporated, you will have to register it as a foreign entity in your state (in this case, CA).

Take the time to read about this before doing anything. One impulsive action could lead to thousands of dollars in annual fees and even more in filing costs (accountants, lawyers).

Re: Startup incorporation checklist

#78

Post by hberg »

_RPM wrote: post #49
hberg wrote: post #44

Earlier quoted context omitted.

Yes, agreed. No need to incorporate just to get together and hack on a project. That said, I would certainly consider (at the very least) signing an agreement with your hacking buddy before launching anything that might generate revenue. I've seen and heard multiple co-founder friendships fall apart once things started to get "real". Good luck!

I want legal agreements in place before I start writing code with a non technical co founder. We've agreed upon a 50/50 equity split.

One reason to incorporate as a C or S-corp is that it's easy to add 4-year vesting to founder shares. This protects you if your co-founder walks away after 6 months. It's much harder (if it's even possible) to vest "shares" in an LLC.

In your case of a 50/50 split, make sure your agreements also have a clause that deals with disagreements. IT's likely you'll come to a point in your business where you do not agree and 50/50 ownership can make your business stall. Codify how those disagreements are solved before you get there.

Re: Startup incorporation checklist

#79

Post by jahewson »

archagon wrote: post #29

I've heard that for small businesses in California, incorporating in Delaware for tax reasons doesn't legally make a whole lot of sense because California will want to tax you anyway. Is that the case? If so, why are so many people still set on incorporating in Delaware?

If you reside in or sell to California then yes, California will tax you. $800 a year plus a share of California-derived income.

The reason to incorporate in Delaware is if you want to sell your business or to get investors - this is the standard investment vehicle in the US.

Re: Startup incorporation checklist

#80

Post by swampthing »

hberg wrote: post #46
ErikAugust wrote: post #19

How about shutting down a company? Anyone have any tips on that?

That'd be a great list! I guess this depends on multiple factors like how many employees you have, how many investors, etc. I've heard that for pre-funded DE corporations you can basically ask your registered agent to formally "resign" as your agent and then the corporation is orphaned. The proper way involves filing paperwork to dissolve the entity along with paying some filing fees.

That might work with some registered agents, but it won't with Incorp - they will require you to either have a new registered agent in place, or you need to dissolve your company.
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