By Kent Burton

While certain state laws (especially Delaware) are generally more favorable to company organizers, especially where passive investors/shareholders are involved, oftentimes difficulties created with foreign incorporation outweigh the benefits. Some of the reasons for this are as follows:

1. If you are operating a corporate (or LLC) business in California (and California defines “operating” very broadly), the corporation or LLC is required to qualify in California and to pay its annual $800 franchise fee, as well as state taxes. As such, incorporating in another state usually requires you to comply with two different sets of state compliance laws, to file tax returns for each state and to pay additional annual fees.
2. For business matters arising in California, the California courts will generally apply California law, no matter where the corporation was formed.
3. For most relatively small corporations, California corporate and LLC laws with regard to creditors “piercing the corporate veil” to hold individuals liable are generally not terribly different from those of other states.

As such, while incorporating in another state can offer advantages in certain specific situations, especially for those doing business in many states and/or with a large number of shareholders, for most small corporations owned by California residents and doing business in California, incorporating in a different state is not advisable. For an analysis of your specific situation or general corporate or LLC needs, please feel free to contact our corporate attorneys at 310-376-9893.

Please Note: This document DOES NOT constitute legal advice. Please consult an attorney for legal advice on what to do in a particular situation.