For various reasons, many founders decide to incorporate in Delaware even if their principle place of business will be California. This is legal and commonplace, but there are some legal and practical points that the founders will consider.
Registered Agent. All Delaware corporations need to have a registered agent within the State of Delaware. If you are going to incorporate in Delaware, but are not located in Delaware, you’ll need a registered agent. There are companies set up for this purpose and their fees range from $50 to $100 or more a year.
Qualification to do business. Upon the formation of the Delaware corporation, the founders will have the corporation resolve to qualify the company to do business in other states. Usually, this is done by Board resolution at the first meeting of the Board of Directors, or in the written consent in lieu of a meeting.
Conducting intrastate business in California will trigger franchise taxes in both states. Before a corporation may transact intrastate business in California, it must first qualify/register with the California Secretary of State. This is done by filing a Statement and Designation by Foreign Corporation. California Corporations Code section 191 defines “transacting intrastate business” as entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce.
Registering the corporation as a foreign business in California will trigger the minimum franchise tax of $800/year beginning after the first year (although regular franchise taxes still apply even if the minimum franchise tax is not imposed). The filing fee for the Statement is $100 and $50 for a Certificate of Good Standing from Delaware (which is required to file the Statement and Designation). The Delaware corporation will be subject to the franchise taxes in Delaware and California after filing the Statement.
California Bank Accounts and Employees: Many banks will not allow you start a bank account for your company in California using a California address if the CA Secretary of State has not issued an entity number (by filing the Statement and Designation by Foreign Corporation). There are some banks that do. You’ll also need to have registered the foreign corporation in order to have employees in California.
If you are starting a business in California and want to read more about Seller’s permit, take a look here.
This blog does not constitute legal advice and does not establish an attorney-client relationship. If you need legal advice, please contact a lawyer directly.