Are you considering incorporating your business on your own?
Have you been enticed by slick advertisements urging you to incorporate in Nevada and avoid corporate income tax?
If the answer to either of these questions is “yes,” please read the following article before you do anything further.
Despite the persuasive come-ons you may have read in newspapers and magazines, heard on the radio or seen on TV, the truth is that incorporating your business on your own over the Internet or incorporating your business in Nevada in order to “legally” avoid corporate income tax could actually wind up costing you more money in the long run than if you used an experienced corporate attorney to incorporate your business. As with most things, if it sounds too good to be true, it usually is.
While Internet incorporation services and CD-ROM legal software can provide basic incorporation documents for filing with the California of Nevada Secretary of State for up to just a few hundred dollars, the forms provided are often outdated and do not establish the corporation with an appropriate authorized capital structure, desired stock ownership or proper appointment of management. For example, such services and software do not provide guidance or strategy as to how much stock to issue, the appropriate consideration to be contributed by the founder(s) for such stock or how much stock should be reserved for future issuances (without requiring additional amendments to the corporation’s charter documents).
In addition, while most individuals that incorporate a business using an on-line incorporation service or store-bought legal forms successfully file Articles of Incorporation with the Secretary of State, filing the Articles of Incorporation alone does not effectuate the legal transfer of business assets to the corporation or properly establish the stockholders and management of the corporation. The confusing and often inadequate “fill in the blank” forms provided by such services or do-it-yourself legal software do not typically include advice or documentation to accomplish these necessary steps in order to properly complete incorporation. Consequently, business owners who incorporate their on their own without using an experienced corporate attorney often conduct business for many years without having implemented the proper structure and legal authorizations required under California law and without having properly established the ownership and/or management of the corporation – and are later unpleasantly surprised to find out that ownership and management of the corporation are uncertain due to the many changes in the company that have occurred over time.
In some cases due to such initial failure to complete the incorporation process, business owners may no longer have majority ownership or management control over the business they founded, may have never properly authorized important business transactions, or may never have properly conveyed valid legal control of existing contracts and other business assets and property (including intellectual property) to the corporation. Failure to properly complete the incorporation process upon inception can later cost a business owner thousands of dollars when the ownership structure and management must be sorted out by a competent corporate attorney, or worse, litigated – often at a crucial time for the corporation.
Although incorporating in Nevada may avoid Nevada corporate income tax (since there is no state income tax in Nevada), if the corporation maintains a business office in California or the majority of its assets or personnel are located in California, the corporation will still be subject to California state corporate income tax. In fact, the corporation is legally required to qualify to do business in California in such case, a process requiring additional filings to be made and fees to be paid.
Promoters of Nevada incorporation services also tout the secrecy of Nevada corporate records as compared to California corporate records. This claim is simply not true. The Articles of Incorporation and annual (or bi-annual, in the case of California) statement of officers required to be filed in both Nevada and California, which provides the identities of the corporate officers and directors and the location of principal business offices of the corporation, are recorded documents that are available for inspection by the general public (including via the Internet).
Consequently, a Nevada corporation doing business in California will actually incur additional costs in qualifying to do business in California, maintaining a resident agent in Nevada and filing annual Nevada corporate maintenance forms. In order to avoid these additional costs after incorporation in Nevada, a California-based Nevada corporation would need to either dissolve and transfer its assets to a newly formed or already existing California corporation or merge into a newly formed or already existing California corporation, a process that can cost up to several thousand dollars in legal fees and costs to complete – all of which could have been avoided by simply incorporating in California in the first place.
On-line incorporation services or do-it-yourself legal software simply cannot provide the level of foresight, business counseling and legal documentation necessary to completely and properly incorporate a business, nor can they provide legal advice and appropriate documentation regarding employment and other labor matters, stock option plans, intellectual property protection and other common business matters that involve important legal considerations. Using experienced corporate counsel to establish your corporation in California - often for just several hundred dollars more than the cost of using an on-line incorporation service - can avoid the many pitfalls and misfortunes that can confront a business that has been improperly or inadequately incorporated.