One of the most important decisions Idaho and California startups can make early on is determining what sort of legal form they will choose to be. There are general structures in which startups and other business can form, each with their own advantages and disadvantages. The structure that startups choose will dictate the way in which the entity is ran, taxed, and how profits can be realized.
Sole Proprietorships: This type of business is operated by a single individual. There is no legal distinction between the owner and the business, and the owner is liable for all the debts and obligations of the business.
General Partnership: This type of startup is operated by two or more individuals. Partners are liable for the debts and obligations that the partnership takes on.
Corporation: Corporations are considered a separate legal entity from their owners. Owners of corporations are generally free from the liabilities of the corporation. Corporations generally experience an extra level of taxation in which the corporation is taxed and then the shareholders are taxed on their profits. Corporations are run by a board of directors. The most common types of corporations are S and C corps. S-corps are limited to one hundred shareholders and are only able to issue one class of stock. C-corps provide the best avenue for companies to expand and grow. They are allowed to issue many different classes of stock and can use this to fund and grow the start-up.
The Idaho and California attorneys at Fisher Hudson Shallat advise startup clients that the C-corporation is the best legal business form to choose. It allows the startup to attract investors and allows for multiple classes of stock to be issued. Corporations provide limited liability for founders and promoters and provides a well understood and secure structure.
After choosing to form as a C-corporation, the startup must choose which state they will incorporate in. The Idaho and California attorneys at Fisher Hudson Shallat advise both their California and Idaho startups to incorporate as a C-corp in Delaware.
Why would we advise startups to incorporate in a state that they are not located in?
Delaware has developed tax, regulatory laws, and court systems that are very favorable and advantageous to corporations. Further the laws and court systems of Delaware are familiar with many investors and investor groups, and they will likely want the startups that they are seeking to invest in to be taking advantage of the favorable laws of the state.
There are some important steps that California startups will need to follow in order to operate a Delaware corporation within California. First, the startup must file a Statement of Designation by a Foreign Company with the California Secretary of State. The startup will also have to pay a minimum of eight hundred dollars in California state taxes. The startup must also appoint a registered agent in Delaware. This typically costs around fifty dollars a year. Finally, the startup my file an annual report in Delaware and pay a Delaware franchise tax. The minimum franchise tax is one hundred and seventy-five dollars.
At Fisher Hudson Shallat, our California and Idaho attorneys are well versed in helping startups choose the business entity that is right for them. We have extensive knowledge of Delaware corporation and can help you through each step in incorporating your startup in Delaware.