Thursday, April 17, 2008

Why Incorporating Out of State Is Not Recommended

Setting up a corporation and being your own boss are only some of the rewards of having a business of your own. Aside from that, there is the practical reason of being financially independent while trying to cultivate your own skills in resourcefulness and being responsible.

In the article, “How to Incorporate and Start your Own California Corporation”, posted on March 23, 2007, the issues on how to start a corporation were sufficiently discussed.

The article enumerates the varied reasons and benefits one can derive from incorporating a business. In California, particularly, some of the common benefits of corporation establishment may include the following:

  • It protects your personal assets by having a separation of ownership
  • There could tax advantages available to you
  • It costs less to start a corporation in California ($100)
  • You can easily and professionally raise money through friends and family
  • For non-Californians, the annual franchise tax ($800) is waived for the first year

We all know what incorporation can do to a business, especially for starters and small businesses. However, incorporating a business outside of one’s state can do more harm than good.

Why is that so?

Not only is it impractical, but also incorporating out of one’s resident state can result in more taxes. And unless you are making out a profit of more than $100,000 a year, incorporating out of state will entail a great deal of expenses. For a starting business, this is not so good.

Added to this, you will have to pay for the franchise tax so that you can take your earnings back to your home state and save it there.

Nevertheless, establishing a corporation is a smart thing to do. Because lawsuits are always possible in business, the decision to incorporate is one’s guarantee of protection from it. Perhaps the best thing incorporation can do is protect your personal assets from legal threat so that no matter what happens to your business, your properties will remain secure. It can also help you find remedies in contract disputes and shield you from employee’s mistakes.