California Incorporation - Look Out For the High Franchise Tax

By: Gust A. Lenglet

California incorporation is simple on its face while being complex once you get into it; however, affordable online California incorporation is only a step away. When starting a new business, there are many important decisions to make and many rules and procedures that must be addressed. While there is no single source for all filing requirements, the following steps have been developed to assist you in starting your business using California incorporation.

Choose a business structure. Select a business entity type after an overview of the principal types of legal business structures available in California with your legal representative and accountant.

For a California incorporation, you should be aware of the following facts:

• The annual tax for C corporations is the greater of 8.84% of the corporation's net income or $800.00.Newly incorporated or qualified corporations are exempt from the annual minimum franchise tax for their first year of business. Every stock corporation must file a Statement of Information within 90 days of filing, and every year thereafter.

• Except for newly incorporated or qualified corporations, all corporations doing business in California are subject to an annual minimum franchise tax of $800.00. This is true even if the corporation is inactive or operates at a loss during the year, and regardless of whether or not it did business for a full 12 months.

California may require that you obtain a business license and pay a licensing fee based on your business type or profession. Please check with the state to make sure your business is complying with the license requirements for your particular profession.

If you perform a California incorporation and do business in another state, you could subject your business to taxation in both states. California will tax a corporation that exists in their state, even if it is not doing business there. Check this out carefully, and discuss with your attorney and/or accountant.

Generally speaking, it is usually less expensive and complicated to do a California incorporation, if that is your resident state. You should avoid paying franchise taxes to more than one state unless there is a very good reason for doing so.

California has made an attempt to be more corporate friendly with an informative web site, and detailed business information available online. However, the Secretary of State office is strict about having entities register in California with any intrastate business conducted elsewhere. They do not want to lose the revenue. Although the initial filing fee is reasonable, look out for the high $800.00 minimum annual tax on a California incorporation. 

 Gust A. Lenglet is an accountant and financial advisor for many years. He is President and CEO of HBS Financial Group, Ltd. and offers online tax filing as well as income tax articles and information.