Incorporation Myths

Incorporation Myths

I can do this myself

Individuals sometimes take the do-it-yourself approach when forming a corporation or LLC. Their process is somewhat facilitated by the “do-it-yourself” books and forms that are available at the local bookstore. Unfortunately, these individuals fail to realize that there is much more to forming a corporation or LLC than completing sample “fill-in-the-blank” forms.

If you don’t know what you are doing, you may set up the company incorrectly, and the consequences may prove costly later. The following are just a few of the common mistake that are average “do-it-yourselfer” makes when attempting to form a corporation:

  • Failing to properly prepare Articles of Incorporation (for example, failing to include optional clauses to protect Directors from liability);
  • Omitting or failing to properly prepare bylaws (this especially applies to professional corporations which require very particular language in their bylaws);
  • Omitting organizational minutes;
  • Failing to prepare shareholder agreements;
  • Failing to prepare and issue stock certificates ;
  • Authorizing too few shares (or issuing all authorized shares) which may later require an amendment of the Articles of Incorporation if more shareholders need to be added;
  • Failing to file notice regarding the issuance of stock with the Department of Corporations.
  • Failing to file the corporate Statement of Information with the Secretary of State.
  • Failing to file a timely Subchapter “S” election with the IRS; and
  • Failing to obtain tax identification numbers.


Neglecting a single one of these requirements can result in monetary penalties and/or suspension of a corporation’s rights and privileges, even automatic termination of a corporation. Additionally, neglect of such requirements can bolster a corporate creditor’s claim that the corporation was not properly formed and that the shareholders should be held personally liable for the debts and obligations of the corporation.

We wouldn’t recommend someone requiring medical assistance go to the local medical supply center, buy a scalpel and perform their surgery. We also do not recommend that someone attempt to form their own corporation or LLC.

Protect yourself. Left the professionals at LawInc form you corporation or LLC… the right way.

Nevada and Delaware corporations are better.

Clients often raise the issue of incorporating in states such as Nevada and Delaware. Incorporating our of state is often not a good idea for small business owners given the additional financial costs that will be incurred by doing so.

Millions of companies regularly conduct business in the State of California. If you have a business nexus in California then you are part of its tax system. The following questions can be used to determine whether or not you are or will be a part of the California tax system and whether a California corporation of LLC is right for you:

  • Do you live in California?
  • Do you have a business work in California?
  • Do you or your employees work in California?
  • Do you own real state in California?

If you answered “yes” to any of those questions then you are or will be part of California tax system. This means that you must pay taxes in California, even if your corporation is another state such as Nevada or Delaware. Incorporating in another state with apparent lower corporate income tax is not likely to save you much money. If your business is making money from business conducted in California, even if incorporated in another state, you must still pay California taxes on the income. That is, you would be paying taxes in two states, potentially doubling you tax bill.

Additionally, a corporation that incorporates in Nevada or Delaware must separately qualify to do business in California. This process takes as much time and can cost as much money as originally forming a corporate agent to receive official notices in the other state — another cost you would have to bear. Finally, you would also have to pay annual registration fees, franchise taxes and gross receipt taxes (which can easily reach into the thousands) in two different states.

In conclusion, if your business is based in California, you likely are not going to save many money by setting up an out-of-state entity. In fact, it will likely cost you much more than setting up an a corporation or LLC in California.