Are there any downsides of incorporating in Delaware when physically in California?

There are no downsides but no ascertainable benefits. Paying the CA State tax is a function of registering your foreign entity in CA which probably would be required. It appears to just double the paperwork.

Yes. If the business is operating here in California, then it must be registered with the California Secretary of State's (SOS) office. See this link to the FAQ page of the SOS website: http://www.ss.ca.gov/business-programs/business-entities/faqs Therefore, to be formed in Delaware or elsewhere will not be particularly useful to you. Suggestion: consult with a business attorney who can review the matter with you.

Congratulations on your new business! Before I address your question, I think its important to emphasize that the question of where you should incorporate requires an in depth analysis of your business's unique circumstances and providing an answer that addresses your businesses unique needs is beyond the scope of this response. Generally, incorporation in Delaware does provide certain advantages such as the flexibility of Delaware's laws governing corporations, well-developed corporate case law, and its Secretary of State's office is very customer friendly. Many businesses that anticipate going public choose to incorporate in Delaware. That being said, if your business incorporates in Delaware, it must still "qualify" with the California Secretary of State if it will conduct business in California. Since you will be initially operating your business out of your home in California, your corporation will most likely have to qualify in California. Probably of greater consequence to you is that if you incorporate in Delaware, in addition to paying the Delaware franchise tax, your corporation will also be subject to the California franchise tax on income from business done in California. For these tax reasons, many small and medium size businesses choose to incorporate in California. As I stated before, there is no "one size fits all" answer for determining where to incorporate your business. You should discuss this matter with counsel to determine the best choice for your business. I hope this helps and good luck!

I wrote an article on the top four drawbacks to incorporating in Delaware that you can view at the link below. Thanks, Doug

The downside is that you will need to register the DE corporation in CA because it is doing business here. This means that up-front and every year thereafter, you will be paying two states (and filing two states' paperwork) for the corporation. Please see the post at the link provided below.