I am staring a business with someone and they prefer Delaware but I figure we could just go with California. Are there reasons why? Taxes? Etc? Thank you in advance!
First regardless of which state you form in, the entity will be on the hook to California for an $800 tax, regardless of income. If you form in Delaware (or any other state other than California), you will also have an added cost of maintaining a proof of service address in Delaware - a minimal cost, often around $100 per yet, but still an extra cost.
Delaware has a very long history of corporate case law - thus many corporate legal issues are settled law in Delaware. That may be a plus.
But, that body of corporate law largely benefits large corporations and not small corporations, like close corps. So if your planned business is going to be a small business, then I'm not sure Delaware is the best bet. Also, Delaware's history with newer business entities like LLC is pretty much on equal footing with most other states, including California.
Also if you to do form out of state, the laws of the state of formation may govern internal dynamics of your entity - to the extent any shareholder agreement, member agreement, or partnership agreement is silent.
But regardless of where you form, your entity will be subject to California laws in how the entity interacts with contacts external to the entity. So in your external business dealings of the entity you'll be subject to California's laws on business, tax, employment, torts, product liability, and the like.
Generally, you should form your business in the state where it is going to be doing business. Many people mistakenly believe that you can get around paying taxes if you register your business out of state. However, if you are doing business in CA, then you will have to register the business in CA and pay taxes in CA, regardless of whether or not the business is registered in DE or any other state.
A full consultation would be necessary to properly advise you.
If you have the actual business here in California (e.g. bank account, address) you would have to register your Delaware Corporation as a "foreign corporation" here in California anyway, eliminating any saving s (e.g. the $800 minimum fee) you think you are obtaining. Delaware generally is for companies planning on issuing shares on a stock exchange or who have other Delaware corporate benefit needs. 99.99% of companies are better off just filing here if that's where they are located.
I wouldn't suggest incorporating in Delaware for all the good reasons my colleagues mentioned. For a national company who has shareholders in various states, Delaware might be a good choice. But if all the shareholders are in California and it will do business in California, there's no advantage. California corporate law is also well defined.
If you are doing business in California, any corporation or LLC has to be licensed with the California Secretary of State. Regardless of whether it is a California-formed Corporation or a Delaware corporation, you will still have to file paperwork with the Secretary of State and pay the minimum $800 Business Tax.
If your business is focuses on California and you aren't doing business in Delaware, there's no real advantage to form a Delaware Corporation in those circumstances.
