Questions

Where to incorporate a new software as a service busines?

I started a website that is software as a service. Currently I am a solo founder, and have not incorporated the company yet. The website is now bringing in some revenue (about $360 in recurring subscription fees), and is growing slowly but surely. Each client pays $40 a month, and the goal is to increase the business to a $1,000/month, with the goal of $4,000/month in 6 months. I live in California and now I want to incorporate this business as an LLC. Any advice as to where?

5answers

I'll keep try to keep this answer brief, but there are several factors and nuances that can be discussed in more depth. Where you decide to incorporate partly depends on what your future goals are with your company. Companies that plan to seek venture capital or go public typically choose Delaware as the state of incorporation, and usually choose a C-Corp. Delaware has a very well developed body of law surrounding corporate governance and that provides comfort and more certainty to future VC investors. If you're not planning to seek VC money any time soon, an LLC is a smart decision because of the tax benefits it can provide to you as the owner.

It sounds like you want to grow your company on your own without outside financing. If that's the case, I would recommend forming your LLC in California. Regarding California vs. Delaware, one benefit to forming your LLC in California is that you can avoid paying a registered agent fee which can cost anywhere from $100-200 a year. If you plan to seek venture capital down the road, you can reincorporate in Delaware.


Answered 6 years ago

The structure of your company is the foundation of your entity or in other words - it’s really important! Thus, solely relying on generic answers found online can be the beginning to the end of your new business. Business lawyers will easily identify potential blindspots particular to your company. With that said, the best state in which to incorporate is usually your own state. Although Delaware is typically thought of as the default state to set up shop, that notion really only applies to startups which plan on going public or seek VC.

Delaware has a strong grip over the incorporation landscape and is often an automatic default for new entities (and lawyers hired to assist in making the decision). Delaware’s Chancery Courts specialize in corporate law and do not require a jury. Delaware also offers C-corps, which do not tax royalties and other intangible assets. Lastly, Delaware corporate law protects the privacy of shareholder and director identities, and provides flexibility that favors directors and minority stockholders - all of which makes Delaware very attractive to VCs and companies planning to go public.

On the other hand, Delaware requires you to maintain a registered agent with a physical address in Delaware, which can add some expense. All Delaware corporations are required to pay annual franchise taxes too. Furthermore, Delaware has mandatory annual reporting requirements, which you’ll need to file in addition to those in your home state or states where you are doing business.

If you’re not planning to raise or go public, California will likely provide you with the most advantages and favorable business treatment. Also, as Brian spoke to already, California requires you to pay them an annual fee for doing business in the state so you’ll be paying fees to two states every year if you decide to incorporate in a foreign state.

If you’d like additional guidance about where and how to incorporate your company, please feel free to take a look at LawTrades (www.lawtrades.com). Also feel free to message me directly with any questions or concerns you might have about the incorporation process.


Answered 4 years ago

(Disclaimer: The following is not tax or legal advice, and I am not your attorney or your CPA. Consult with your own professional counsel before making a decision.)

Unfortunately, California has an $800 "minimum franchise tax" fee that every LLC or corporation doing business in California must pay, regardless of where they are incorporated.

As far as the State of California is concerned, if any of an LLC's or corporation's owners live in the state, the company must be registered there and pay the $800 annual fee.

If you plan to move away from CA soon, it's probably worth it to file in someplace like Nevada, New Mexico, or Wyoming where filing fees are lower and out-of-state (or in the case of Nevada, also in-state) companies pay no state tax. My understanding is that companies incorporated in California must pay CA state tax even if the business's operations are elsewhere. If in doubt, ask your accountant or your attorney about this.

If you plan to continue living in California for the foreseeable future, you should probably form your company there instead of paying fees and/or taxes to two states. The one exception is if you are planning to take venture capital funding soon, in which case it may save you some money and hassle to form a Delaware corporation (but you will have to pay both Delaware and California filing fees and a Delaware registered agent).

If you aren't planning to take VC money soon, go ahead and form a California LLC. If you're near Sacramento, you can actually go to the Secretary of State's office and get the paperwork processed while-you-wait.

If I recall correctly, you'll need to file Articles of Incorporation and an initial List of Members. This will cost you several hundred dollars. If you are good with paperwork, just go online to the CA Secretary of State's website and get the necessary forms and file them yourself. If you're not good with paperwork and legal stuff, hire an attorney to do this for you.

Once your LLC paperwork is filed, you can apply online to the IRS for an EIN. With that and your LLC papers, you can get a business checking account.

When your LLC is formed, it defaults to "pass-through" tax treatment. Your LLC will not file a return with the IRS. The business's profit or loss will be reflected on your individual tax return Schedule C.

Talk to your accountant about whether (and when) you should elect S Corporation or C Corporation tax treatment for your LLC. When you're making a lot of money, this can save you thousands of dollars a year in taxes. Or it can cost you hundreds of dollars in unnecessary tax prep fees. So get some good advice and run the numbers.

Be aware that many municipalities have a local business license / tax scheme, and if you're operating your business out of your home you may need to get into compliance with this. Some cities will get tax data from the State for anyone in town who files IRS Schedule C and send them a hefty estimated tax bill if they aren't registered as a business.

Congrats on getting your SaaS business off the ground. I advise SaaS businesses on how to increase their sales and recurring revenue, so get in touch if you'd like any help with that.


Answered 6 years ago

You might want to incorporate soon for liability purposes.

You might consider "foreign qualifying" an LLC in california, as this can provide additional asset protection and privacy.

-i.e. your name won't be shown on the state register.

Popular states for this type of procedure include Wyoming, Delaware and Nevada.

Essentially you would register an LLC in Wyoming and then foreign qualify that LLC to do business in California and this could provide greater protection for very little extra cost.

This is not tax or legal advice.


Answered 6 years ago

A few folks are answering just the location question, but there's another issue here: Why do you want to form an LLC? Do you want to take on outside investors? Or do you just want to grow this for yourself? If you think there's any chance you may want outside capital at some point, an LLC is likely not the right choice; you're probably better off with a C Corp in Delaware.

If you want to keep this smaller: As to the California minimum $800 tax for LLCs, that is definitely a consideration. As long as your actual business is headquartered in California, it'll be tough for you to avoid that tax by trying to form an LLC elsewhere -- but perhaps a California-admitted attorney could give a more detailed answer.

(All usual disclaimers: this is not meant to be used as legal advice, and no attorney-client relationship has been created, etc.)


Answered 5 years ago

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