There are many things to consider when forming a corporation.  One is where to incorporate the business.

If the business in located in California and is doing business in California, here are some of the reasons why the business should incorporate in California rather than another state:

  1. If the business incorporates in another state, but does business in California, California requires the business to qualify as a foreign corporation in order to do business in California.  As a result, the business ends up paying filing fees in California and in the state the business was incorporated.  To avoid duplication of filing fees, the business should form a California corporation. (Corp Code 2105)
  2. State Taxes: An out-of-state corporation, doing business in California, will have to pay a franchise tax to the State of California (Rev. & Tax. Code. § 23151). The state of incorporation may also require fees, subjecting the business to taxation by two states.
  3. Lawsuits.  If an out of state corporation is doing business in California and has not qualified to do business in California with the secretary of state, it cannot prosecute or defend a lawsuit.  The only way to prosecute or defend a lawsuit if the business has not qualified is to get qualified and file tax returns for all those years you have been doing business in California.