Social networking website incorporating in CA

Asked by: Phoebe C.  — 2 August, 2011


I want to ask information about forming a company for social networking website, which provide users purchase virtual credits to exchange services (accept only paypal at the beginning).

I am foreigner but planning to setup small office in California in the future, will probably having other US LLC company corporate as shareholders (sharing profit), should I apply for inc. in California under this case?

Is there any suggestions or disadvantages for online business incorporate in CA?

Do we also need to apply Sales Tax Vendor ID Number for this kind of online business?

I will also need to apply for business bank account (to accept credit card online) and business card at once, do you have any suggestions?

Thanks for your time and help.

Answered by: admin  — 2 August, 2011

Dear Phoebe,

Let’s analyze your situation first and then get to some action plan for incorporation that would suit your business needs.

As a foreigner and especially since you will be adding entities as co-owners of the business the choices for business entities that you have are LLC (taxed as partnership) or C-Corporation. For all practical reasons LLC would work just fine, with the only exception – if your company will one day go for IPO (that is become publicly traded on any stock exchange) your entity type for that purpose would have to be C-Corporation.

That doesn’t mean having an LLC to begin and then changing the structure to Corporation would not work – as far as I know thats exactly what Amazon did, quoting wikipedia:

“Amazon [LLC] was incorporated in 1994, in the state of Washington…. In 1996, it was reincorporated in Delaware. Amazon issued its initial public offering of stock on May 15, 1997, trading under the NASDAQ stock exchange symbol AMZN…”

Since maintaining LLC is easier than maintaining a corporation, and since LLC is a pass-through entity while C-Corporation is taxed on corporate and then on shareholder level I would say you should opt for forming an LLC for your business.

Now lets talk about the state where you plan to organize your company. As you probably know California is a famous hub for online companies, however you would probably discover that very few of those companies are organized in California. Majority would be Delaware companies (especially those with Venture Capital investors as co-owners) for a variety of reasons. For example Delaware corporate law is very old and has plenty of cases regarding such matters as management/shareholder issues and mergers/acquisitions. Other reasons are the fact that Delaware makes it easier for out-of-state licensed attorneys to practice Delaware law. For more reasons why Delaware is often the choice you are welcome to read our article Incorporating in Delaware.

Another popular destination especially for online retailers is Wyoming (it used to be Nevada, but nowadays Nevada is less attractive than Wyoming or Delaware). Wyoming shares many advantages with Delaware, and it is in general cheaper to organize in Wyoming and to maintain your company there than in Delaware. For more information about Wyoming please read our Incorporating in Wyoming article. In my opinion any of those two states would work just fine in your case.

With all that being said, the day you open your office in California you will need to register your Delaware or Wyoming company in California as Foreign Entity (also called Foreign Qualification). But until you have actual physical presence in that (or any) state (or you plan to apply for any specific licensing) you don’t need to register there. Keep in mind that California has high maintenance cost ($800 annual franchise fee as an example), so only register there when you absolutely must.

As far as Sales Tax ID goes I don’t think you need one since you don’t sell any tangible goods in retail, and I don’t think any state has sales tax on the kind of product (virtual credits) that you do sell. However, since I am not 100% confident I understand exactly the type of exchange you will provide through your system, so I would recommend to consult an accountant once you begin operations, or if you like you can clarify the model and I will try to do my best to analyze it sales-tax-wise. In any case, just FYI, Delaware has no sales tax to begin with, but the whole topic of sales tax is pretty cumbersome.

Finally, bank account can be opened in any state, regardless of the state of organization. Most banks would require corporate/company statement that the company does not conduct any business in that state in order to open the account without local state registration. That means if you register in Wyoming or Delaware and then choose to open a bank account in California (or Bermuda) you would be able to do so without registering the company as Foreign Entity there.

To accept credit cards beside the company bank account you will also need to open a merchant account. To learn more what needs to be done to accept credit cards you are welcome to consult our Credit Card Processing article.

I hope this information helps you make the right decisions for your business.

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