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Ask HN: Should I incorporate as an S-Corp in California?
I recently quit my day job in preparations to launch a start up.
Aside from the income I made at my job during this fiscal year, I generated a considerable income from a few cryptocurrency investments I made in the past year. Consequently I have enough capital to start up, but also have a hefty tax bill coming up. To avoid this I am thinking of incorporating as either an S-Corp or sole proprietorship, so that I can deduct my taxes as a part of the capital investment I make in the start up.
I can either incorporate in Delaware or in California (where I currently reside). I've read that if your company is to do any form of business in California (or any other state for that matter) you would have to incorporate in (that state) California. This would be double the work if you incorporate in Delaware to begin with.
My idea is in the gig economy space (think something like Instacart), where I plan to launch exclusively in San Francisco to test the idea/MVP. Given this I would presume that the best path for a start up like mine (i.e operating with independent contractors in California) would be to register an S-Corp or sole proprietorship in the state of California.
Are my assumptions here correct? Or is there something I'm completely overlooking?
Thanks for taking the time to read till here.
- brudgers 9y agoI recommend speaking with an accountant familiar with these matters. I am not one. Generally an S-corp is a pass through entity (LLC's are similar). This means that profits (both cash and increases in the book value of the company) are not taxed at the corporate level and instead distributed to the the shareholders (either in cash or as the increased value of their shares). Because LLC's provide greater flexibility in terms of salaries and operating procedures, they are generally more common than S-corps for new businesses. The difference between an S-corp and a C-corp (usually incorporated in Delaware) is that profits are taxed at the corporate level rather than being passed through to the individual shareholders. Cash profits may be distributed as dividends to the shareholders, however, the dividends will be taxed for each individual receiving them. This is what is often called 'double taxation'. An S-corp/LLC and C-corps are different types of financial instrument. An S-corp/LLC primarily provides returns to shareholders via annual/quarterly cash flows. A C-corp primarily provides returns in the form of capital gains...i.e. by increasing the value of the equity (raising the share price). The lower tax rate for capital gains versus ordinary income and the growth that deferred tax liability provides (equity is not taxed until it is sold) are among the reason C-corps are attractive to passive investors such as Venture Capital. Again, talk to an accountant. Good luck.
- rajnathani 9y agoThank you for the elaborate response.