Wed 09 Mar 2016 | By:

Pros and Cons to Starting a California Corporation

Pros and Cons to Forming a Corporation

Incorporating your California startup is essential if you want to protect and ensure its continuation. Many unincorporated businesses fail because they are not protected by the state law in California.

When incorporating, you need to understand the different business structures to choose for your startup. One structure that will give you numerous benefits is forming a California Corporation.  However, starting a Corporation in California is not that easy, also, you need to consider its pros and cons first.

Before you learn how to start a Corporation in California, let’s first discuss the pros and cons of forming one. Let’s get started!


Pros to Starting a Corporation

1) Limits Financial, Legal And Personal Liabilities

Since your California small business is incorporated as a Corporation, it is now considered a separate entity. It will be given its own rights and its transactions will be different from its business owner.

If your business is ever sued, prosecutors will have no legal stake on your personal property because your business will be a separate entity. All your personal assets, properties and even your reputation are all protected by California law.

2) Ensures Business Stability

As an independent entity, there’s a big chance that your business will outlive you, or any of your co-founders and partners. The company’s ownership can be transferred easily, and you’ll be able to assure investors and customers of your company’s stability even in the hard times.

The term that best describes this is called ‘Perpetual Existence’; it can only be established by legally going through the incorporation process.

3) Attracts Investors

Before investors decide to pitch in to your business venture, you need to have an entity first. A California Corporation attracts investors more easily because it is given the local government’s stamp of approval.

Also, the ability of a Corporation to sell stock is a strong selling point; and you can easily convince investors of the continuous growth of your business.

4) Builds Business Credibility and Reputation

It’s easier to trust a business that is legally registered before the state – it’s as simple as that. Building your business’ credibility and reputation is one of the most difficult tasks to do; it can take years before you can fully develop this.

To give you an added boost of credibility, it’s best that you form a California Corporation. Let’s face it, having a Co. after a business name, can work wonders for your business, it can draw in more customers and therefore, increase sales.

5) Power Structure Is Organized

The chain of command in a Corporation is highly established, meaning, it’s well-defined and organized. Every position in the company is important and everyone needs to know their job and responsibilities.

Power struggle is less likely because decisions are made and discussed in all organizational levels.


Cons to Starting a Corporation

1) The Process Is Expensive

Like any government process, starting a Corporation involves money. You need to pay for filing fees and extra charges – which may be a little too much if you’re still in the initial stages of starting your business.

Some of the fees that you might save up for include state filing fees for California, attorney fees and many other government fees.

2) Forming A Corporation Is Time-Consuming And Difficult

Incorporating is a long, complicated process that requires patience to deal with legal procedures and document preparation.

You can do it yourself, or, you can hire the services of online incorporation providers to make the process smooth sailing.

3) Greater Tax Liabilities Compared To Other Business Structures

California increases your tax liabilities by requiring you to have separate tax returns. Corporations are also subject to double-taxation, but if you want to avoid this, you can form an S-Corporation.

To give you more options, you can talk to your attorney. He/she will also explain how the corporate tax code works and what you can do to decrease your tax liabilities.

4) Corporations Are Subject To Strict Government Regulations

Unlike other business structures, corporations need to go through strict government regulations. They can be anything, from tax regulations to environmental compliance. Because of this, you may have to make critical decisions and judgments that other business owners may not have to go through.

5) You Need To Observe Several Corporate Formalities

Incorporating your business doesn’t automatically make it a separate entity; you will need to follow formalities to establish that concept. One of them is following corporate formalities: regular director meetings, record keeping of corporate activities, and maintaining the financial independence.

You have to observe these formalities, if you want to protect both you and your business from being one.

Although forming a California Corporation has its disadvantages, the pros definitely outweigh the cons. The benefits of incorporating your California small business is for the long term, you’ll be able to run your business worry-free.

After reading this article, I hope that you’re fully convinced on the importance of forming a California Corporation. It’s time that you decide what to do next, good luck!

About Ryan James

Half hardworking hermit, half avid adventurer, Ryan founded Startup Savant to simplify entrepreneurship and pay it forward by donating a portion of all revenue to support children's education via