When you choose a state to open a limited liability company, you are most likely to consider a variety of aspects that affect the formation and development of your future company. State tax benefits, rules, and regulations for LLCs, unemployment and poverty rates, etc. – all these aspects play a big role when you have to choose a perfect state for your LLC.
In this review, we’ll compare Delaware and California, namely, their advantages and disadvantages. If you want to know more, we suggest reading a more in-depth Delaware vs California review by Dmytro Kondratiev.
Briefly on LLCs
Every business structure affects the taxation and liabilities of the company in some way.
Small and medium-sized business owners, as well as startups, most often opt for limited liability companies due to their “pass-through taxation” and personal liability protection.
Other advantages of LLCs are as follows:
- Easy to form;
- Charging order benefits;
- Affordable registration fees (compared to corporations).
Another advantage is that LLC owners may not be limited to their state – you can establish an LLC anywhere in the country. However, in this case, it’s going to be a foreign company, and there are special rules to follow for such LLCs.
Similarities between LLCs in Delaware and California
The main similarity between California and Delaware is in the filing of Articles of Organization with the Secretary of State, at the initial registration stage. Articles of Organization are the main part of a legal formal document that usually includes the purpose of your LLC, the principal location of the business, and the names of initial owners and managers. Both states allow you to apply online, in person, or by mail.
The requirements for preparing information to be reviewed and approved by the Secretary of State are also similar in Delaware and California:
- Find/reserve a unique business name and appoint a resident agent;
- Fill out the Articles of Organization form, pay the state filing fee, and send the document in the most convenient way;
- Prepare an Operating Agreement and get an EIN from the IRS;
- Determine what permits/licenses are needed for your business and obtain them.
All of the steps described above are significant. Otherwise, if, say, you skip the registered agent point, this will be a reason for the Secretary of State to reject your application. Additionally, the same goes for having a single mistake in your Articles of Organization. Moreover, some of them can result in legal liability.
Also, no matter which state you choose for your LLC, you can always turn to professionals who will help you avoid paperwork and save your time. No need to look for a suitable business name, hire a registered agent, or stress about making a mistake in the Articles of Organization or being non-compliant with state rules. You can simply hire a reputable online service provider and let professionals do the job for you.
Why Set Up an LLC in Delaware?
Delaware is home to less than 1 million people, but that hasn’t stopped it from being one of the most popular states for limited liability companies. And the fact that over 60% of all Fortune 500 firms are registered in Delaware proves it.
The first reason that might entice you to do business here is the low tax rates. For example, you don’t have to pay income and sales tax, but the corporate tax is 8.7%.
The second reason is the existence of a special court, which deals exclusively with business matters. Consequently, we can talk about a strong court system. The Delaware Court of Chancery has been in operation for over 230 years.
The third reason is the simplified filing of constituent documents with the Secretary of State due to the absence of requirements to list the owners in the Articles of Organization. As a result, this decision increased the level of confidentiality for business owners.
Lastly, the fourth reason is that LLC owners do not need to file a report or hold a meeting every year in the state. Consequently, you have more time to focus on your business growth.
However, as ideal as the conditions for doing business in Delaware may look, it’s still worth admitting that there are some downsides to doing business in the state, which will probably make you think twice:
- You have to pay an annual tax of $300, which is quite a lot (not compared to California, though);
- Not ideal for small businesses and startups. Especially for those that don’t plan to issue stock or go public in the future.
Why Form an LLC in California?
California will not surprise business owners with low taxes, nor will it please you with its low franchise tax. That said, every LLC that is doing business or organized in California must pay an annual tax of $800. What’s more, the tax can be even higher if your income exceeds $250,000 a year.
Despite this, in some cases, California may still be your perfect option. The thing is that you should consider all peculiarities of the state, as well as its most prominent industries. That said, if you have a promising startup related to the technology sector, you may want to form an LLC in California
Among California’s most popular advantages are:
- The state is great for business entrepreneurs engaged in the tech industry;
- California is quite popular among international investors;
- Has developed economy;
- Affordable Corporate tax;
- Great human resources.
As for the disadvantages, in California, they include the slow processing time of LLC applications. Although there’s nothing surprising about that, given the flow of those wishing to open an LLC here, the Secretary of State simply does not have enough time to quickly review all the applications.
High tax rates are another disadvantage. Let’s take a look:
- Corporate tax rate is 8.84% (flat rate);
- Sales tax rate is 7.25%;
- Property tax rate is 0.73% (on average);
- Marginal income tax rate is 13.3% (the highest in the country).
Among other things, in California, some professional businesses, e.g. dentistry, are prohibited from operating under an LLC. There are also problems with protecting single-member companies.
Delaware vs California LLC: Registration Differences and Mandatory Fees
The difference between Delaware and California begins as early as business name registration. The price to reserve a name in DE for 120 days is $75, while in CA you can reserve it for 60 days for $10.
Other features include:
- The price for a registered agent may vary depending on who you choose. If you perform the RA role yourself, it will not cost anything. Whereas third-party online services will offer their registered agents at around $49 to $300 per year;
- In CA, the fee to process your Articles of Organization (Form LLC-1) is $85. However, it’s worth considering that you will also have to pay the mandatory Statement of Information fee of $20. You can also order an expedited service – depending on how fast you want your result, the fee varies from $350 to $750. In DE, you will have to pay a $90 fee to file your Articles of Organization + at least $50 for a state business license. The expedited service fee is $90 or $140;
- The annual franchise tax in California will depend on the income level of the LLC and can range from $900 ($250,000 – $499,999) to $11,790 ($5,000,000 or more), in Delaware, it’s $300 (flat annual rate);
- In CA, the Annual Report filing fee is $25. Whereas, in DE, there are no requirements to file an annual report at all.
Should You Open a Foreign LLC?
It might seem that if you live in California, opening a business in Delaware would avoid a number of requirements and get tax advantages, but that’s, alas, not the case.
By registering an LLC in DE, instead of benefits, the business owner gets new requirements in terms of reports and taxes in both states. Consequently, you will have to pay twice. In addition, opening a foreign LLC in Delaware will cost you $200, whereas, in California, it will cost you $0.
Conclusion
In the LLC Delaware vs California battle, each state has its own pros and cons, features, opportunities, and prospects. Thus, it’s quite difficult to determine the winner.
To choose a perfect state for your LLC, you need to fully understand the specifics of your business niche, as well as tax and management aspects. We can say one thing for sure: it’s always the best idea to do business in your home state. So to start, think through each step, weigh all the pros/cons, and consult with a local professional attorney and accountant to make the right choice.
