Choosing the right state for your LLC is crucial. If you’re thinking about forming an LLC in California or Delaware, you can rest assured of the benefits and status you’re going to achieve in these states with your venture.
Lots of aspiring entrepreneurs over the last few years have been pondering California LLC vs Delaware LLC formation; their benefits, challenges, costs, legal obligations, and so on. Don’t be too agitated so fast.
Let us tell you that both California and Delaware are business havens for those with high goals and visions.
On one hand, California, the Golden State, offers magnificent stature for business holders apart from its picturesque natural beauty. In contrast, Delaware is also a business-friendly state with simplicity and tax exemption in forming LLC.
California is a sumptuous place for business with huge growth and profitability. As a matter of fact, Californian companies are 2156% more profitable than Texas companies. Opening an LLC here could be a blessing.
Delaware, conversely, follows the rule of flexibility with LLC formation, asset protection, privacy, and the like. Not known to many but 66.8% of Fortune 500 companies are incorporated in Delaware, making it one of the friendliest places on earth to incept and thrive with an LLC.
Care to know more? Let’s delve into five key factors with in-depth insights to illustrate California versus Delaware LLC formations, legal considerations, and more.
5 Key Factors on California LLC vs Delaware LLC
With the benefits of limited liability, perpetual existence, separate legal identity, and so much more, forming an LLC can be a life-changing decision for you.
However, with varied statutes, challenges, and facilities in different states, you must assess which state you want to go with for your LLC venture.
Since this article deals with comparing California LLC with Delaware LLC, we’ll delineate five key factors for your consideration to choose the right state for your business:
- Choosing Your Home State (Domestic LLC)
Let us put it straight. If you’re native to California, opening an LLC in California will be a wise decision. The same applies if you’re living in Delaware.
Take it as a rule of thumb or a regulatory benefactor, the best state to form your LLC is your home state. This is the very first decision you need to make even before going through all the legal procedures and costs. Why so?
First of all, your state where you live will entitle your LLC as a domestic LLC. With this, you can receive numerous benefits when starting off with many more to come down the line. Such benefits include:
- Home advantage in running your business
- Easy to manage your operation since you live in that state
- Better communication with customers and local regulatory authorities
- Home state statutes obligation easier than other states
If Delaware is your home state, you’re lucky since it’s one of the best states to form an LLC or C-Corp businesses in the US. Delaware offers you steady growth and upward prosperity.
The General Corporation Law and Court of Chancery of Delaware are other reasons that make this state so popular for LLC.
On the other hand, if you’re a Californian who wants to form an LLC in this state, good news for you too. Californian statutes also can pave the way to flexible, tax-friendly, and privacy-protected LLC formation along the way.
- Choosing Another State (Foreign LLC)
In contrast to domestic LLC, you may want to open an LLC in a state other than your home. Doing so, your LLC incorporated in another state will be termed as a foreign LLC according to your state law.
It may be due to targeting customers in another state apart from your home state. You may also go with a foreign LLC for expanding your business. Other reasons may include:
- tax benefits,
- reviving business in through another state,
- access to local resources of another state
But considering the other side of the coin, one must know that foreign LLC involves additional administrative burden besides being done in domestic LLC. You’ll need an additional registered agent for that particular state.
You’ll have to pay double taxes, face two-folded legal complexities, and your operational expenses will be doubled.
If you take California, forming a foreign LLC here requires state registration along with other legal attributes. You may get a tax benefit for the first year of LLC formation, but there may be legal complexities regarding other aspects of your business.
Conversely, Delaware foreign LLC could be good for you if your business will potentially earn more money through intellectual properties like trademarks, naming rights, etc. Delaware offers a flexible legal system as well as exempt of tax for the out-of-state income in business. But the additional administrative operation will always be a hassle for your head.
- Are You a Non-US Resident?
If you’re a non-US resident, there are few things you must consider before forming an LLC in California or Delaware, or in both states.
First off, you don’t need to be a US resident or citizen to form and run an LLC in California. Besides, California LLC can offer you pass-through tax benefits where your LLC business doesn’t have to report income tax. Instead the profits and losses are to be subject to individual tax returns.
In California, as a non-US resident, you can run your LLC through a member-managed or manager-managed operation system.
But as a non-US resident, your LLC might be subject to certain tax withholding conditions in California as well as in your home country.
Moreover, you may need to report to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) for foreign-owned LLCs regarding additional regulatory compliance of your business.
As for forming an LLC in Delaware as a non-US resident, you can enjoy a strong legal framework monitored and regulated by the Delaware Court of Chancery. Delaware lets you remain anonymous regarding your LLC and its members, helping you retain your privacy and confidentiality in public.
Besides, like California, Delaware also doesn’t require you to be a US citizen to form and run an LLC in this state.
However, you must consider the costs involved in forming an LLC in both these states. As a foreigner, you may have to pay $90 to file a Certificate of Formation to form an LLC in Delaware while a flat $300 for annual franchise tax per year.
Conversely, the California LLC will cost you $70 to start with for filing the Articles of Organization. Afterwards, you must pay $800 each year for annual franchise tax and $20 biennially for the Statement of Information.
Furthermore, Delaware has its own set of reporting and compliance requirements which as a non-US resident, you may find difficult to adhere to.
- Consider LLC Formation and Ongoing Expenses
While forming an LLC in California or Delaware, you must consider the initial filing fees and ongoing expenses. If you’re forming an LLC in any of the two states, your overall expenses can be low.
However, if you’re going for a foreign LLC, obviously, the cost will double in all aspects.
A Delaware LLC will cost you $110 for formation filing along with a business license fee of $75. The filing cost may add an additional $50 to get a certified copy of your Certificate of Formation.
Besides, you have to pay Delaware Franchise Annual Tax of $300. As for hiring a registered agent, the cost varies from agent to agent from $29 to as far as $125.
But if you consider California LLC expenses, it will cost you nearly $70 for the initial formation filing. This filing fee in California also includes the paperwork of the Articles of Organization.
As for a registered agent fee, it’s free in California since the state allows you to play the role by yourself. But if necessary, you may hire one. Filing the Statement of Information here may cost you around $20 while the Franchise Tax Board requires you pay a minimum of $800 per year as an annual tax.
To get a certificate of status for your LLC formation in California, the pay is $5 if filed via mail and $15 if filed in person.
- Are You Investing in Real Estate?
If you take California LLC into account, you have to consider the following matters while planning to invest in real estate:
- California LLC allows you to maintain complete privacy of your real estate customers, not forcing you to publish their name in a public database.
- You can get tax benefits in California like pass-through taxation, i.e. getting your LLC protected from personal liabilities.
- Your real estate properties in LLC can be a part of the estate plan.
- You can put your own property into the LLC without any reassessment.
If you consider the downsides, then—
- For landlords and investors, the rental properties come with inherent risks, such as fatal injuries of the tenants, entitling you to an immense amount of penalty; sometimes, exceeding your property insurance limit.
- Any mortgaged property may not be included into an LLC without risking ‘due on sales clause.’
Now let’s check what Delaware LLC has to offer while investing in real estate:
- Like in California, Delaware LLC facilitates privacy of the real estate customer records year after year.
- Delaware requires a flat tax per annum; $300 at best, regardless of the annual revenue from your business.
- You can ensure protection for your real estate properties from risks like tenant lawsuits, market downturns, etc.
- Delaware LLC provides credibility for your real estate investment and your relation with the partners, stakeholders, lenders, etc.
When it comes to downsides of Delaware LLC, you should consider that:
- You need to do dual registration for out-of-state business if you’re operating from your home state but incorporated LLC in Delaware.
- Doubled costs due to two attorneys and registered agents to represent your business in both your home state and Delaware.
These are the pros and cons above for both California and Delaware if you’re planning to invest in real estate.
Bottom Line
Lastly, if you’re thinking about forming an LLC in California or Delaware, both states have their distinct benefits and disadvantages.
While facing pros and cons are natural due to distinct statutes and norms of each state, the key considerable factors mentioned above must help you determine which one to go with.
From the initial forming process to tax matters, and members’ privacy to litigation complexities, all points and possibilities must be entertained before taking the final decision.
So, what’s your take between California versus Delaware LLC?
