Delaware vs. California: Which State Is Better for Your LLC?
As a business attorney, I receive a lot of questions about the benefits of incorporating an LLC in Delaware compared to California. While incorporating in Delaware does have benefits, it is usually not the right choice for a majority of businesses.
Why do Companies Chose Delaware for Incorporation?
Delaware is chosen for businesses for a number of reasons. Delaware’s corporation laws are quite different from California. One main difference is that Delaware’s laws are touted as “pro-management,” meaning that the laws slightly favor the CEOs and managers over the shareholders. This becomes beneficial when the company anticipates becoming huge, with hundreds, maybe even thousands of shareholders. A good example of a large company such as this is Facebook. With over 2,000 shareholders, it is no wonder why Facebook would incorporate in a state that favors the CEO and managers.
Another reason why companies chose Delaware is because of its privacy laws. Delaware allows a company to incorporate with a registered agent without listing shareholders, directors, officers, etc., on the public record. This is a huge factor when there are silent partners or passive investors wishing to be kept anonymous. Delaware also has lower incorporation fees and taxes for LLCs.
Does California Have Benefits Over Delaware Incorporation?
Taken in concert, the above appeals to a number of companies. However, Delaware is not always the right choice. There are times when California is a better choice for incorporation. One such instant is if the LLC is based in California. If the LLC is based in California, but incorporated in Delaware, the LLC will have the burden of paying the California State Franchise Tax Board taxes, and will be subject to Delaware taxes. Even though the LLC may have saved some money during the incorporation process in Delaware, it will be paying double taxes in the long run. This is not a good choice for any small LLC on a budget.
As stated, Delaware’s corporation laws are pro CEO and managers this is to limit the possibility of a shareholder suing the LLC. However, if your LLC has a small number of shareholders and does not plan to go public anytime soon, then there is no need to abide by Delaware’s pro-management laws, pay the double tax, and worry about following Delaware’s formalities.
If your LLC has a small number of shareholders, is based in California, does not plan to go public soon, is not concerned about privacy, and does not want to pay taxes to two states, then incorporating in California is the best choice. There are times when Delaware is a better state for incorporation, but if the above facts describe your business, then you should incorporate in California
All information provided in this article is for educational purposes only, and does not constitute legal advice. Each situation is dependent on the specific facts and must be evaluated on a case-by-case basis. If you’d like to discuss the specifics of your situation, please call our office at (213) 784-3640