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You can’t possibly find two more opposite states than Delaware and California. The former is a small area on the East Coast with less than a million citizens that played a huge role in US history by being the first state to sign the Constitution in 1787. The latter is the most populous American territory by the Pacific Ocean with an incredibly diverse nature and culture.
However, when it comes to business opportunities, both Delaware and California are surprisingly very similar and highly attractive for entrepreneurs all over the country. Let’s take a closer look at each state and find out where you should form your company.
If you don’t have time to do all by yourself, choose one of the recommended LLC services:
Delaware vs California LLC Formation: What’s in Common?
Incorporating in Delaware vs California is a standard procedure with the same requirements. It can be broken down into 6 steps:
Name your company;
Designate a registered agent (a person or another business that will receive your legal and federal mail);
Create an operating agreement (an unofficial document that describes how your business will be operated);
Prepare and file the Articles of Organization (LLC) or Articles of Incorporation (S-corp, C-corp) with the Secretary of State;
Get a federal ID number (EIN);
Obtain business licenses and permits if necessary.
All papers can be filed online (Delaware; California) or by mail. Also, both Secretaries allow you to submit your documents personally which may be convenient for those who live in Los Angeles, CA, or Dover, DE. You can skip all of these steps by hiring a professional business formation service that will take care of every formality for a moderate price. Check this article to find out more.
Delaware vs California Incorporation: What’s Different?
While starting an LLC in either California or Delaware is not rocket science, there are a few unique features for each state that we are going to pinpoint down below.
Delaware LLC Formation: Pros and Cons
Despite its tiny size and population, Delaware is a corporate home for more than 300 companies on the Fortune 500 list, including JP Morgan, Walmart, DuPont, Ford, Wells Fargo, Apple, and many more. Matter of fact, there are more incorporated businesses in DE than actual residents. How did that happen?
There are a few factors that work in Delaware’s favor:
Tax-friendly environment. Delaware did not obtain the reputation of a corporate haven for nothing. The tax laws there are incredibly business-friendly and offer lots of benefits for entrepreneurs. For example, there is no sales tax, no copyright tax, no VAT, and no income tax for entities registered in DE but operating outside of the state. This is a huge advantage that allows financial powerhouses such as Meta or McDonald’s to save millions of dollars on taxes each year;
Quick turnaround. Because of its limited personnel and an overwhelming amount of high-profile clients, Delaware’s Secretary of State needed to create a top-notch customer service system. It did just that by simplifying the filing form and reducing the approval time to less than 2 weeks, which is one of the lowest numbers in the entire country;
Identity protection. One of the aspects that helped Delaware speed up the filing process was reducing the requirements on personal information in the Certificate of Organization. Now you don’t need to include the names and addresses of the LLC owners, which means less writing and more privacy;
Immaculate judicial system. All business-related disputes in Delaware are settled in the Court of Chancery, one of the most respected American institutions with over 200 years of experience. These guys know business laws in and out, so you can be 100% sure that every decision they make is legit every single time;
No annual report. Running an LLC in Delaware is almost as easy as setting one up. It’s one of the very few states that don’t require companies to file annual reports or organize ownership meetings, so you have fewer things to worry about and can focus more time and resources on important issues.
Delaware might look like the perfect place to start a company, but there are a few negative aspects that must be mentioned.
Annual franchise tax. There are 14 states that charge LLCs for the right to do business on their territory. Unfortunately, Delaware is one of them. DE’s franchise tax is $300 flat, which is one of the highest rates in the country;
Two states – two registrations. If you want to enjoy Delaware’s incorporation perks while doing business in another state, you will need to register your company twice. That includes two sets of formation documents, two tax reports, and twice as much hassle overall;
May not be beneficial for small businesses. While large companies can enjoy DE’s tax benefits in full effect, small businesses will barely see any improvements in their tax reports. Basically, if you don’t earn millions of dollars on a regular basis, there’s no point in incorporating in Delaware – your home state will be a much better choice.
California LLC Formation: Pros and Cons
California is a popular destination for American entrepreneurs as well as international investors. The economy of the Golden State is larger than that of the United Kingdom, France, or Canada, thanks to advanced agriculture, tourism, energy production, and such megacorporations as Apple, Google, Disney, Meta, and Intel.
Here’s how your LLC can benefit from CA business laws.
Reasonable corporate taxes. California tax rates are by no means low, but they are not bad either. Additionally, the state offers decent tax credits that allow small businesses to save a noticeable amount of money every year;
Professional variety. Whatever industry you can think of, you can find at least one representative company in California. This means you will have no problem finding a specific expert or a like-minded business owner;
Infinite human resources. With almost 40 million California residents at your disposal, there is no shortage of potential employees, business partners, or helping hands of all sorts. The Golden State gives everyone plenty of opportunities for success, so people all over the world flock there to try their luck.
Forming an LLC in California is not without its problems. Here are some of the issues that you have to consider:
Long processing times. Everyone wants a piece of the California pie, so it should not come as a surprise that the state employees often can’t keep up with the high demand. The California Secretary of State is notoriously slow with new business applications, and getting your LLC approved may take up to two months. There is an option to reduce the waiting time, but it’s too expensive to recommend;
High franchise tax. Just like Delaware, California also collects annual fees from limited liability companies that operate in the Golden State. The rate is a whopping $800, and if you earn over $250,000 per year, this number can go even higher.
Delaware LLC vs California LLC: Taxes and Fees
The two states are drastically different in regards to their corporate taxation and filing fees. Here is the comparison of California vs Delaware in major financial categories.
So, what is the better place for LLC formation: Delaware or California? Both are quite similar in terms of filing requirements, with Delaware getting a slight advantage due to less paperwork and quicker turnaround.
Location-wise, if you live in one of those states and plan to do business there, then we would recommend sticking to your home ground and starting a local company. On the other hand, if you would like to conduct business activities outside of the state you’re incorporating in, then you should consider getting registration in Delaware because of its friendly conditions for foreign entities.
Last but not least, California generally favors small businesses, while Delaware might be the better choice for more advanced LLCs with high potential income and expansion ambitions.
In this article, we tried to answer most if not all questions regarding the California LLC vs Delaware LLC topic, and we hope you found it helpful.