Depending on your line of work, some states can be friendlier than others when it comes to forming an LLC. Officially known as a “Limited Liability Company,” LLCs offer tax and legal benefits to business owners in all 50 states, though different jurisdictions will have different rules and regulations pertaining to their formation. For entrepreneurs, two popular destinations for setting up limited liability companies are California and Delaware. Besides having very different geographic locations and population sizes, these states also differ in terms of how they treat businesses, both small- and large-scale operations alike.
If you are choosing between forming an LLC in California or Delaware, it is prudent to know the pros and cons that each state can present. By having a thorough understanding of the business regulation landscapes of both states, you can ultimately make a more informed decision that is right for your business.
Is a Limited Liability Company Right for Your Business?
There are many different ways you can choose to structure your business. Maybe a General Partnership (GP) or Limited Liability Partnership (LLP) is right for you and your team (these are common among licensed professionals). Or, perhaps you are interested in forming a corporation and issuing stock to shareholders? Chances are, if you are like the bulk of business owners, you are going to want to create a limited liability company.
LLCs are especially popular among entrepreneurs. The reasons for this are generally two-fold. For one, there is a sizable tax incentive to create an LLC. As the Internal Revenue Service (IRS) treats these entities as “pass-through” organizations, your business will not need to pay taxes on the profits it generates. Rather, that money will pass through to the members of the LLC who will then pay personal income taxes.
Another key benefit to establishing an LLC is the concept of “limited liability.” If your business is faced with a deluge of debts and enters bankruptcy, members of the LLC will not be found personally liable. In other words, you can shield your individual assets from legal judgments incurred by your business.
Forming an LLC in California
If you are set on a limited liability company as your preferred business structure, and are indeed based in California, you may opt to form your LLC with the state. In order to do this, you will need to select a name that is unique to your business and distinguishable from other registered LLCs in the California Secretary of State’s database. You can easily do this by going to their website and perusing the registered names.
Next, you will want to appoint a registered agent and complete your Articles of Organization (also called a Form LLC-1). Your registered agent will be tasked with receiving all service of process on behalf of your LLC. Your Form LLC-1 will call for some pertinent information about your LLC and its members. Once it is complete, you can mail it to the Secretary of State’s office for processing.
Keeping your LLC in California will make sense if your business is relatively small and does not have many shareholders. This is doubly true if you have no plans on going public soon. As you will see in the next section, however, Delaware can be a sound choice for certain types of business.
Why Create an LLC in Delaware?
The process for establishing a limited liability company in Delaware is largely the same as it is in California. You will have to select a unique name, appoint a registered agent, and file your Articles of Organization with the correct state agency.
The reason why many business owners opt to form LLCs in Delaware is that their laws are generally thought to be “pro-management” instead of “pro-shareholder.” With this in mind, if you are a large company with thousands of shareholders, it would make sense to look out for your best interests as a manager.
One thing to consider, however, if you are based in California, is that should you form your LLC in Delaware, you will need to pay taxes in both states. As this can become a sizable financial burden, it really only makes sense to go this route if you have a large, profitable organization.
Set Up Your LLC Online Today
There are, of course, individual nuances to forming an LLC in Delaware or California that you may want to explore further. In such an instance, a tax or business attorney may be able to provide you with further guidance. No matter which state you choose to set up your LLC in, you can expect to navigate some forms and documents. Once you have filled everything out completely, you can then return your registration papers to the correct California or Delaware state office for processing.
At the Corporation Center, we can save you a trip to the post office. We offer easy-to-complete web forms for LLC registration documents in all 50 states. To learn more about how you can register your LLC online, contact us today by phone or email.