When you start a company, one of the most significant decisions you will make is where to incorporate it. Choose the right location, and you can benefit from advantageous laws, tax incentives, and access to a large talent pool. On the other hand, the wrong state could end up costing you a lot of money, time, and effort.
Two of the most popular states to incorporate are Delaware and California. Both states have advantages and disadvantages, so it is vital to understand all the facts before deciding. This article will discuss the perks and cons of incorporating your business in Delaware and California.
Incorporating In Delaware
Delaware is one of the most popular states for incorporation due to its favorable laws, pro-business environment, and low taxes. It is home to most Fortune 500 companies, making it an attractive option for businesses from all industries.
Delaware’s legal and liability protection of established corporate laws is an attractive feature for entrepreneurs. The state’s corporate laws provide limited liability protection for shareholders and directors, meaning their assets are not at risk if the business fails. With the Delaware Court of Chancery, the oldest court in the US specializing in corporate law, business owners can quickly resolve disputes without expensive litigation.
Tax savings are another significant benefit of incorporating in Delaware. The state does not require businesses to pay income taxes for transactions conducted outside the state, which can save you a lot of money in the long run.
Delaware also does not have an inheritance tax on stock held by non-Delaware residents, which can be advantageous for business owners who plan to pass on their company to their heirs.
Delaware does not require businesses to pay sales tax on intangible personal property. This can be a huge benefit for companies who sell digital products or services, as they won’t have to pay sales tax on their revenue. Shares of stock owned by non-resident aliens also do not have to pay capital gains tax in Delaware.
The downsides of incorporating in Delaware are that it can be expensive, and the state does not offer as much support for new businesses as other states, such as California. The paperwork associated with setting up a business in Delaware is also complicated and time-consuming, so you may hire a lawyer to help you with the process.
Incorporating In California
California is another popular state for incorporating due to its pro-business climate, large talent pool, and access to venture capital funding. The state also offers generous tax incentives for businesses that incorporate there.
Management flexibility is one of the main advantages of incorporating in California. The state allows for various corporate structures and business entities, giving companies more freedom to structure their own according to their needs.
In California, you only need three officer positions when filing; president, chief financial officer, and secretary. You can even have the same person fill multiple positions. This flexibility can be a great advantage for startups and small businesses.
The anonymity of shareholders and management is another advantage of incorporating in California. The state does not require companies to list their shareholder’s names on public documents, giving companies more privacy regarding ownership and management.
This can benefit startups who don’t want their competitors to know who is behind the company. You only need the director and resident agents to be disclosed in public.
California taxes are relatively low compared to other states. At nine percent, California has the fourth lowest corporate tax rate in the US. This can greatly benefit businesses looking to stay competitive and save money on taxes. The state also offers a variety of credits and deductions, which can help you further reduce your tax liabilities.
On the downside, incorporating in California can be complicated and expensive. The state has strict regulations which must be followed, and the paperwork associated with setting up a business there can be overwhelming. Additionally, businesses will have to pay annual franchise taxes and fees, which can quickly add up.
How to Incorporate in California
Incorporating a business in California is relatively straightforward, but there are still certain steps you must take. You must choose a business name and make it available in the state. You then must file Articles of Incorporation with the Secretary of State and obtain an Employer Identification Number (EIN) from the IRS.
Once those steps are completed, you need to create corporate bylaws which outline how your company will be managed.
If you want to apply for an LLC in California, you’ll need to file an LLC Agreement. California requires that you have a Federal Employer Identification Number (FEIN) to open a bank account, so make sure to have that ready as well.
You’ll also need to appoint directors and officers for your company and file an initial statement of information with the Secretary of State. Finally, you’ll need to pay all applicable taxes and fees, which can vary depending on your business.
In conclusion, incorporating in Delaware or California can be a great way to protect your business and save money on taxes. However, you should ensure you understand all the rules and regulations associated with each state before choosing which one is right for you. Additionally, it’s important to remember that setting up a business in either state will require some paperwork, so make sure you’re prepared for that when making your decision.