Should I Form an LLC For My California-Based Business in California or in Delaware?

A limited liability company (“LLC”) can be formed in any state, regardless of where it conducts its business. Although Delaware is generally viewed as the preferred state for business entities, there may be advantages for a California-based business to form a California LLC rather than a Delaware LLC.

The Case for Forming a California LLC for a California-based Business

In today's dynamic and competitive business landscape, choosing the right legal structure for your California-based business is paramount. One option that stands out is forming a California Limited Liability Company (LLC). Designed to provide numerous benefits, a California LLC offers two advantages over a Delaware LLC for a California-based business.

It costs $70 to form a California LLC. The Secretary of State also requires California LLCs (or LLCs registered to do business in California) to file regular Statements of Information. Statements are due within 90 days of the LLC’s formation and then every two years thereafter. Although the filing cost for Statements of Information is nominal (generally $20), it is another requirement to remember. California LLCs are also generally required to pay a minimum $800 annual franchise tax.[1]

Foreign entities must register with the California Secretary of State before they are permitted to “transact intrastate business” in California.[2] If an LLC plans on conducting all of its business in California, it generally makes sense to form a California LLC rather than a Delaware LLC. LLCs that “transact intrastate business” in California are required to register with the California Secretary of State and must pay taxes to the California Franchise Tax Board. Thus, a Delaware LLC that conducts all of its business in California must pay LLC/franchise taxes to both states.  

An LLC will need a registered agent for each state it is registered to do business in. A registered agent is a business or individual who receives legal correspondence on behalf of a business entity—for example, documents regarding ongoing lawsuits or tax notices from governmental entities. A Delaware LLC that conducts all of its business in California will still need a Delaware registered agent. If the LLC does not have an address in Delaware that can receive such correspondence, they will need to hire a registered agent in the state. Registered agent fees generally cost between $100 and $200 per year. However, a California LLC that does all of its business in California will save on such registered agent fees as any legal notices can be sent directly to the LLC’s office in the state.

The case for forming a Delaware LLC for a California-based business:

It costs $110 to form a Delaware LLC. Delaware LLCs do not need to file annual reports. Delaware LLCs may also appeal to those with privacy concerns, as information about such LLCs are not readily available to the public. Delaware LLCs are generally required to pay an annual franchise tax of $300.[3]

Delaware LLCs provide LLC members with greater liability protection than do California LLCs. Each LLC is governed by the laws of its state of formation—in other words, a California LLC is governed by California law and a Delaware LLC by Delaware law.[4] Delaware law offers more protection to LLC members for post-liquidation claw-backs than does California law. A “claw-back” is an order requiring a member of the LLC to return all or a portion of an LLC distribution to the LLC or to a creditor of the LLC. Post-liquidation claims arise after an LLC has been dissolved. Under Delaware law, members only have claw-back liability if the LLC was insolvent at the time the distribution was made. [5] Under California law, however, a creditor with a post-liquidation claim against a California LLC has the right to collect such claim from an LLC member to the extent of any liquidating distributions received by the member from the LLC whether or  not the LLC was insolvent at the time of the liquidating distribution.[6]

[1] Cal. Rev. & Tax. Code §23153(d)(1).

[2] Cal. Corp. Code §2105(a).

[3] 6 Del. Code §18-1107(b).

[4] Cal. Corp. Code §17708.01(a), 6 Del Code §18-901.

[5] 6 Del Code §1305.

[6] Cal. Corp. Code §17707.07(a)(1)(B).