When you are thinking about starting your own business, there can be a number of reasons that incorporating in Delaware may seem attractive. Delaware is a particularly attractive state for the incorporation of large corporations because it offers the best franchise tax rules and has typically been the most pro-management. It provides the best protection for board members against derivative lawsuits, there is less protection for minority shareholders than in California, and Delaware also offers limited statutory protection against hostile takeovers.
While all of these concerns can certainly be important, they may mean very little when your company is not ready for an initial public offering (IPO) or stock launch, or later rounds of equity financing. When you are debating this type of decision, be sure to speak with a California startup attorney at Structure Law Group, LLP.
Advantages of Incorporating in Delaware
Delaware is a preferred destination for businesses for many reasons, and more than two-thirds of Fortune 500 companies chose to incorporate in Delaware. Delaware’s corporate laws are remarkably different from California’s, with a big difference being that many people consider Delaware’s laws to be pro-management.
Pro-management means that the laws tend to favor chief executive officers (CEOs) and managers over shareholders. Such considerations may become more beneficial if a company anticipates becoming large enough to have hundreds or even thousands of shareholders.
Another common reason why businesses choose Delaware is because of the state’s privacy laws, which allow companies to incorporate with a registered agent without listing their shareholders, directors, or officers on the public record. Such consideration could be a huge factor if a company has silent partners or passive investors who want to maintain anonymity.
Delaware also enjoys lower incorporation fees and taxes for limited liability companies (LLCs). Whereas California’s Revised Uniform LLC Act (RULLCA) governs all business disputes and allows California courts to void contracts under the manifestly unreasonable standard, the Delaware LLC Act has no such exceptions and respects a business’ Operating Agreement under all circumstances.
Advantages of Incorporating in California
While Delaware can certainly appeal to many companies for the above reasons, working with a startup company lawyer in California to incorporate in California can still be a better choice when an LLC actually has a location in California. When an LLC is based in California but incorporated in Delaware, the LLC has to pay California State Franchise Tax Board taxes as well as Delaware taxes.
Even though an LLC saves money during the incorporation process in Delaware, it pays double taxes, meaning that the option will be bad for a small LLC on a tight budget. Even though Delaware’s corporation laws are pro-CEO and managers, an LLC with a small number of shareholders that do not plan to go public in the near future probably does not need to abide by Delaware’s pro-management laws, pay double taxes, and worry about also following all of Delaware’s formalities.
Call Us Today to Schedule a Consultation With a California Startup Attorney
Debating where exactly to incorporate your business is a common concern, but you do not have to wrestle with the decision by yourself. Structure Law Group, LLP understands all of the concerns that business owners are dealing with and can help you make an informed choice.
Our California startup company attorney can walk you through the entire incorporation process and make sure that you take the steps that will ultimately be the best decision for your business. You can call (408) 441-7500 in Silicon Valley or (408) 441-7500 in Los Angeles, or contact us online for an initial consultation so we can discuss your case further and evaluate all of your legal options.