Prior to selecting the state of incorporation, entrepreneurs should take into account factors such as the size of their business, the market for their product or service, the jurisdiction, business licenses required, and future goals.
Startups and large corporations have traditionally preferred Delaware to register their LLC, since Delaware law provides businesses greater flexibility in their corporate structure and stock options. In recent years, Texas has emerged as an attractive alternative to California for startups, particularly those managing rental properties or planning to form a holding company.
So, if I live in California, can I start an LLC in another state?
Yes. Here are some of the different states California companies can incorporate in and the pros and cons of each:
Texas
- Price: The cost of registering an LLC in Texas is more than three times the cost of registering an LLC in California. The Texas LLC Certificate of Formation has a one-time cost of $300 for filing through mail or $308 for online filing. Texas also requires the designation of a Registered Agent with a Texas address to receive legal documents for the LLC. California residents planning on registering an LLC in Texas should expect to pay about $125 per year for a Commercial Registered Agent.
- Ease of Registration: Like most states, Texas allows online filing and filing through the mail.
- Privacy: Texas does not maintain any public information on the LLC owners, except records of the LLC’s registered agent and registered office address.
- Asset Protection: Texas is an exception to the traditional corporate veil rules, and instead follows the 'actual fraud rule.' Under this rule, owners or members of the LLC cannot be held liable for corporate obligations unless they used the LLC to commit actual fraud.
- Business Licenses and Jurisdiction: When considering Texas, it is crucial to ensure that your business complies with local business licenses and jurisdictional regulations, especially if your company engages in sales or income-generating activities within the state.
Delaware
- Price: Between Texas, California, and Delaware, Delaware is the most expensive state to register an LLC. The costs of registering an LLC in Delaware often outweigh the benefits a smaller business can expect to receive. The initial one-time filing fee is $90 ($99 for a 24-hour turnaround). Like Texas, California residents can expect to pay up to an additional $100/year for a Commercial Registered Agent. Delaware also requires all Delaware LLCs, regardless of their principal place of business or size, to pay an additional $300/year for the Delaware Franchise Tax.
- Ease of Registration: Like most states, Delaware allows online filing and filing through mail.
- Privacy: Delaware allows anonymity and nominee officers.
- Asset Protection: Delaware companies offer the same corporate veil as other states.
- The high costs associated with registering and maintaining a Delaware LLC often make it a less-than-ideal choice for new entrepreneurs. If you are considering forming a holding company or dealing with public LLC information, Delaware might be suitable, but weigh this against the cost.
California
- Price: The cost of filing articles of organization in California is $70. There is an additional $20 fee to file a Statement of Information, which needs to be filed every two years. California residents can appoint themselves as registered agents for the LLC instead of paying for Commercial Registered Agents.
- Ease of Registration: Like most states, California allows online filing and filing through the mail.
- Privacy: California allows anonymity and nominee officers.
- Asset Protection: California companies offer the same corporate veil as other states.
- Real Estate and Rental Properties: California is often considered a favorable location for LLCs involved in real estate or managing rental properties due to its established market and regulatory environment.
- Business Licenses and Jurisdiction: Ensure your LLC complies with California’s specific business licenses and jurisdictional requirements, particularly if your company is engaged in extensive commercial activities within the state.
Will an LLC registered in Texas/Delaware still need a foreign qualification in California if most of the staff and customer meetings will be in California?
Any LLC registered in a state other than California is a foreign LLC and would need a foreign qualification in California to transact intrastate business in California.
California law classifies transacting intrastate business as the physical presence of company officers, employees, offices, or other facilities within California, or if the business plans to develop extensive commercial relations within the state over a long period of time. However, your business does not need to be registered in California if your only connection to California is hiring independent contractors located in California.
You may not have any option other than registering your LLC in California or registering it as a foreign LLC in California if your online business hopes to solicit customers in the state. Failure to register in California can bar businesses from bringing lawsuits in the state.
The inability to utilize California's court system can be particularly detrimental to online businesses with valuable intellectual property prone to infringement. If you wish to register as a foreign LLC in California, then you must provide the same information needed to create an LLC in your state of incorporation and pay all the fees required to register and maintain LLCs in California.
Unsure of where to go next? Lloyd & Mousilli provides startup legal advice and functions as your Registered Agent. Schedule a free strategy session to kick off the process. We help you navigate the new LLC registration process, regardless of your jurisdiction, and set up a solid legal framework for your startup. Read the case studies of numerous small business owners who had our help in finding the best fit entity structure for their company.
