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Why incorporate in Delaware if you just have to pay in-state taxes? When do you have to pay the in-state tax?

What are the reasons to set up an LLC in Delaware if you are just going to get stuck with a foreign llc tax in CA anyways? When do you have to pay the in-state tax? Is it when you start doing business or when you initially register your LLC in say Delaware?

7 Replies

Steven Heintz
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Steven Heintz Entrepreneur • Advisor
Chief Technology Officer at Quirky
Delaware allows you to issue more initial shares in your corp (some states have a small tax/fee per share allocated) Also, for a while, Funders (VC's, etc) preferred knowing the ins-and-outs of corp law in one state jurisdiction (vs 50 different sets of state laws) For this reason, it was advantageous to get setup in Delaware if you thought you might pursue funding.
Eoin Matthews
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Eoin Matthews Entrepreneur
Cofounder at Point
It's pretty much all for the lawyers/investors in the event of something meaningful happening with your business in terms of funding or m&a. There is also a perception among corporate lawyers that Delaware is predictable whereas California is not -- if you've ever called the California Div. of Corporations with a filing questions, you will often find you get 2 different answers. If you are a foreign corp in CA operating as a DE C corp, you have minimal filings in CA and so the lawyers benefit from the predictability of DE. You benefit from the predictability too since the corp lawyers know DE corp law better and the hours billed should be less. If you are flying solo or as a very small team, a CA LLC may be the best route and then restructure as a DE c-corp when investors are banging on your door (and get the investors to pay for the restructure). Brad Feld posts a useful piece here: http://www.feld.com/wp/archives/2006/05/why-incorporate-in-delaware.html
Michael Brill
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Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
As has been discussed on numerous threads, if you do intend to raise money from traditional sources, you'll end up wanting a C corp instead of an LLC. You can change forms later, but if that's your end-goal then just start with a corp.

The primary reason that people form entities outside of their home state comes down to business-friendliness of the courts. Hopefully you won't have to worry about that, but there are tons of gray areas in law where you want a friendly court on your side. People choose Delaware (plus a few other states) because it also imposes the least amount of hassle and restrictions relative to other states. File a form a year and pay a couple hundred dollars and that's it.

There are filing fees of a few hundred dollars plus you probably want a DE registered agent to do the paperwork and that's another couple hundred dollars.
Stephen Williams
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CTO & cofounder at Change My Path
After analyzing everything, for my consulting company I just registered in California. Simpler and I could see no savings when operating in California, just an extra state to deal with. Corporations seem to be taxed the same for income generated in California regardless of where they are based, if they have an operating presence in California. I believe that corporations of every kind owe the $800 minimum California tax the first full year you are in operation, and I decided I had to pay it in the first quarter as an estimated tax payment. I dimly remember some period after first incorporating, the rest of the first year perhaps, where it was waived or delayed or something. The minimum corporate tax is galling, but only matters if you have less income than it represents anyway. More important, depending on what you're doing, is deciding which type of corporation you want: The tax rate on an S-Corp style LLC is 1.5% I think, vs. 8% or more perhaps for a C-Corp. Depending on where the money is going, one or the other is better. For instance, if you are spending it personally in a consulting company, it is going to be double-taxed anyway (other than what you write off), the 1.5% looks better. I've read that there is less rationale to incorporate in Delaware and Nevada than there used to be. The advantages had something to do with yearly fees including on stock issued (some states charge a fee for every share that exists in every corporation every year, prohibitive if you create and/or issue many shares) and perhaps something about corporate rules/requirements and liability. For a consulting company or other small business, little of this seems relevant. For something that is intended to go big, there is probably some cross-over point where the extra expense and headache makes sense. For bootstrapped ventures, you can probably defer the problem by rechartering or creating a subsidiary or similar if and when the situation warrants it. Stephen
Anthony Zeoli
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Anthony Zeoli Entrepreneur • Advisor
Digital Strategy and WordPress Consultant and Trainer
As Michael Brill said and I second, you would set up a C in Delaware and not your LLC. If you are looking to raise money quickly, then you want to go with a C corp structure. An LLC is not investor friendly and you'll end up needing to restructure. So, if you're doing something like running an agency, you are cash flow positive and you split profits between partners, then you want to do an LLC, because you're not interested in raising money. But, if you're building out a web or mobile app or some other startup and you want to take in VC money, then go with a C corp out of the gate.
Eric Landeen
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Eric Landeen Entrepreneur
Director at doxo
Most people go the Delaware path because that's what most VCs prefer. So it's about setting things up so that there is minimal resistance later if you plan to raise money.
O.Shane Balloun
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O.Shane Balloun Advisor
Attorney / Shareholder at Balloun Law Professional Corporation
(Obligatory disclaimer: I am a lawyer but not your lawyer for the purposes of this legal information. This is not legal advice.)

The principal reason you domesticate your entity (corporation, LLC, etc.) in a different state is to take advantage of that state's statutory (legislative) and case (judicial) law, not for taxation avoidance. (Although some legal tax avoidance can be accomplished with passive or other revenues not generating from the state of your headquarters, in general, you will end up paying taxes to the state where you are located and doing business.

Delaware's Court of Chancery is arguably the most respected court with respect to business matters in the nation. The Delaware General Corporation Law is typically clear, and business owners can rely on the treatment they will get when issues have to be litigated over the nature/structure/or ownership of the Delaware corporation. This is one of the two main reasons Silicon Valley VCs urge founders to start with corporations formed in Delaware.

As to LLCs, many people choose Delaware for LLCs as well. I typically prefer Wyoming LLCs for cost reasons, because the Supreme Court of Wyoming is about as friendly to business as they come, and because of a few highly technical differences between laws. Generally, Wyoming > Delaware > Nevada > everything else, though a specific entrepreneur's circumstances may dictate differently.

But after you form the LLC in another state, you will still need to register it in your state where your principal place of business (PPB) is and you will not avoid (typically) paying taxes to that second state.



(To ensure compliance with requirementsimposed by the IRS, we inform you that any tax advice contained in thiscommunication, unless expressly stated otherwise, was not intended or
written to be used, and cannot be used, for the purpose of (i) avoidingtax-related penalties under the Internal Revenue Code or (ii) promoting,marketing or recommending to another party any tax-related matter(s)addressed herein.)
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