Incorporating in Delaware vs California: Which is Better?

Corporations are created when you file articles of incorporation with the Secretary of State in whichever state you've chosen. You're required to stay in compliance with the laws in the state and your corporation will be owned by shareholders and governed by a shareholder-elected Board of Directors. Corporations are also managed by officers elected by the Board of Directors. Both California and Delaware allow you to incorporate with only one director and shareholder, although California law requires a president or CEO, a chief financial officer and a secretary.

So, what benefits can you gain by incorporating in Delaware over California? Many choose the state because filing is very easy and affordable and doing so makes it much easier to go public in the future without needing to reincorporate in the state. Delaware also gives you much greater flexibility in terms of the necessary number of board members. In California, you're required to have at least 2 members of the board if you have 2 shareholders, or 3 board members if you have 3 shareholders. In Delaware, you're required to have only a single director, regardless of how many stockholders you have. Because selecting the initial board members for your business is an incredibly important decision early on, this gives Delaware corporations a clear advantage.

Under federal law, the maximum corporate tax rate is set at 35%. In Delaware, the corporate tax rate is 8.7%, compared to California's 8.84%, although income taxes will not be applied if your business does not operate in the sate. Some businesses also find that raising capital in the future is easier if they're already incorporated in Delaware, which is more appealing to many venture capitalists.

It's important to note, however, that you may face franchise taxes in Delaware and California if more than 50% of your shareholders are in California, thanks to certain provisions in California law. You may also want to keep things simple and stay with California for incorporation because the state doesn't have much of an IPO market now and your business may be acquired in the future, giving you a clean exit.

Again, there is no single answer that will be right for everyone. If your business is in the early start-up stage, however, you won't find any major advantages to incorporating in Delaware over your own state of California. During this stage, you'll find incorporating in California is much simpler and doesn't divert any of your company's resources to anything that can be avoided.

Depending on your business, you may find the advantages Delaware has to offer exceed the simplicity of incorporating in your home state. This is why it's important to discuss this issue with a knowledgeable business attorney or business services company such as USA Corporate Services to make sure you're making the right choice.