Any successful entrepreneur will tell you that where you choose to plant your roots will determine how much you grow. So, as you think about where to get financing or who to partner with, you also need to research the best places to set up shop.
If you landed here, you're probably thinking: California. Thanks to its large market size, the Golden State is one of your best options if you're considering starting a new LLC or registering your business in a new state.
However, a diverse market isn't all California has to offer. It also provides vital protections for business owners, has a relatively low filing fee, and invests in LLCs. The benefits don’t stop there: Here's a deeper look at why California may be the ideal state for forming an LLC.
States typically have laws in place to protect shareholders, such as the right to inspect corporate documents. However, in some areas, these laws aren't as robust as they should be, and they don't necessarily protect minority shareholders.
For example, in Nevada, the right to inspect corporate documents is only accorded to shareholders with at least 15% of shares in a limited liability company. And, in many states, some shareholders can restrict members' right to inspect these documents in their LLC operating agreements.
California explicitly protects minority shareholders by stating that anyone who holds at least 1% of voting shares has the right to inspect and copy records of shareholders as well as inspect LLC minutes and books.
The state further protects minority shareholders by preventing majority shareholders or LLC directors and executives from altering these rights in company bylaws. This benefits California LLC owners as it promotes transparency and accountability, which can prevent company executives from unethical acts like fraud.
California protects LLC owners from personal liability by distinguishing between personal assets and professional or business assets. This means that creditors can't go after your personal assets in case of a business claim, and they can't come after business assets if you have a personal debt.
This isn't to say there aren't protections for creditors. As with many states, California can grant creditors charging orders, giving them the right to receive profit or income that an LLC would otherwise distribute to the member in debt. However, the LLC reserves the right to choose whether or not to make these distributions to the creditors.
California further protects owners by restricting creditors' participation in LLC management, even with charging orders. As such, they can't force your LLC to dissolve to pay off debts.
These protections apply to both single-member LLCs and multi-member LLCs since, unlike states like Florida, California doesn't explicitly distinguish the two types of businesses in its provisions.
Saving every dollar when starting an LLC in California or any other state is crucial, as it allows you to direct more money to your business. Because of California's low filing fees, you can do just that.
The Golden State has one of the lowest LLC filing fees in the country — business owners only need to pay $70 to file their Articles of Organization. Compared to states like Alaska, Massachusetts, and Nevada, which charge $250, $500, and $425 respectively, this is pretty affordable for startup or small business owners who may have difficulty coming up with front money.
Generally, California treats LLCs as pass-through entities. This means that the state doesn't impose tax on corporate income. Instead, it collects personal income tax from LLC members — essentially, the income tax obligation is on shareholders, not the business entity itself.
The main benefit of a pass-through entity status is that it prevents double taxation (at personal and corporate levels), so shareholders can enjoy greater returns on their investments.
You can access this tax advantage at the federal level, too, by electing your LLC as an S Corporation. An S Corp gets the pass-through taxation designation from the Internal Revenue Service (IRS), meaning you can avoid both federal corporate taxes and California LLC taxes.
It's worth noting that LLCs that choose the C Corporation classification are subject to corporate taxes, both at the federal and state levels. However, this is rare since many LLCs elect to file their taxes as S Corps instead of C Corps.
The Golden State is making direct investments in its businesses through grants and incentives — it has recently awarded eight California businesses $120 million in tax credits.
Experts expect California's recent investment to propel the VC economy further by bringing in roughly $15.5 billion in private investment. This is definitely the place you want to be if you want to earn investments from venture capitalists!
Different states make varying investments to improve their business environments. For example:
While these strategies are all geared toward improving the venture capital (VC) economy in these states, none is as impactful as California's. The state is performing exceptionally well — it registered a 46.15% share of venture capital recorded on Carta, a system that helps document VC activity in the U.S.
Whether you're considering establishing a new business or registering your out-of-state LLC as a foreign entity in California, you need to understand the pros and cons of forming in the state to make a well-informed decision.
Now that we’ve covered the pros, let's look at the less-rosy side of registering your business in the Golden State:
The cost of doing business in California can be quite high. Apart from paying the state filing fee ($70) when registering your LLC, the Golden State also requires you to pay an annual franchise tax of $800 and an LLC fee based on your gross income if you earn $250,000 or more. The LLC fee is as follows:
Higher annual fees could minimize the benefit of lower filing fees and corporate taxes. The California franchise tax and state fees make the state unfavorable compared to options like Arizona, Missouri, New Mexico, and Ohio, which have no annual fees.
This is especially true for startups and small businesses that must reinvest their revenue to foster growth. However, because each business is unique, you’ll need to assess your profits to determine your costs.
Politicians in California are working to pass and enact legislation that would require LLC owners to disclose their information. The logic behind this bill is that some people create complex business structures that make it hard for officials to track them down in case of legal issues.
Currently, LLCs must register with the California Secretary of State and disclose their representatives or executives. If passed, this bill will require them to also provide the information of members who own at least 25% of an LLC's assets. It'll also require venture capital companies established in other states to report if they receive an investment from a California resident, regardless of where they operate or solicit the investment.
California isn't alone in this. New York also recently passed a similar act (New York LLC Transparency Act), requiring New York LLCs to disclose the information of all beneficial owners.
Such laws are problematic as they limit LLC owners' privacy and may discourage investors from financing LLCs in these states. Some may prefer options like Wyoming and Delaware, since they allow anonymous LLCs.
LLC formation in California can benefit entrepreneurs looking for a strong venture capital economy, low filing fees, and robust shareholder and limited liability protection. However, it may not be suitable for those looking for anonymity or low annual fees. Consider what's vital for you when deciding whether to start an LLC in the Golden State.
Stable can make the process of forming your LLC easier. Whether you choose California or another state, we can provide a professional and local address to facilitate a seamless registration process. We can also serve as your registered agent and receive legal correspondence on your behalf, helping you remain compliant in your chosen state.
Ready to form your LLC in California or another state? Create your Stable address today!
