“Should we incorporate in Delaware?” is one of the first questions asked from founders. Many of the companies they admire are Delaware corporations, and a lot of online formation services present Delaware as the “serious” option.
For most California small businesses that operate only in California and do not plan to raise venture capital, a California corporation is usually the simpler and less expensive choice. Delaware tends to make sense for companies that expect to raise institutional investment, plan for future sales or IPO, or want access to Delaware’s well-developed body of corporate law. Either way, a Delaware corporation that does business in California still pays California’s $800 minimum franchise tax and must register with the California Secretary of State.
But the right answer depends on your business, not on what a famous company did. Choosing the wrong state rarely ends a business. It can, however, mean years of paying two states’ fees, filing two states’ reports, and, later, paying legal fees to unwind a decision that never was a fit. Let’s walk through how to make the choice deliberately.
Why So Many Companies Choose Delaware
Delaware’s reputation is earned. It offers three real advantages, and they matter most to companies with outside investors.
- A specialized business court. Delaware’s Court of Chancery hears corporate disputes. Its judges, not juries, decide cases involving directors, officers, and stockholders. That expertise tends to make outcomes more predictable.
- Decades of corporate case law. The Delaware General Corporation Law has been interpreted in thousands of decisions. When a board faces a hard question, its lawyers can usually point to a Delaware case that answers it.
- Investor familiarity. Venture capital funds and their counsel know Delaware law well. Many institutional investors prefer, and some require, a Delaware corporation before they will write a check.
If your plan includes a priced equity round, a stock option plan for a growing team, or an eventual acquisition by a larger company, those advantages can be worth the added cost.
Why California Is Often the Better Fit for California Businesses
Here is the part the online formation services tend to skip. Incorporating in Delaware does not take your business out of California. If your office, employees, customers, or owners are here, California still treats you as doing business here. A corporation is “doing business” in California if it actively engages in transactions here for profit, has employees in the state, or crosses certain sales, property, or payroll thresholds. A Delaware corporation in that position must qualify to do business in California under Corporations Code Section 2105. That means:
- Obtain a current Certificate of Good Standing from Delaware
- Filing a Statement and Designation by Foreign Corporation with the California Secretary of State ($100 filing fee)
- Appointing a registered agent in California, in addition to the one Delaware requires
- Filing a California Statement of Information, in addition to Delaware’s annual report
- Paying California’s $800 minimum franchise tax on top of Delaware’s franchise tax
Skipping registration is not a savings. Under Corporations Code Section 2203, an unqualified foreign corporation can face penalties of $20 per day and cannot bring a lawsuit in California courts until it qualifies. A single year of operating unregistered could mean $7,300 in penalties, plus back taxes, interest, and the risk of losing the ability to enforce a contract when you need it most.
Practice Tip: If you already formed a Delaware corporation through an online service and never registered in California, address it now. The cost of catching up voluntarily is almost always lower than the cost of being caught.
California Law May Follow You Anyway
Corporations Code Section 2115 applies certain California corporate rules to out-of-state corporations when more than half of their business activity is in California, and more than half of their voting shares are held by California residents, with publicly traded companies generally exempt. These are sometimes called “quasi-California corporations.” Affected rules include cumulative voting for directors and certain shareholder rights.
Delaware’s Supreme Court has held that Delaware law governs a Delaware corporation’s internal affairs, so the two states do not fully agree on this point. For a closely held company owned by Californians, that tension can mean less of Delaware’s predictability than you were paying for.
What Does Each Option Actually Cost?
A California corporation operating only in California starts at about $825 a year in state fees, which covers the minimum franchise tax and annual Statement of Information fee. A Delaware corporation operating in California pays a minimum of $1,050 a year (and possibly higher depending on how the Delaware franchise tax is calculated), before paying a second registered agent. Here is the minimum annual picture:
| State fee | California corporation | Delaware corporation doing business in California |
|---|---|---|
| California minimum franchise tax | $800 | $800 |
| California Statement of Information | $25 | $25 |
| Delaware franchise tax (minimum) | None | $175 (Authorized Shares method for 5,000 or less authorized shares—can be up to $8,665 for 1,000,000 in authorized shares) or $400 (Assumed Par Value Capital method) |
| Delaware annual report fee | None | $50 |
| Delaware registered agent | None | Annual fee charged by a commercial agent |
| California foreign qualification (one time) | None | $100 |
How to Decide: Five Questions to Ask Before You File
The right state follows from your plans for the next three to five years. Start with these questions:
- Will you raise money from venture capital or other institutional investors? If yes, Delaware is often the expected choice, and investors may ask you to convert later anyway.
- Where will you actually operate? If your office, team, and customers are all in California, a Delaware corporation means paying and reporting in both states.
- Who will own the company? A closely held company owned by a few Californians may get less benefit from Delaware law because of Corporations Code Section 2115.
- What is your exit plan? Buyers and underwriters are comfortable with both states, but a planned IPO or a sale to a large acquirer usually points toward Delaware.
- How much administrative work can you absorb? Two states means two registered agents, two annual filings, and two sets of deadlines. Missing one can cost far more than the fee itself.
It is also worth knowing that this decision is not permanent. A California corporation can later convert or reincorporate in Delaware when an investor asks for it. That process takes time and legal work, so it pays to choose with your growth plans in mind rather than by default.
One caution about templates: online formation services will file articles of incorporation in either state in minutes. What they will not do is tailor your bylaws, stock issuance, and founder agreements to your actual situation. Those documents are where most of the expensive disputes between co-founders begin.
Key Takeaways
- For most California businesses that operate only in California and are not raising venture capital, a California corporation is simpler and less expensive.
- Delaware’s Court of Chancery, deep case law, and investor familiarity make it a strong choice for venture-backed companies and those planning a major exit.
- A Delaware corporation doing business in California must register here and still pays California’s $800 minimum franchise tax.
- Under Corporations Code Section 2115, some California corporate rules can apply to out-of-state corporations that are mostly owned and operated in California.
Let BMBR Handle the Filing, Whichever State You Choose
Once you have weighed the options, you do not have to navigate the filing process alone. Whether you decide on California or Delaware, our firm can prepare and file your formation documents, register your corporation in California if you choose Delaware, and help you set up the bylaws, stock issuance, and ongoing compliance calendar so nothing falls through the cracks.
If you are deciding where to incorporate, contact our office to schedule a consultation. We will help you choose the state that fits your plans and then take care of the paperwork in whichever state you decide to file.