Would it be cheaper to set up as a Delaware LLC or should I do California?
Hi Hackers,
I am currently setting up my business structure as I've recently hit financial proof of concept on my new website.
I currently live in California. Los Angeles to be specific. As many of you know California taxes are high. I built a website that sells digital products and is 100% online and remote. There is nothing physical attached to it, no physical goods, or physical location and product delivery takes place via email. Everything is through the computer. I can honestly operate this from anywhere.
I would like to set up a Delaware LLC and operate from California. I know Atlas offers this service and am leaning towards using it.
I also recently became aware that California does not require sales tax on digital goods (ebooks etc.). So i'm now split. Would it be cheaper to set up as a Delaware LLC or should I do California?
I know this is a highly specific question to my current situation but I haven't been able to find anyone who can help. My Uncle is a corporate tax lawyer and he doesn't know. I've also asked some other people in my life who are unsure.
The goal is to do this as affordably as possible and keep as much money down the road for profit as possible.
Does anyone have any ideas, advice or thoughts into the legality and/or practicality of doing this?
I'm not a lawyer, but if your goal is to save money, then I believe you should set up a CA LLC.
If you do Delaware, I believe you will have to pay LLC fees in both Delaware and CA.
See: https://gusto.com/blog/start-business/delaware-llc-advantages-disadvantages
and
https://www.delawareinc.com/blog/delaware-llc-doing-business-in-california/
You should only LLC in Delaware if you are concerned about differences in corporate laws and business/legal protection... for example if your company gets sued. But this is beyond my area of expertise.
Also from a sales tax perspective, it doesn't matter where you're incorporated. Based on the recent Wayfair rulings, you will owe sales tax in any state that requires sales tax collection, even if you don't have traditional nexus (physical presence) in that state. You have to go state by state to see which ones collect sales tax on digital goods. After that, most states don't require collecting sales tax until you reach a certain threshold. See: https://blog.taxjar.com/economic-nexus-laws/
Hi Steven. Thanks for the response.
Since this is 100% online and digital, do I have a presence anywhere? I’m not delivering furniture or anything material, deliveries are basically pdf files via email. I read about nexus but I can’t figure out how it applies to my situation. This business in a way is like having a website that just runs itself and makes money.. Is it technically located anywhere?
It seems like I may be able to create the business in delaware and apply for foreign qualification then operate from California. In doing this it doesn’t seem like I will also have to set up an LLC in california. That sounds like it would be redundant and would cause the business to exist twice?
Yes, at the very least you have nexus in CA. Traditionally nexus includes not only building locations (offices, headquarters, warehouses and stores), but also the location of active owners and employees. So by simply living and working in CA, you have nexus in CA. If you hire employees who work in another state (even from home and even for digital goods), you also have nexus in that state.
With state sales taxes, it used to be that you only needed to collect taxes with physical nexus. However, with the Wayfair case, you may now have to collect taxes for digital goods in states where you don't have traditional nexus once you reach a certain threshold called "economic nexus". It gets complicated which is why companies like Taxjar and Avalara exists. But in general, you don't have to worry about this until your company gets bigger.
https://blog.taxjar.com/sales-tax-nexus-definition/
https://blog.taxjar.com/sales-tax-digital-products/
https://blog.taxjar.com/economic-nexus-laws/
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Re: Delaware LLCs with foreign qualification in CA, the answer is no, you are not setting up a CA LLC, you are registering your Delaware LLC with CA (i.e. you are letting CA know about the existence of your Delaware LLC).
See: https://www.delawareinc.com/blog/what-to-know-about-californias-llc-forms/
If you had a Delaware LLC, you need to do CA LLC-5 (letting CA know about your Delaware LLC) and CA LLC-12 (statement of information) and the CA LLC Tax (minimum $800/year). All of this is on top of Delaware LLC taxes/fees and filing requirements.
Understood thank you
I set up a California S Corp previously, and what subsequent lawyers told me (while I was selling the business) is that California has really complicated laws.
So, if you think there's a chance that you'll be subject to laws from any other states in addition to California, you might find your life is easier as a Delaware company.
I set up my newest LLC through Stripe's Atlas service. It was incredibly easy compared to the last time I set up a corp in Delaware (I'm on my third). Price was pretty much what I expected, a few hundred bucks.
This is a great answer thank you.
Did you have to apply for foreign qualification with the business established in Delaware but you living in California?
:-) I live in New Jersey, and found it super easy. I don't remember exactly what was required, but being a resident of NJ wasn't any kind of barrier.
Great to hear. Thanks for the direct and clear answers!
Hey Ryan!
One thing keep in mind is that every LLC that is doing business or organized in California must pay an annual tax of $800. If you want to learn more about filing in California check this out https://www.blook.io/form-llc/california. (Or more about Delaware - https://www.blook.io/form-llc/delaware)
Check out https://blook.io if you need any more help! We make it simple for entrepreneurs to register their businesses so you can focus on building your company. :)
Thank you
Are you planning to ever sell your business or try and fund raise to grow it?
If so, I'd strongly consider a delaware C-corp (and not a LLC) to take advantage of specific tax incentives such as QSBS: https://www.sba.gov/blog/qualified-small-business-stock-what-it-how-use-it
I am not planning on fundraising but may at some point sell it
Can you convert the structure from llc to c corp at some point?