You may already know that Delaware is one of the most popular states for companies to incorporate in, regardless of where they’re located. And with its business-friendly laws and knowledgeable courts, it’s not hard to see why.
But like all business decisions, choosing which state to incorporate in shouldn’t be taken lightly. And depending on your preferences and needs, you might be wiser to step off the Delaware bandwagon altogether. The only way to find out what’s best for you and your company is to carefully weigh the pros and cons of incorporating in the First State.
The Benefits of Incorporating in Delaware
There are several reasons why companies small and large have opted to incorporate in Delaware. Some of the most compelling include its legal system, corporate laws, and shareholder protections.
A Legal System Steeped in Business Expertise
Delaware’s highly regarded legal system is well-established, carefully crafted, and inarguably the most business-friendly in the country. That’s not because it gives businesses an unfair advantage or provides a tax haven but because it offers thoughtfully written laws specifically designed to promote business practices that are both principled and profitable.
In fact, all of Delaware’s corporate legal cases are tried by highly experienced judges rather than juries unfamiliar with the intricacies of corporate laws. Those judges are part of the Delaware Court of Chancery, a specialized court tasked with handling corporate disputes.
In other words, if your business gets into a corporate dispute and it’s incorporated in Delaware, you can be sure experts will evaluate the case.
Flexible Laws
Delaware’s General Corporation Law (DGCL) offers unparalleled flexibility for companies incorporated in the state.
Specifically, the DGCL allows entrepreneurs to create company-specific procedures and choose the best business entity type for their needs. For example, those starting businesses in Delaware can opt to issue various classes of stock, form unique entities such as public benefit corporations (PBCs), and customize their corporate structure with few restrictions.
Robust Shareholder Protections
As Delaware’s own government states, “the mandatory provisions of the DGCL are minimal and address only issues of utmost importance to protecting investors, such as the right to elect directors and to vote on certain major transactions.”
In other words, Delaware’s corporate laws may be flexible, but they’re specifically designed to protect shareholders and uphold their rights.
The Pitfalls of Incorporating in Delaware
Forming a corporation in Delaware isn’t without its drawbacks. Those include pricey fees, complicated taxes, and the need to hire Delaware-based lawyers.
High Fees
Delaware provides businesses with prompt service and expert courts, and that doesn’t come cheap. For example, the state imposes a minimum corporate franchise tax of $175 to $400. Similarly, LLCs must pay a minimum of $300 per year.
While that might not sound like a lot, it’s certainly more than what you’d pay in states with no such franchise tax.
Complex Tax Implications
If your business is incorporat in Delaware but operates in another state, you’ll still need to pay income taxes in the state you actually do business in. That means in addition to Delaware’s minimum franchise tax, you’ll also need to pay corporate income tax as per your own state’s laws.
And if you do business in both Delaware and another state, you’ll need to pay Delaware’s 8.7% corporate tax; as well as the other state’s applicable income tax.
Simply put, incorporating in Delaware (or any state other than your own) will introduce complex tax implications and a slew of additional paperwork.
Delaware-Based Lawyers
Delaware’s sophisticated corporate court system is one of its most appealing assets. But if your company is incorporat in Delaware and becomes involved in a legal dispute; then you’ll need to hire a Delaware-based lawyer to represent you in court (and you may even need to travel to Delaware yourself).
So if you’re planning on incorporating in Delaware, don’t forget to consider the inconvenience (and steep legal fees) that can be associated with such a decision.
How to Decide What’s Best for Your Business
To determine if you should incorporate in Delaware or not, you’ll need to evaluate your unique wants, needs, and goals.
For example, you’ll likely want to incorporate in Delaware if you:
- are starting a large company;
- can rely on external funds to bankroll your company’s expenses; and
- anticipate you’ll benefit from Delaware’s top-tier corporate court.
On the other hand, you might be better off incorporating elsewhere if you:
- are starting a small business with limited resources;
- don’t have the capacity to handle additional paperwork and tax ramifications; and
- don’t expect you’ll need to take advantage of Delaware’s corporate court system.
Delaware Incorporation: Not for Everyone, But Invaluable for Some
Although not all businesses can benefit from incorporating in Delaware, certain types of corporations can scarcely afford not to.
So if you’re starting a large company, consider forming your business in Delaware. But if you don’t have the time and resources to handle the drawbacks, don’t sweat it; — forming a business in your home state will likely serve your needs just fine.