Whether you’ve heard it from a friend or on TV, everyone is talking about incorporating a business in the state of Delaware. In fact, Delaware incorporation makes up more than half of all Fortune 500 companies.
So, what makes Delaware the best place for incorporating a business? This article explores the benefits and drawbacks of incorporating a business in Delaware and reasons why it may be worth considering for your business.
Benefits of Incorporating in Delaware
Court of Chancery
The Court of Chancery reinforces Delaware's reputation for its business-friendly tax laws in the United States. The Court of Chancery of Delaware is a specialized court that handles business disputes. Businesses seeking reliable legal protection in the corporate world have celebrated the court's focus on equity, making it popular.
The panel of judges that make up the court all are deep experts in corporate law. Another factor that makes this court unique is that it doesn’t operate with a jury, but rather leaves the decisions to the business judges. This system allows for more efficient court proceedings based solely on the law.
Regardless of how complex the topic, whether that’s shareholder disputes, mergers, or acquisitions, the legal consistency of the Court of Chancery helps give business owners peace of mind when in the court of law. The court has helped establish Delaware as a leader in corporate law and ensures that businesses receive fair and efficient handling of any legal disputes.
Business-Friendly Tax Benefits
Another business-friendly aspect of Delaware is the tax environment. One of the key advantages is Delaware's favorable corporate tax structure, which is relatively business-friendly when compared to other states. With no sales tax and no state-level tax on intangible assets (such as trademarks and patents), Delaware has tax laws that directly benefit business owners.
Additionally, Delaware doesn't impose state corporate income tax on corporations formed in state but not conducting business there. So, if your business is incorporated in Delaware but runs out of Colorado, you don’t pay state corporate income tax in Delaware. This implies that corporations can potentially decrease their tax liabilities by incorporating in Delaware, leading to significant savings that can be reinvested into business operations or growth initiatives.
Oh and that’s not all! Delaware also provides a favorable environment for small business bookkeeping like the kind we do here at LedgerFi. Since the state's tax laws are clear and simple, they facilitate smoother compliance and decrease the risk of state audits.
Privacy and Asset Protection
Delaware offers strong privacy and asset protection for business owners. The state allows for anonymous ownership of a corporation, which can provide an additional layer of protection for business owners.
The state also allows for the creation of a series LLC. A series LLC is a parent company that houses several LLCs (or any other business entity) in it but has its own unique name and separate books. It’s similar to a business with multiple owned companies.
This provides further asset protection by separating the assets and liabilities of each business from the others in the series LLC. This means the assets of one business entity are free from the liabilities of another entity in the same series.
Flexibility in Corporate Structure
Delaware also allows for a great deal of flexibility in corporate structure which helps businesses mold themselves in a way that best suits their specific goals. One advantage to this flexibility includes the ability to create multiple classes of stock. This provides companies with the flexibility to tailor their ownership and voting rights according to specific preferences.
Another advantage is the ability to issue stock options to employees. This is a vital tool for attracting and retaining top talent by offering them a stake in the company's success. This flexibility can also be beneficial for businesses looking to raise capital or offer competitive employee packages.
Delaware corporations can also appoint officers and directors without requiring them to be a resident of the state. This allows for yet more flexibility in creating your team of diverse and skilled leaders. This freedom from residency requirements gives way to companies to expand their hiring pool to a global level, ensuring they get access to the best-suited people for the key roles within their organization.
Drawbacks of Incorporating in Delaware
Cost
Now all of these amazing pros do come at a hefty price, literally. Incorporating in Delaware can often be more expensive than in other states. The filing fee for a Delaware corporation is at a minimum of $89. This includes: your Division of Corporation fees ($50), filing fee tax (minimum of $15), and the county fee ($24). Now when compared to $70 in California and $50 in Nevada, these prices might start to worry you.
Delaware also requires that corporations pay an annual franchise tax. Annual franchise tax is a tax paid by corporations that want to do business in certain states. This tax, also known as a privilege tax, grants your business the authority to operate in that state.
In Delaware, it depends on the number of shares issued by a business.
5,000 shares or less, the minimum tax, is $175.00. 5,001 to 10,000 shares is $250.00. Each additional 10,000 shares or portion thereof adds $85.00 with the maximum annual tax being $200,000.00. As you can see, this can be quite a significant tax for larger corporations.
Annual Compliance Requirements
In addition to the annual franchise tax, Delaware also requires that corporations file an annual report. Now this can be easy to manage with the proper bookkeeping, but failure to comply with these requirements can result in penalties or even the revoking of the corporation's charter.
Registered Agent Requirement
Another Delaware requirement is that corporations need to have a registered agent in the state. This again will be responsible for receiving legal and tax documents on behalf of your corporation. This requirement means adding additional costs for businesses that would not have a physical presence in Delaware, which ultimately takes the place of paying the state corporate income tax.
Is Delaware the Right Choice for Your Business?
While incorporating in Delaware can offer many benefits, it may not be the right choice for every business. Let’s go over some key factors when deciding whether to incorporate in Delaware:
Business Activities
If your business primarily operates outside of Delaware, it may not make sense to incorporate in the state. In most cases, incorporating in Delaware may make sense for businesses that conduct a significant amount of business within the state or that have a strong physical presence in Delaware.
Company Size
Larger companies that can benefit from the state’s flexible corporate structure and business-friendly laws may see Delaware as a good choice. However, smaller businesses may find that all the costs that come with incorporating in Delaware can be a bit restricting without a larger budget.
Future Plans
It’s best to consider your business's future plans when deciding whether to incorporate in Delaware. Do you plan to raise capital or offer competitive employee packages? Then Delaware's flexible corporate structure may be beneficial.
Is your business primarily focused on a specific geographic area and dominating that niche market? Do you not plan to expand significantly outside of that area? If that's the case, incorporating in Delaware may not be necessary for your business to have success.
Conclusion
Incorporating in Delaware can offer many benefits, including a business-friendly legal environment, tax benefits, privacy and asset protection, and flexibility in corporate structure. However, there are also some drawbacks like higher costs and the registered agent requirement.
Ultimately, you should base the decision of whether or not to incorporate in Delaware on your specific business needs and future plans. It's important to weigh the benefits and drawbacks carefully and consult with a qualified attorney or accountant before making a decision.
If you do decide to incorporate in Delaware, the process is relatively straightforward. You can file the necessary paperwork with the Delaware Division of Corporations and pay the required fees. It's important to have a registered agent in place before filing, as this is a requirement for incorporating in Delaware.
In summary, incorporating in Delaware can offer many benefits for businesses, but it may not be the right choice for every business. Consider your business's specific needs and plans for the future when making a decision, and consult with a qualified professional to ensure that you make the best choice for your business.