Incorporating in Delaware: Advantages and Disadvantages

Incorporating in Delaware: Advantages and Disadvantages

by Jane Haskins, Esq., September 2014

Delaware is a tiny state, but it has an outsized importance in the world of corporations. Nearly half of the nation’s publicly traded companies, including giants like Apple, Coca-Cola, Google and Wal-Mart, are incorporated in Delaware.

Why Delaware?

Delaware has a long history of corporation-friendly laws. In addition, Delaware’s tax laws allow corporations to be taxed at a low rate in Delaware and avoid higher taxes in their home states.

Should your business incorporate in Delaware? Here are some of the advantages and disadvantages of choosing The First State as your corporation’s home.

Why Incorporate in Delaware?

For many years, Delaware has tried to position itself as a welcoming home to corporations.

Its laws are generally favorable to businesses, and, unlike other states, it has a separate Court of Chancery that hears cases involving corporate law. Chancery judges have a background in corporate law, and can decide cases relatively quickly, without the need for a jury. This, coupled with the large number of corporations that call Delaware home, means that Delaware has an unusually well-developed and predictable body of corporate law.

These predictable laws allow corporations to make better assessments of the probable outcomes of litigation or the advisability of settling a case.

Delaware has also been called a tax haven. It does not collect corporate taxes from Delaware corporations that do not do business in the state. It also does not tax royalty payments or other “intangible assets.” These tax policies lead to substantial savings for some corporations, but you should consult a tax professional to find out if incorporating in Delaware will provide any tax benefits for your business.

You can form a corporation more quickly in Delaware than in just about any other state, and, unlike some states, Delaware does not require you to publicly disclose the names of the corporation’s directors or shareholders.

Finally, venture capitalists and other outside investors often prefer to invest in a Delaware corporation.

Disadvantages of Incorporating in Delaware

If your business is not physically located in Delaware, you’ll face some additional costs and obligations if you decide to incorporate there. These include:

  • The cost of registering to do business in your home state and any other states in which you do business (called foreign qualification). You’ll pay these fees in addition to the fee for incorporating in Delaware.

  • The cost of a registered agent. If you incorporate in Delaware, you are required to name a registered agent with an actual street address in Delaware to receive legal documents on behalf of your corporation. Unless you know someone in Delaware who is willing at act as your registered agent, you will have to hire a company to provide this service for you.

  • Franchise taxes. All Delaware corporations must pay an annual franchise tax based on the value of the corporation’s shares. The tax starts at $75, plus a $50 filing fee, and can be as high as $180,000.

  • Annual reporting requirements. In addition to making any required reports in your home state, you will also have to comply with Delaware’s annual reporting requirements.

If your business is small and does business in only one or two states, the additional costs of incorporating in Delaware may well outweigh the benefits.

How to Incorporate in Delaware

To form a Delaware corporation, you must file a certificate of incorporation with Delaware’s Secretary of State, listing the name of your corporation, its purpose, the number of authorized shares of stock, the name and address of your registered agent, and the names and addresses of the incorporators.

Because the name of your corporation must be different than the name of any other Delaware corporation, Delaware LLC or partnership, it’s a good idea to make sure your business name is available before you file incorporation documents. You can conduct a Delaware corporation search online.

Forming a corporation is an exciting step in the life of your business, but you should think carefully before choosing a state for your incorporation. For some businesses – especially those with outside investors and a nationwide scope – Delaware’s predictable body of law and corporation-friendly tax structure make it a clear choice. But other businesses are better off incorporating in their home states.

Unsure if incorporating in Delaware is right for you? Consult with a tax professional through the LegalZoom business legal plan.

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