Why Do Companies Incorporate in Delaware?

Delaware corporate laws offer companies legal and liability protection that is more protective to businesses than in other states. Companies incorporate in Delaware because of its corporate-friendly environment, which offers numerous benefits regarding legal protection for companies and tax liability.

Author: Brad Nakase, Attorney

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Business owners know that the experience of running a business is full of difficult choices. Deciding on the right place to incorporate is one of these tough decisions since it has so many unique ramifications for the viability of your company down the line. We recommend you take your time, study the projected gains and losses, and perhaps do some additional research about Delaware before deciding to set up your company there.

You might be wondering: why do so many companies incorporate in Delaware? There are reasons that explain why and how the state has become popular for businesses looking to expand. On the other hand, there also exist specific reasons why you might think twice about making Delaware the base of your company’s operations and therefore incorporate your company there.

In this article, our California incorporation attorney discusses incorporating in Delaware as follows:

1. Advantages of Incorporating a Small Business in Delaware

2. Disadvantages of Incorporating a Business in Delaware

3. The Consensus: Whether to Incorporate a Company in Delaware

4. An Informed Decision

Advantages of Incorporating a Small Business in Delaware

The fact is that as it stands, over 65% of the largest companies in the United States have chosen to incorporate in Delaware. By 2018, there were far over 1 million companies incorporated within Delaware. This is more companies than there are people in Delaware, as the population hovers under one million. Additionally, more than half of companies that are publicly traded have incorporated there. Delaware is a small state—second to only Rhode Island—and this leads us to ask: why are so many business people choosing to head over there to incorporate a business?

Tax Benefits

It is the hallmark of a strong business to be perpetually aware of and concerned with taxes, and the small state of Delaware does offer unique tax benefits. How could these benefit your company? If a corporation is incorporated in Delaware but does not do business there, they do not have to pay income taxes. This is a significant benefit that impacts profit margins, and it does not stop there. If you were to decide to incorporate your business in Delaware, your shareholders would not be obligated to pay taxes on their shares within the state. This is why some refer to Delaware as a sort of “tax haven.” Why else is it beneficial to incorporate a business there?

The Loophole

What is known casually as the “Delaware Loophole” has also caught the eye of business owners. This allows businesses to declare specific revenues in Delaware where the company was incorporated, as opposed to declaring them where business was conducted. Royalty payments, copyrights, VATs, stock transfers, inheritance, and capital shares are also not taxed.

Favorable Rulings

Also, Delaware’s Corporation Court deals exclusively with corporation cases. Corporate law experts preside over the court, and the judges’ decisions are known to be predictable. As compared to other states, this makes incorporating in Delaware an ideal state.

Fast Filings

Going along with Delaware’s reputation as friendly to businesses and corporations is the fact that the state processes filings rapidly, sometimes in 24 hours. While this process can drag on in other states, it occurs quickly in Delaware, and businesses have noticed. This type of quick turnaround is a benefit to incorporating your company in Delaware.

Privacy

Delaware also has a strong reputation in matters concerning company privacy, which these days is paramount to success. Incorporating in Delaware means that you will not need to reveal the names of your officers or your directors, therefore allowing for what is welcome anonymity for many businesses.

Residency Optional

Even though you have incorporated there, your residency in Delaware is not needed. Owners, shareholders, directors, and officers do not have to be registered residents of the state.

Smaller Company Structure

Incorporating in Delaware allows you to have a smaller company structure. If you would prefer it, the law says that you can name one individual to three positions (shareholder, director, and officer) and, in this way, slim your company down so you can focus on the tasks at hand. Small businesses find this the most agreeable since many of them thrive on a more reduced footprint.

Angel Investors

Angel investors, as well as venture capitalists, prefer to incorporation in Delaware for all of the reasons listed above. If this is important to your business as you contemplate incorporation, Delaware might be the top choice for your flourishing company. Before you commence incorporating a business in Delaware, however, remember to consider the drawbacks.

Disadvantages of Incorporating a Business in Delaware

We know: so far, incorporating in the state of Delaware sounds as though it can only help your business. We want to make sure that you grasp the whole picture, however, so here are some of the less positive aspects that businesses should be sure to take note of. Although some of these drawbacks are significant, we would encourage you to consider the entire picture before making your decision. And while Delaware’s policies have proven attractive to many companies, it generally makes prudent financial sense for a company to file within their home state.

Small Business Issues

First, let’s consider small businesses. These types of less sizeable entities will not experience tax savings in Delaware. While it is true that your small business will not be taxed in Delaware, it will still be taxed in the state your business calls home. Therefore, your small business will still pay state and federal taxes. This can be a difficult aspect of incorporating your business in Delaware.

Filing Fees

In Delaware, some of these positive business regulations are offset by the fact that filing fees remain more expensive as compared to other states, so it could prove costly, depending on your business size, to incorporate a company there.

Franchise Tax

Businesses must pay what is called ‘franchise tax.’ This specific tax is derived from the value of your business’ shares. While it is usually minimal, the rate will climb as your shares increase. Your company may also have to pay this type of ‘franchise tax’ back in the state you call home, and these payments can add up.

Home State Regulations

Your business still must deal with your home state’s requirements. Incorporating in Delaware does not mean that you do not have to respect your state’s licensing and filing regulations. After all, you still technically conduct business there. Adding to your paperwork, you will need to file your annual reports within Delaware as well as at home, creating more paperwork for your company. More importantly, you will need to pay to file and license fees multiple times. This can be a major drawback to incorporating your company in Delaware.

Agent Costs

Your company will need to find an agent who is registered in Delaware and who is located within the state. While it can be easy to find an agent in your home state, it can prove difficult to find one in a state where things are unfamiliar. Many businesses find they need to hire a registered agent, and you guessed it—another additional cost.

Travel Fees

Traveling can put a drain on your funds and time, and regardless of where your brick and mortar is located, you will need to head back to Delaware in order to deal with legal action for or against you, including disputes. Also important to remember—you will need to find a lawyer based in Delaware to help handle your case, as opposed to the legal representation you may employ in your own state.

The Consensus: Whether to Incorporate a Company in Delaware

Delaware, also known as The First State, indeed provides a welcome sense of flexibility to small, mid-sized, and larger business owners. Additionally, Delaware also has policies, regulations, and laws that make it easier for companies to retain their privacy, avoid liability issues, and, most importantly, incorporate smoothly and successfully in your new home state.

While all of this information should be duly noted, we would like to point out that larger corporations are able to profit most from these advantages. When assessing the benefits of incorporating in Delaware, you will have to debate if the extra costs, as well as paperwork, are worth it.

An Informed Decision

This decision is an important one for your company, and we hope this article has helped to clarify things. Take your time deciding if incorporating your small business or larger entity in Delaware is right for you. It is true that many investors consider Delaware an excellent place for a company to incorporate, based on favorable corporate laws. However, this choice is all up to you and what will benefit your business. Research carefully, and make sure you understand all of your options regarding incorporating your company.

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