Why Do Companies Incorporate in Delaware?

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.