The Pros and Cons of Incorporating in Delaware
26 April, 2018
Do you have the idea for your dream business all ready along with the business plan? Well, the next step is selecting the city in which your company should be incorporated. Yes, choosing the right city for your company is a crucial step as it would determine how large the company grows, its success and the benefits you get from owning a company in a particular state or city.
If you have gone through the Internet searching for places you can incorporate your business in the USA, you might have come across many websites suggesting this place - Delaware. Along with this, you would find that many new startups usually opt for starting their business in Delaware when you begin to research more about this state. Other than that, many of the huge companies have their physical headquarters here already.
As a matter of fact, more than half of all the Fortune 500 and the publicly traded companies have been incorporated in Delaware. But why exactly is every company coming here and trying to be a part of this state?
The answer is straightforward here, which is that Delaware provides multiple numbers of advantages to the companies. But you've already guessed that it offers a lot of benefits, and you want to know what exactly are those benefits that you can enjoy too if you choose to incorporate your business in Delaware.
And before you move ahead to see the best points about the state, remember that not everything is perfect, and it has it's disadvantages as well that would be shared after the benefits.
In other words, if you are planning to incorporate in Delaware, you need to know both the good and bad that you would have to face when you incorporate there. The following primary benefits and drawbacks that are related to the incorporation of a company in Delaware would help you to comprehend what is the right choice for your business.
Perks of incorporating in Delaware
There are many benefits to incorporating a business in Delaware and here are some of them:
States like Nevada and Wyoming has been rising and becoming more popular for the lack of the state corporate income tax in these states. And with this Delaware is also another state that has some business-friendly tax laws. For any business that is incorporated in Delaware and that does not conduct business within the state, there is no state corporate income tax for the profits they earn.
Instead, there is a franchise tax that is applied, only if it applicable. Moreover, if you own stock shares that is outside Delaware, you would not have to pay any taxes in Delaware.
Investors prefer Delaware Corporations
Yes, this is true that the investment banks and the VC investors normally prefer the corporations that are in Delaware, before any of the other corporations in the other states of the USA. So, if you are eventually looking for the VC funding or are about to go public, you would need to be smart enough and incorporate your business in Delaware.
It is better to have that done now, rather than converting the company later on when and if that is what is required by the venture capitalist or investment banker. This would just cost you more and waste your time, or there could be a chance where you can't get your investment as easily. Hence, it is better to choose Delaware if you know that you would need funding later on.
If you have done a good amount of research, you would have come across places where the directors and officers in a business need to share their details with the public. In Delaware, it is not this way, and there is no need to disclose any details on the formation documents at all. In short, giving you a good amount of privacy as needed.
Flexibility in Structuring Your Business
The corporate statutes in Delaware are highly flexible regarding the way you can structure the company and even the board members. For example, the officers, directors, and shareholders do not have to be a resident of Delaware. Other than this, one person can easily act as the shareholder, director, and officer in the business, unlike the other states where all three have to be different people.
Well-Established & Highly Respected Court System
The court of the Chancery in Delaware specializes in the issues of corporations and run with the help of a judge instead of juries. In short, this means that you would be dealing with a judge who has a lot of experience in complex corporate law issues when you are involved in litigation.
Additionally, the attorneys are familiar with all the business laws in Delaware. Hence, the lawyer representing your business would be a professional and would be able to help you properly with the situation.
Disadvantages of Incorporating in Delaware
With all the points above, you might have be highly impressed with how great the advantageous would be to incorporate in Delaware. But again, there are always some negative points to everything in the world, and incorporating in Delaware has one as well that has been shared below:
The main disadvantage of incorporating in Delaware is that if your business isn't actually headquartered in Delaware or you aren't doing business there. Let us say that you are located in California, and incorporate a business in Delaware; you would have to pay the franchise tax in both states. Along with this, you would also have to adhere to the reporting requirements for each of the states.
So, if your company doesn't need the benefits that incorporating in Delaware can offer, and then this is not the place for you. But if you need to make a successful business and you are new in the entrepreneur world, it is better to incorporate your business in Delaware. Moreover, if you are living somewhere else, it is better to even relocate to avoid the double franchise taxation.
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