Incorporating in Delaware: Advantages and disadvantages

Many corporations incorporate in Delaware. And there are good reasons why this state is so popular for incorporating. However, there are also distinct disadvantages to registering your company in Delaware.

These are some of the pros and cons you should consider before deciding whether you want to register your company in this state.

Advantages of incorporating in Delaware

According to the Delaware Division of Corporations, 67.8% of Fortune 500 companies are incorporated in Delaware, and 1.5 million corporations have registered in the state.

The State of Delaware has worked hard to position itself as the place for incorporating a business. The advantages of incorporating here include:

• The state offers some tax benefits. Delaware doesn't impose income tax on corporations registered in the state that don't do business in the state. Also, shareholders who don't reside in Delaware need not pay tax on shares in the state. For these reasons, Delaware is sometimes referred to as a tax haven.
• There is a corporation court. Delaware has a Court of Chancery, which handles only corporation cases. The judges are experts in corporate law, and the decisions from the court tend to be more predictable than those in other states.
• Filings are processed quickly. Because Delaware is committed to being corporation-friendly, they will process your filing the same day.
• Privacy is protected. When you file in Delaware, you don't need to disclose your directors' and officers' names to the state. This allows for anonymity.
• Residency is not required. Officers, directors, and shareholders don't need to be residents of Delaware.
• You can have a slimmed-down corporate structure. Delaware law allows just one person to hold the role of officer, director, and shareholder, which is attractive to small businesses.
• Investors prefer Delaware. If you're going to look for angel investors or venture capital, know that most of these prefer you incorporate in Delaware.

Disadvantages of registering in Delaware

While Delaware offers distinct benefits, there are also significant drawbacks to incorporating there. It should be noted that it makes the most financial sense to file your business in your home state in nearly all circumstances.

Here are other factors to consider:

• There are no real tax savings for small businesses. Although Delaware doesn't tax companies incorporated in the state that don't do business there, your home state will tax your company, so you do not avoid taxation.
• Filing is more expensive. Delaware's filing fees are significantly higher than other states'.
• You will pay a franchise tax. Although your company won't pay income tax in Delaware, it will have to pay the Delaware franchise tax based on the shares' value. This is generally minimal for small businesses, but it will increase as the number of shares increases, and as your share value goes up. You may also need to pay a franchise tax in your home state.
• You must meet your own state's requirements. Even though you incorporate in Delaware, you still need to meet your state's filing and licensing requirements for conducting business there. You also have to file annual reports in both locations. It's twice the work and twice the expense to do this.
• A Delaware registered agent is required. When you file, you'll need to provide your registered agent's name within Delaware, a person or company located in-state, who can accept legal filings on your behalf. If you hire someone to handle this, it's an additional cost for your business.
• Legal disputes require travel. Because cases involving your company must be heard in the Delaware court, you'll need to travel to Delaware to handle any legal disputes. You'll also have to retain a Delaware attorney to handle the case instead of the attorney you use in your home state.

While Delaware does offer benefits to companies who incorporate within the state, it's primarily large corporations that derive the greatest advantage. Small businesses should carefully weigh the additional costs involved against the benefits of incorporating in the state before making a decision.