Why Incorporate in Delaware?
As you are evaluating where to form your corporation or LLC, you may be considering Delaware. Maybe you’ve heard that over half of the public companies and Fortune 500 companies are incorporated in Delaware. While this is true, you should closely assess whether Delaware is the appropriate choice for your particular business.
For large businesses, there are a number of reasons why it is advantageous to incorporate in Delaware; however, these reasons may not be as beneficial to smaller businesses.
Common Advantages of Forming in Delaware
- Delaware’s business law is one of the most flexible in the country.
- The Court of Chancery focuses solely on business law and uses judges instead of juries.
- For corporations, there is no state corporate income tax for companies that are formed in Delaware but do not transact business there (there is a franchise tax, however).
- The taxation requirements are often favorable to companies with complex capitalization structures and/or a large number of authorized shares of stock.
- There is no personal income tax in Delaware for non-residents.
- Delaware does not require director or officer names (corporations) or member/manager names (LLCs) to be listed in the formation documents, thereby providing a level of anonymity.
- Shareholders, directors and officers of a corporation or members or managers of an LLC need not be residents of Delaware.
- Shares of stock owned by persons outside Delaware are not subject to Delaware taxes.
Typically the court system is not a primary factor evaluated when choosing where to form a business; however the Delaware court deserves a special mention. The Delaware Court of Chancery is often considered an advantageous venue for shareholder lawsuits. As mentioned above, the Court of Chancery hears only business cases and uses only judges, no juries. For large corporations with thousands or hundreds of thousands of shareholders, this can be beneficial.
For small corporations with only a few shareholders, shareholder suits are unlikely. Also, undertaking a case in the Delaware courts may place more of a burden on a small business versus undertaking a case in a court in the company’s home state. Therefore the Court of Chancery does not often hold the same advantages for small businesses that it does for large public companies.
Another factor to consider if you are evaluating forming your corporation or LLC in Delaware is whether you will need to foreign qualify your company in another state.
Corporations and LLCs are considered "foreign" in every state other than their state of formation. Foreign qualification registers a company to transact business in a state other than the home state.
Corporations and LLCs formed in Delaware often need to foreign qualify in their home state, since they have a physical location and employees there. If you are considering Delaware as the state of formation, you should include the initial and ongoing costs of formation and also foreign qualification costs in any other state(s) in your evaluation.
For questions on which state is best for the formation of your business, please seek the advice of an attorney or an accountant.
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