If you are starting a company you have probably heard about incorporating in the State of Delaware. More than half of all public companies, including many large corporations like Apple and Google, are incorporated in the State of Delaware. So, why incorporate in Delaware? What are the advantages of incorporating in Delaware? Why you might not want to incorporate in Delaware?
Advantages of incorporating in Delaware:
1. Delaware has very friendly business and corporate laws. With so many companies incorporating in Delaware this has created a robust body of corporate law that promotes predictable and probable outcomes when litigating and settling business law suits.
2. Delaware uses a Chancery Court that utilizes only judges and not juries to hear and rule on business related lawsuits. This means that any cases heard before their court can be decided quickly. Chancery judges also have a background in corporate law. With this background they can best assess the specifics of corporate suits brought before them.
3. Angel investors and venture capital firms prefer investing in Delaware C corporations. Many typically require the company they are investing in be formed in Delaware due to the related benefits mentioned here and others.
4. Why incorporating in Delaware is the norm. Since filing a corporation in Delaware is so common, most corporate lawyers are familiar with Delaware corporate and business laws which can expedite your research time and save you legal fees.
5. Delaware has low corporate tax rates. Corporate income taxes are not collected on Delaware corporations who are doing business outside the State of Delaware.
6. There is not tax on: royalty payments, trademarks, copyrights or other “intangible assets”.
7. You are not required to have a business license to operate your company outside of Delaware.
8. Complex shareholder structures enjoy flexible taxation requirements.
9. Non-residents of Delaware do not incur personal state income tax.
10. Shareholders, officers, directors, managing members of LLCs do not need to be residents of Delaware.
11. Any stock or shareholders that reside outside Delaware are not subject to Delaware taxes.
12. Delaware companies have much faster formation times than the majority of other states.
13. Processing time is less than one hour in Delaware. Compared to California which has a 24-hour option however it is not guaranteed and requires a rush processing fee.
14. Your designated corporate structure is more flexible as you can elect one person to fulfill all of the typical roles and duties required to form the corporation such as executive officer and director.
15. Investment bankers usually require corporations be formed in Delaware when filing an initial public offering (IPO).
16. Complicated mergers are easier to file in Delaware.
17. Enjoy more privacy protection in Delaware. You are not required to publicly disclose the names of corporate officers, directors or shareholders with Delaware.
18. Logistically it makes sense to form your corporation in Delaware because it is so business friendly.
19. You are setting precedent that you are a national company by incorporating in Delaware. By incorporating in Delaware you are sending a message to customers and investors alike that you are a big, national corporation that means big business.
20. If your company is an internet or technology startup with presence throughout the U.S. or globally, Delaware’s laxed reporting requirements can be helpful.
If you are operating your company outside Delaware you will need to perform additional steps to properly setup your company operations and formation.
1. You must Foreign Qualify your company if you transact business in your home state outside of the state that you incorporate in.
2. If you have a physical location and/or employees in a different state you will need to register your company as “foreign” in that jurisdiction. Example if you are located and operating business out of California but are incorporated in Delaware, you will need to register as foreign in California.
3. You are subject to the corporation and state income taxes in the state you are doing business in as well as the taxes and fees associated with incorporating in Delaware.
4. You must register an agent in Delaware as a requirement when incorporating so that you can receive legal documents to the corporation.
5. If you do not know anyone who can serve as a registered agent in Delaware you will need to hire a company to act as the registered agent. Here is a list of reputable companies that perform this service for nominal fees.
6. You must also register an agent in the state you are doing business in.
7. You must pay annual franchise taxes in Delaware. This tax is calculated by the value of the corporation’s shares. The tax starts at $175.00 with an annual reporting fee of $50.00. However the tax can be as high as $250,000.00 for large corporations. To be considered a large corporation your company needs to be generating at least $750,000,000 in annual gross revenue. See how Delaware uses 2 methods to calculate franchise tax on corporations for more details on this calculation.
8. There are annual reporting requirements in Delaware that corporations must adhere to as well as the reporting requirements of your home state of business.
This question is best answered first by what your goals are for your company. Do you plan to bring on investors and other shareholders to help you grow a national company or do you plan on operating a “mom and pop shop” in your home state? You should also seek the advice of a business attorney well versed in corporate law to best answer this question in conjunction with your company goals. You can post a job for free or call (800) 390-3293 to consult and get bids from our network of vetted business and corporate attorneys.
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