By NiNi Vo
When you have decided your small business is ready for incorporation, the first step is to choose which state you want to incorporate in. A popular place that many companies incorporate in, is the state of Delaware, but you will rarely see any headquarters physically located in the area.
As a matter of fact, more than fifty percent of publicly traded and Fortune 500 companies incorporated their business in Delaware. Why is this the case?
The answer is because Delaware provides a large number of advantages for big companies. But this is not the case for the average small business, as they may never get to use the benefits that they offer. Another side to incorporating in Delaware is that the cost may be too high and far too complex.
To put it simply, incorporating in Delaware isn’t an easy task and is not the only option available for your startup. That is why it’s important to understand the positive and negative components when it comes to incorporation. This article aims to further your understanding by explaining a couple of important key points to consider before deciding whether it’s the right decision for your company to incorporate in Delaware.
Advantages of incorporating in Delaware
Listed below are a couple of key advantages for incorporating in Delaware:
- The court system of Delaware is highly renowned and respected throughout the country. Delaware’s Court of Chancery in particular works well alongside corporate issues judges instead of juries. If your business was to be involved in a litigation case, you would be provided with a judge who holds a high amount of expertise with the complex corporate laws. Additionally, corporate attorneys are usually familiar with Delaware business law practices. Which acts as a bonus if your company attorney is familiar with how the system works in Delaware compared to laws in a different state.
- Delaware has a considerable amount of flexibility on how you want to structure your corporation. Their corporate statutes allow you and your company autonomy on decisions about the structure of your corporation and electing board members. For instance, shareholders, directors, and officers do not need to be residing in Delaware. Instead, one person can be chosen as the director, shareholder, and officer of a sole corporation. Whereas in other states, a minimum number of people may be required to obtain the position of an officer of director.
- Delaware offers far more privacy than other states. Corporations established in Delaware have the ability to legally deny disclosing officer or director names on formation documents. This provides an additional layer of protection and privacy if need be.
- Investors typically prefer Delaware corporations. Venture capital investors and investment banks favor Delaware corporations over other states and business structures since it is the most popular place companies incorporate in. If your company is considering venture capital funding or going public, it’d be beneficial to incorporate in Delaware as soon as possible to take full advantage of these opportunities.
- Delaware offers tax advantages. Some states such as Wyoming and Nevada are lacking with their state corporate income tax. However, Delaware upholds business-friendly tax laws. Many businesses decide to incorporate in Delaware but don’t conduct business in the state because they do not need to pay state corporate income tax, only franchise tax. This saves your company money in the long haul. It’s also beneficial for owners of stock shares who reside outside of Delaware, since they are not given Delaware taxes.
Disadvantages of incorporating in Delaware
After reading the points mentioned above about how advantageous it is to incorporate in Delaware, you may be convinced that it’s the best option for your business. This is highly done and seen among large corporations that contain thousands of shareholders. These companies reap the most benefits from incorporating in Delaware. But it’s important to capitalize the reality that this may have for a smaller business, as they may not receive the same benefits.
You may decide otherwise when you learn about the disadvantages of incorporating in Delaware.
The most common problems occur when you incorporate in Delaware but have no intention of conducting business or physically locating a headquarters in the state. For example, if we take a company that is physically located in California, but decides to incorporate in Delaware, the company faces paying the annual franchise tax in both states. This tax may be a financial burden on the company. Additionally, you will have to follow the reporting requirements for both states.
If you’re not interested in the benefits of incorporating in Delaware, then you should reconsider and save your company the trouble and expenses associated with it if you don’t plan on conducting business there.
In brief, every business does not make the same decision. The daunting task of incorporating a business is avoidable. It is only the matter of deciding what’s the best path and outcome for your business that is important.
If your company is struggling to launch your company, we can help! MassLight has served over a hundred companies, small and large. We offer a unique program where we offer software development solely for equity. Learn more about our build for equity program. Contact us today.