Is Incorporation in Delaware Beneficial for Small Businesses?

When setting up a business, the location where you incorporate can have significant implications for your company. Delaware is a corporation hub; over 60% of Fortune 500 companies are incorporated there. But what about small businesses? Is incorporating in Delaware a wise choice for them, too? Let’s explore why small business owners consider Delaware and examine if it fits your business.

Why Do Companies Incorporate in Delaware?

Delaware is attractive to businesses for several reasons:

• Flexible Business Laws

Delaware’s laws are very business-friendly. The state has its own Court of Chancery that doesn’t use juries but judges specializing in corporate law. This can lead to fairer, more predictable legal outcomes for businesses.

• Privacy

Delaware doesn’t require company owners to be publicly listed. This means you can keep your ownership private, only possible in manometer states.

• Tax Benefits

Delaware offers significant tax advantages. There is no state corporate income tax on goods or services provided by Delaware corporations outside the state. Moreover, there are no inheritance taxes on stock held by non-residents of Delaware and no state sales tax.

• Investment Attraction

The state’s reputation and legal framework make it easier to attract investors. Investors and banks often prefer businesses incorporated in Delaware due to its predictable legal system and business-friendly environment.

Considering Delaware for Your Small Business

While the benefits are clear, the real question is whether these advantages translate as well for small businesses as they do for large corporations. Let’s break it down:

Advantages of Incorporating in Delaware for Small Businesses

• Credibility

Being incorporated in Delaware can lend credibility to your business. It signals to customers, suppliers, and investors that you are serious about your enterprise.

• Legal Precedence

Delaware’s extensive history of corporate law means that there is a great deal of legal precedent. This can help obtain clearer corporate-level guidance, which might be less predictable in other states.

• Flexibility in Company Structure

Delaware allows significant flexibility in structuring your corporation. You can have shareholders, directors, and officers from anywhere worldwide, and there is no minimum capital requirement to form a corporation.

Disadvantages for Small Businesses

• Cost

Incorporating in Delaware can be more expensive than in other states. There are costs to consider, such as the franchise tax, and if you don’t live in Delaware, you will need to pay for a registered agent to represent your company in the state.

• Complexity

For small businesses operating locally in another state, the benefits of Delaware incorporation might not outweigh the complexities and costs of filing in two states. You’ll have to comply with the legal requirements in Delaware and your home state, which can be burdensome.

• No Immediate Tax Benefits for Small, Local Businesses

If your business operates solely in your home state and you incorporate in Delaware, you’ll still be liable for state taxes in your operating state. The Delaware tax benefits primarily help those who operate on a multi-state or international scale.

Is It Worth It?

Assessing Your Business Needs

• Scale of Operations: If you plan to expand beyond your local area or expect to attract significant outside investment, Delaware might benefit you.
• Privacy Concerns: If privacy is a significant concern, Delaware offers advantages that many other states do not.
• Legal Concerns: Delaware is a good choice if you expect your business to face many legal challenges or want the assurance of a well-established legal system.

Considering Costs vs. Benefits of Incorporating in Delaware for Your Small Business

When deciding whether to incorporate in Delaware, understanding the costs and weighing them against the potential benefits is crucial. Here’s a more detailed breakdown to help you make an informed decision:

Costs of Incorporating in Delaware

• Initial Incorporation Fees

There are fees associated with filing the incorporation documents in Delaware. These include the cost of filing the Certificate of Incorporation and any fees for expedited processing if you’re in a hurry.

• Annual Franchise Tax

Delaware requires all incorporated businesses to pay an annual franchise tax. The amount can vary based on the type of corporation and the number of shares your corporation has. This tax is required regardless of your company’s revenue or activity levels.

• Registered Agent Fees

If you don’t live in Delaware, you’ll need a registered agent who does. This agent receives legal and tax documents on behalf of your business. Annual fees for registered agent services can vary, but they are an ongoing cost to consider.

Cost of Compliance in Multiple States

If your business operates in states other than Delaware, you must comply with the legal requirements in each state where you do business. This might include qualifying as a foreign entity, which involves additional fees and paperwork. You will also need to keep up with multiple sets of regulations and tax filings, which can increase your administrative burden.

• Legal Benefits

Delaware is known for its strong understanding of business law, which can help you if you end up in legal trouble. The state has many past legal decisions that make predicting how your case might be resolved easier.

• Privacy

Delaware allows more privacy than many other states. For example, you can start a corporation without putting your name on public records, which is excellent for business owners who want to keep their information private.

• Flexibility in Setting Up Your Business

Delaware is flexible about how you set up your business. You can have shareholders, directors, and officers from anywhere in the world, and there is no requirement for how much money you need to start your business.

• Attracting Investors

Starting your company in Delaware might make it look more trustworthy to potential investors. This is particularly true for investors who are already familiar with the benefits of Delaware corporations, making them more likely to invest in your business.

Deciding Whether to Incorporate in Delaware

To decide if it’s worth incorporating in Delaware for your small business, think about the following:

• Costs vs. Benefits: List all the costs of starting and running a corporation in Delaware and weigh them against the benefits you expect to gain. There might be better choices if the expenses are higher than the benefits.
• Plans for Growth and Investment: If you’re planning to expand your business a lot or looking for a lot of investment, the benefits of being in Delaware might outweigh the costs.
• Managing Out-of-State Operations: If your business isn’t in Delaware, consider whether you can handle the extra work and costs of operating in multiple states.

Conclusion

Starting a business in Delaware has clear advantages, especially if you plan to grow your business a lot or are looking for a serious investment. However, the benefits might not be worth the extra costs and effort if your business and customers are primarily local. It’s essential to consider your business needs and plans before deciding. While Delaware appeals to big companies, small businesses must carefully consider whether it’s the right move for them.