For corporations, it’s hard to beat Delaware. This state boasts more than a million business entities from around the world who have chosen to call Delaware home. This includes approximately two thirds of all Fortune 500 companies. Why do so many businesses, big and small, choose to incorporate in Delaware?
While many assume that the choice to incorporate in Delaware is purely financial, there is much more to the story. Delaware has not become such a popular place to conduct business by accident. State representatives have worked for decades to provide favorable conditions in which corporations can operate.
For example, Delaware makes it easy for corporations by creating laws and a judicial system that companies want, including a specialized court to handle corporate disputes without a jury. Delaware can also make a company more attractive to investors with its advantageous tax laws.
If thinking about forming an LLC in Delaware here are the top pros and cons:
The state’s 8.7% flat corporate income tax rate leads to tax collections that are the fourth highest in the country, and combined with a personal income tax, they help allow Delaware to charge no sales tax. Sole proprietors, partnerships, and C Corps who incorporate in Delaware will not have to pay corporate income tax on monies earned outside of the state. While there is no sales tax, there is a gross receipts tax of 0.0945% to 0.7468% and a net income tax of 8.70%. Delaware also has no state property or value-added taxes (VATs).
Access to a Corporation Court
Corporations prefer filing in Delaware because of its court system. Known as the Delaware Court of Chancery, this specialed state court lets corporations resolve disputes quickly and without a jury. This allows for more flexibility and efficiency when dealing with corporate legal disputes. Importantly, the country often looks at Delaware’s corporate courts for precedence. That means what happens in Delaware will usually have repercussions for business law throughout the country.
Quick Filing and Paperwork
Delaware makes incorporating a business quicker and easier compared with most other states. This includes the possibility of getting same-day filing for a new business.
Rules set by the state of Delaware provide better privacy for companies looking not to disclose the personal information of their owners, directors, or officers. Delaware allows companies to incorporate without sharing the names or other private information, helping provide anonymity and privacy for those connected to the business.
No Residency Requirement
Delaware allows nearly anyone in the world to form an LLC or corporation in their state. They have no residency requirements for officers, directors, or shareholders.
Fewer Corporate Structure Requirements
Delaware has slimmed-down corporate structure rules that allow a single person to hold multiple roles, including officer, director, and shareholder. This makes it uniquely easier for a small business to incorporate in the state.
Preferable Tax Advantages for Investors
Shareholders in the company who do not live in Delaware will not have to pay taxes on their shares, making Delaware-based companies a favorable option to all types of investors, including sought-after angel investors.
While there are obvious benefits to incorporating in Delaware there are a few downsides to consider:
Tax Advantages May Not Benefit Small Businesses
While some may like to think of Delaware as a tax haven for any business, that is not the entire story. If you are a small business conducting business in another state, you will likely still be on the hook to pay taxes to other states.
Filing Fees Can Be Expensive
While long-term businesses expect to save money by incorporating in Delaware, the short-term expenses may be higher. Delaware filing fees are expensive and significantly higher compared with some states. As a result, some companies may save money in the short term by incorporating elsewhere.
There Are Franchise Taxes to Consider
Another area where Delaware is more expensive is its franchise taxes. This is a fee that is based on the company’s shares’ value. While this may not impact a startup or small business, as the company grows in value, so will the associated franchise taxes. Franchise taxes may also be due in other states the business operates in outside of Delaware, increasing potential costs.
You Still Must Adhere to Other State’s Rules Where You Conduct Business
Incorporating in Delaware does not negate the laws of other states in which a business operates. Every state and local area in the U.S. can require additional registration requirements, taxes, and fees. Often this means incorporating in Delaware is not enough on its own to save you from paying taxes or following the rules in other locations where you conduct business.
Your Registered Agent Must Reside in Delaware
While the corporation or LLC owners may not need to reside in Delaware to incorporate there, the registered agent has different requirements. Registered agents, which are the people responsible for receiving notice should the business entity be sued or have a legal summons, must be located somewhere in the state.
Popular Alternative States to Incorporate Your Business
There may be several states that could beat Delaware for the best place to incorporate a business, depending on your circumstances:
Often, Wyoming and Delaware are lumped together in lists of best places to incorporate a business. For small companies forming an LLC, Wyoming could offer cost savings with lower filing costs and annual fees.
Like Delaware, Nevada offers low business taxes and perhaps higher than average filing fees. Nevada also has no personal or corporate net income tax.
While Texas has not traditionally been considered the ideal location to incorporate, this state has gained popularity recently. Texas has low taxes, low cost of living, and ties several other states for residents that choose to incorporate in their home state.
No matter where you live, you may be better off filing with your home state. Until you grow larger, filing for your LLC, S Corp, C Corp, or DBA within the state you reside and do business could cut back on paperwork, fees, and other responsibilities that may involve travel back and forth from Delaware.
Travis Crabtree is the President of online business filing company Swyft Filings, which helps entrepreneurs in every state navigate and automate the new business filing process. Crabtree is an expert in brand management and protection, online marketing, risk management, and privacy issues.