Why Incorporate in Delaware: The Ultimate Guide to Advantages and Disadvantages

Are you thinking about incorporating your business in the United States? If so, you may have heard that you should incorporate in Delaware. In fact, more than half of all publicly traded companies and vast majority of venture capital-funded startups in the United States are incorporated in Delaware.

So why is Delaware so popular for incorporation? What are the advantages and disadvantages of incorporating in Delaware? In this comprehensive guide, we’ll provide you with everything you need to know to make an informed decision about whether incorporating in Delaware is right for your business.

Advantages

Business-Friendly Legal System

Delaware’s state government is aware of the importance of having a modern and business-friendly legal system, and works hard to ensure that its laws and judiciary system is competitive with any other state in the US. As legal trends develop regarding corporate entities, Delaware makes sure to keep up. For example, Delaware was an early leader allowing corporations to have just one shareholder and one director. Later, Delaware was an early state to allow the creation of limited liability companies (LLCs). Delaware was one of the first states to abolish the requirement to have officers named President, Secretary and Treasurer, and allow corporation boards to call their officers by any title they desired, and to assign roles to those officers as needed.

Delaware has a well-established and highly respected legal system that is widely considered to be the most business-friendly in the United States. The Delaware Court of Chancery is a court that specializes in business law and has a long history of making decisions that are favorable to businesses. This court is known for its efficiency and expertise, which means that business cases can be resolved quickly and effectively. Because the judges came up through the court system, court decisions tend to be highly predictable and rarely surprising.

Delaware is a great place for a startup to incorporate.

For a new company looking to attract outside investment from angels, venture capitalists and private equity, incorporating in Delaware is often the best way to go. Many investors will only invest in a Delaware C corporation, so starting off with a Delaware corporation from the beginning can save a lot of legal and accounting headaches later. Delaware’s laws regarding securities and management fit in with the expectations of professional investors. Even if you launch your startup as an LLC in Delaware, you can easily convert your LLC to a C corp with one state filing and one IRS filing.

Delaware Companies Are Great For Virtual or Mobile Companies

With the advent of cloud computing, mobile internet and easy file-sharing, many companies are spread around the country or around the world. For a company with high mobility, the best place to incorporate is in a jurisdiction where there are few entangling requirements, such as complicated, compulsory annual franchise tax reports to file – even if no business is done in that state. Because Delaware does not tax companies that operate outside of its borders, it is easier for a Delaware company to register and unregister from other states as needed.

Delaware Companies are the Gold Standard

All around the US, corporate attorneys are well-versed in Delaware law, so if your company needs to obtain a legal opinion or other documentation you will have an advantage. Delaware earns one third of its state budget from the incorporation business, including filing fees, annual fees and taxes and the related legal work. You can be assured that the state has an interest in keeping its laws up to date, relevant to today’s needs and making sure that all the players in the ecosystem have high integrity.

A New Delaware Company Can Be Formed Very Quickly

The state of Delaware offers a number of choices for speed of filing, depending on your needs and budget. The options are standard, 24-hour, same-day, two-hour and half hour. There is no additional charge for standard service, although it may wear out your patience waiting for them to process it. Our standard filing package includes 24-hour filing, so that (generally speaking) the company will have the filing date on the same day that we receive and process your order. The “24-hour filing” means that the Delaware Secretary of State will confirm your filing about 24 hours after processing the document. The same-day, 2-hour and half-hour options are very expensive, and should only be used in case of dire emergency.

Disadvantages

High Franchise Taxes on Corporations With Large Number of Shares

If you set up a corporation in Delaware, and you decide to issue large numbers of shares, especially if the shares have no par value, then your annual franchise tax bill will be high compared to other states. This is a quote from the Delaware State website:

The Annual Franchise Tax assessment is based on the authorized shares. Use the method that results in the lesser tax. The total tax will never be less than $175.00, or more than $200,000.00.

Beware of using large numbers of shares, and if you really have to go big, you may want to use a tiny par value instead of no par value for  your shares.

Extra Overhead and Expense If You Are Located Out of State

If your business is located in another state but incorporated in Delaware,  you will have to file a foreign state entity registration to do business there. Each year you will also have to pay Delaware for its annual fees and your Delaware registered agent, plus whatever taxes you need to pay where you are located. Although most likely not a huge amount, it is an extra expense that must be taken into account.