Pros and Cons of Incorporating in Delaware

Discover the benefits of incorporating in Delaware (and the drawbacks, too).

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If you’ve done any research about starting a corporation, there’s a good chance you’ve seen the advice to start in Delaware. But why incorporate in Delaware of all places? Is it worth it, or would another state be a better choice?

In this guide, we’ll discuss the primary advantages and disadvantages of incorporating in Delaware.

Why do companies incorporate in Delaware?

A staggering number of business corporations call Delaware their corporate home. And we’re not talking your average run-of-the-mill corporations, either; over two-thirds of the Fortune 500 list is incorporated in Delaware.

Delaware attracts so many corporations because it’s established itself as a very business-friendly environment. It’s no secret that there are many advantages to incorporating in Delaware. With lighter taxes, a dedicated business court, and more, Delaware stands out as a top choice for many new corporations.

Advantages of Incorporating in Delaware

There are numerous advantages to incorporating in Delaware. Before we dive in, though, we should note that not all of these benefits impact every business in the same way. Every new corporation is unique, and so are the people that create them.

Tax Perks

Delaware does have a corporate income tax, but they don’t levy that tax on corporations that don’t conduct business in the state. Corporations that were formed in the state but conduct the bulk of their business elsewhere won’t incur extra Delaware taxes. A word of caution, though: “conducting business” is a concept that has a slightly different legal definition in each state. Don’t assume that you’re automatically exempt from the corporate tax rate.

Delaware also doesn’t charge a sales tax, although that’s a smaller benefit compared to some perks. You’ll also be subject to the state’s franchise taxes every year. Because taxes can be very complicated, we recommend consulting with a corporate attorney or licensed CPA for help. 

Privacy Protection

In Delaware, the only names and addresses that must be listed on the public record are the registered agent and the original incorporator. Delaware incorporators aren’t required to list director names or addresses on their Certificate of Incorporation. Shareholders and corporate officers don’t have to be listed, either. In other states, the general public can look up a corporation’s information freely, compromising privacy.

This small aspect of a Delaware formation is ideal for business owners who want to keep a lower profile and reduce the public’s visibility of some of their personal information.

Smooth Business Litigation

Delaware is well-known for its Court of Chancery, a court that’s dedicated to handling business cases exclusively. Since this court only governs business disputes, its lawsuits are typically resolved more quickly. Additionally, the judgments are fairly predictable because the dedicated judges know Delaware’s business law incredibly well. It’s also ideal that the state’s laws are generally pretty favorable towards business entities, too. 

No business ever wants to be involved in a legal dispute. But when they do happen, it’s a big relief to have them resolved quickly and with minimal hassle.

No Residency Requirements

Delaware actually doesn’t require a corporation’s directors or officers to live in the state. That makes the state a great option for business owners who want to start a business away from their home state. You could, for example, live in New York State but start your corporation in Delaware.

Granted, this advantage isn’t desirable for all business owners, but it’s worth mentioning.

Disadvantages of Incorporating in Delaware

Delaware offers some serious advantages for businesses, but it’s not the right choice for every business. There are some drawbacks to incorporating in Delaware.

For starters, the business tax advantages aren’t limitless. Delaware’s exception to the corporate income tax only benefits corporations that conduct business out of state. You’ll still have a tax liability for annual franchise taxes, and you’ll also pay corporate or personal income taxes in any other states where you operate.

On that note, you’ll also have to obtain a foreign qualification for each state where you operate, too. You’ll also need to meet any annual compliance guidelines and licensing requirements like annual reporting and maintaining a registered agent in each additional state. Because of that, it’s often recommended to start and run a business in the state where you live because that’s the simplest approach.

Delaware also has higher filing fees than some other states, including start-up fees for your formation documents and annual report fees. For example, the Delaware Certificate of Incorporation costs at least $89 but rises depending on how many authorized shares of stock you issue. Additional costs can include applying for professional licenses and obtaining and maintaining the state business license

We can help!

No matter whether you start your corporation in Delaware or any other state, you don’t have to go it alone. ZenBusiness can help you sort through the red tape of incorporating. Whether you need assistance with starting your corporation, a Delaware registered agent for service of process, or help with annual compliance, we have your back.

Why Incorporate in Delaware FAQs

  • It can be worth it to incorporate in Delaware — but only for certain businesses. There are advantages and disadvantages to starting a Delaware corporation, and you should carefully weigh those before making your decision to incorporate.

  • Technically, no. Delaware doesn’t require you to be a resident of the state to incorporate there. However, you must appoint a registered agent who is a resident of the state or a business entity authorized to do business in the state of Delaware.

  • Generally speaking, the “best” state to incorporate in is often the state where you live. That’s because it’s typically easiest to start and run a business as a domestic corporation.

    Obtaining qualification as a foreign corporation is perfectly legitimate and legal, but it can be complicated and expensive. The more states you operate in, the harder it is to track your ongoing costs and corporate requirements.

  • Delaware does present a favorable environment for other registered businesses, such as limited liability companies. These businesses can still take advantage of limited personal liability, the Court of Chancery, and favorable business laws, but there are fewer tax benefits for most LLCs. They’ll still pay a franchise tax, too. 

    Plus, it can be harder to attract venture capitalists to invest in your LLC. Capital firms are much more likely to back businesses that issue stock shares.

  • Registered business entities like corporations and LLCs enjoy personal asset protection because they have a corporate veil. If the business loses a corporate lawsuit or defaults on a loan, the business owners usually can’t lose their personal assets. 

    If you operated as another business type, like a sole proprietorship or general partnership, you would not have personal asset protection. Your business would not be a separate legal entity from you as an individual.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

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Written by Team ZenBusiness

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