Pros and Cons of Incorporating in Delaware
Delaware is considered a favorite place to form a new business owing to the several advantages the state offers. A report by the New Jersey Business and Industry Association revealed that the business climate of Delaware is one of the most competitive in a 7-state Maryland to Massachusetts region. There are several other benefits of Delaware incorporation or LLC formation apart from the fact that it has zero sales tax rates and a strong economy and transportation infrastructure. Some of the top U.S. publicly traded companies are based out of this state because of the many Delaware incorporation advantages. This guide has been specifically created to help you identify the pros and cons of incorporating in Delaware.
Pros of Incorporating in Delaware
You can form a variety of businesses in Delaware including Limited Liability Company (LLC), General Corporation (INC), Public Benefit Corporation (PBC), Limited Partnership (LP), S Corporation, Sole Proprietorship, Limited Liability Partnership (LLP), and Delaware Statutory Trust among others. There are several salient benefits of Delaware incorporation and hence a large number of small businesses are registered as corporations. Due to the business friendly laws almost 63% of the Fortune 500 companies have been incorporated in Delaware. The top Delaware incorporation advantages are:
Favorable taxation for businesses
Delaware is one of the few states that are synonymous with favorable taxation for startups and new businesses. If you incorporate in Delaware then one of the top advantages you will enjoy is the absence of state taxes. The favorable business taxation climate is driven by the following facts:
- When you incorporate in Delaware; your company will not be subjected to any tax for in-state purchases
- As a business corporation operating outside Delaware, you will not be subjected to any state corporate income tax on goods as well as services
- A holding company is not subjected to any corporate tax on interest or any other investment income earned in the state.
- There are more benefits of forming a corporation as compared to Delaware llc advantages disadvantages
- If your company owns equity investments or fixed-income investments then there will not be any state level taxation on its gains
- There is no personal property tax although on a county-level, you may be subjected to real estate property tax
- One of the top benefits of Delaware incorporation is that business transactions are not taxed. There are also no value-added taxes (VATs), inventory or unitary tax, and inheritance tax
- Corporations can also benefit from the fact that there are no stock or capital shares transfer taxes
Taxes play a crucial role in the overall growth of a business and also help a business to save money thus reducing the overall cost of formation. Favorable taxation is actually one of the strong points when it comes to Delaware incorporation advantages.
One of the top benefits of Delaware incorporation is the flexibility of structuring your company. The corporate statutes in Delaware are considered as one of the most flexible when it comes to the ways in which you can structure your business and even the directors or board members. Flexibility is also one of the primary Delaware llc advantages and disadvantages as a limited liability company can be managed by its members, managers or board of directors without a manager or board of directors. An LLC enjoys contractual flexibility meaning the Delaware LLC Act allows certain restrictions and elimination of fiduciary duties in accordance with an LLC agreement.
A Delaware corporation enjoys flexibility when it comes to arranging management structures as well as economic rights along with other matters within the organization. When you incorporate in Delaware; the shareholders, directors, and officers of the said corporation can reside outside Delaware. In fact, the directors or shareholders can start a new business in Delaware or apply for a business license without the need to reside in the state and this is one of the top Delaware incorporation advantages. This is one of the biggest Delaware incorporation advantages and hence half of the publicly traded companies in the U.S. are based out of this state.
Delaware is popularly known as the “go to” state for startups and entrepreneurial businesses due to its long standing favorable business laws. There are several other benefits of Delaware incorporation and one of them is the privacy certain businesses enjoy. The Delaware law makes it possible for members to form an LLC without the need to put their names on any form of public documents thus successfully eliminating any paper trail. The same is true for corporations and this provides a lot of privacy to the members or directors of the limited liability company and business corporations.
Well established Delaware court system
One of the benefits of Delaware incorporation is the highly reliable Delaware judicial system. The Delaware Statute is an integral part of the friendly business laws and so is the Delaware courts, which interpret it. The Delaware court system also known as the Delaware Court of Chancery is a specialized court that handles corporate or business issues thus making it one of the top Delaware incorporation advantages for new businesses. The Delaware Court of Chancery was established in 1792 and is famous for its impartial and expert judges. In fact, the court uses judges instead of juries to resolve business issues or corporate disputes. Some of the renowned and top experts in business law are serving as the judges at the Court of Chancery, and cases from this court can be appealed directly to the Delaware Supreme Court.
It is a known fact that new businesses and startups prefer to incorporate in Delaware but did you know investors also prefer Delaware companies? There are numerous reasons for this favoritism and one of the primary reasons is the Delaware law, which is considered to be quite practical. An example of this is any amendment made to the certificate of incorporation for facilitating creation of “Preferred Stock” for a venture capital investor which will be effective when you file in Delaware as compared to some other states like California where the amendment will be reviewed by the Secretary of State thus making the process time consuming. Secondly, one of the Delaware incorporation advantages is that it is quite easy to trade shares in a C Corporation and investors normally like preferred stock vis-à-vis common stock.
The Delaware Division of Corporations is responsible for the issuance of the certificate of incorporation (Stock Corporation) and Certificate of Formation (LLC). One of the advantages you will enjoy if you incorporate in Delaware is a quick and easy filing process. You can download the required forms and submit them with the Delaware Division of Corporations after choosing the type of expedited service 1-hour, 2-hour, same day, and next day service. This will ensure the processing takes place quickly and the Delaware incorporation advantage is that you can receive the formation documents within 24 hours.
Zero sales tax
The sales tax laws are not subjected to the federal regulations and hence each state in the U.S., can control its own sales tax or sales tax rates. The sales tax is normally imposed on specific services and retail transactions. The state of Delaware along with Montana, Alaska, Oregon, and New Hampshire does not impose a state or local sales tax and this is irrespective of the physical location of the business entity and this is one of the benefits of Delaware incorporation.
Let your new business benefit from the Delaware Advantage!
Cons of Incorporating in Delaware
There are several Delaware llc advantages and disadvantages but there are also some disadvantages of incorporating in the state.
Extra foreign qualification costs
If you are already operating a business outside Delaware and want to incorporate in Delaware then the foreign qualification laws would be applicable. As a part of foreign qualification, you will have to submit a fee of $245 for the Qualification Certificate and $125 for the Annual Report. Hence the foreign qualification costs and ongoing fees can be higher as compared to forming a domestic corporation.
If you incorporate in Delaware then one of the main disadvantages is the franchise tax. It is important to note that foreign as well as domestic corporations have to pay a franchise tax by March 1st of each year. There are two methods for calculating the tax and they are the Authorized Shares method and the Assumed Par Value Capital Method. The minimum franchise tax is $175 while the maximum is $200,000 and for a Large Corporate Filer, the tax would be $250,000. The franchise tax is one of the Delaware LLC advantages and disadvantages as they are required to pay a flat tax of $300.
Filing cost are high compared to other states
Whether you incorporate in Delaware or form a limited liability company, the filing costs can be higher than some of the other states. Apart from the initial incorporation or formation documents, you may be required to file an annual report and franchise tax thus increasing the overall filing costs, which is more of a disadvantage than Delaware incorporation advantages. The initial filing fee in Delaware for a domestic corporation is $89 and that of a foreign corporation is $245 while the filing fee for both domestic and foreign corporations in Florida is $35. There are additional filing fees that you may have to pay for Name Reservation, Registered Agent Designation, Certified Copy of the incorporation or formation documents, and Annual Report among others.
Looking to Incorporate a Delaware Business?
Delaware is considered one of the top states when it comes to providing a business friendly environment and tax benefits. It is favored by entrepreneurs as well as investors and is home to some of the top Fortune 500 companies. If you want to start a new business in this state then there are several benefits of a Delaware incorporation that you can leverage. You may feel overwhelmed by the incorporation process but that is why IncParadise is there to provide guidance and assistance. We are one of the expert incorporation service providers in Delaware and we can help you with the entire process of Delaware incorporation.
The state of Delaware requires businesses to fulfill certain annual requirements like franchise taxes, annual reports etc. In order to help maintain compliance with the Delaware laws and to ensure smooth operation of your business, IncParadise offers a wide variety of business related additional services. The services include foreign qualification, EIN assistance, S Corporation status election, and Delaware Certificate of Good Standing among others.