The Advantages and Disadvantages of Establishing a Corporation or LLC in Delaware
One of the questions I was asked recently was “Why do so many companies list Delaware as their place of incorporation?” Delaware continues to be the most favored state of incorporation for U.S. businesses since the early 1900s. The number of companies (large and small) incorporated in Delaware is in the millions! Many of the largest and most important companies in the world are incorporated there – including more than half of the Fortune 500. For those of you who are contemplating incorporating a business, the following discussion may help.
Why incorporate in Delaware? Delaware is viewed as a haven for businesses due to Delaware’s General Corporation Law being the most advanced and flexible corporation statutes in the nation. Also Delaware, has been rated as the state with the best legal climate for 10 years in a row by the U.S. Camber Institute for Legal Reform. An unusual plus is that the law includes the Delaware corporations court which it calls the Court of Chancery. The Chancery Court, the Delaware legislature, and the Delaware Secretary of State’s office work closely together to keep the business laws current and up-to-date with what is happening in the business world, making it simpler to do business. For example, in Delaware, has no minimum bank account requirement for a com0pany’s bank and does not impose state income tax on businesses that do not operate within the state. The efficiency of Delaware law that pertains to business keeps bureaucracy to a minimum, unlike that of other states.
Delaware is a small state that is generally pro-business because the populace recognizes that the income received from corporation franchise taxes is an important part of the state budget. Thus, the people of Delaware support keeping Delaware’s business laws state-of-the-art, business-friendly, and positive.
Given the sheer volume of cases heard in Delaware’s Chancery Court, the decisions made there create a strong, ever-evolving and nuanced body of corporate law statutes. Thus, the total package Delaware offers - the Law, the Courts, the Legislature, the Secretary of State’s office, and its Case Law - create an efficient system that is admired by those intending to start a company, or to invest in one, that is incorporated in Delaware. The Delaware system is so strong that many venture capitalists insist that the start ups they invest in be incorporated in Delaware.
Are there any disadvantages to filing as a Delaware corporation? The biggest disadvantage to incorporating in Delaware is its fee structure. First, there are filing fees. The fees in Delaware tend to be higher than those in other states. Additionally, to have standing in the courts in the state(s) in which you are actually doing business (for example, Georgia), you will likely have to register as a “foreign entity.” Foreign entity registration requires a separate fee for each state in which your business operates outside of the state in which it was formed. So if your business operates in Georgia, but your corporation is registered in Delaware, you will have to register in Georgia as a foreign corporation. And for each state in which you are registered as a foreign corporation, you must pay to have a Registered Agent for Service. Finally, if you do not actually operate your business in Delaware, you will be charged a State income tax fee. For all of these reasons, it may not be cost-effective for you to incorporate your business in Delaware.
Also, you will be required file annual registrations and other paperwork regularly (or, at a minimum, annually) in all states in which you do business, including Delaware. Filing in multiple states can be time consuming and costly. A Delaware domicile simply adds administrative burdens for most startups. While most of the burdens can be dealt with, the question “Is the burden worth the advantage for a startup?”
When considering whether you should incorporate a business in Delaware (versus in the state in which you are actually doing business), you would do well to explore the question with the guidance of a skilled business attorney. The legal consequences of this choice are many, and a business owner would do well to understand what they are before deciding where to incorporate.