Incorporating in Delaware: Is It Worth It for My Small Business?

When you're thinking about starting a new business, the state of Delaware might come to mind. This state is known for being a hotspot for big companies, with many Fortune 500 businesses incorporated there. You may have heard about the state's supposedly business-friendly laws and tax rates. Will they work for your small business?

Let's dive into what it means to be a Delaware corporation and see if it's the right move for you.

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Incorporating in Delaware: A Brief Overview

Incorporating a business in Delaware is a popular choice for many business owners because many business owners feel that Delaware law creates a business-friendly environment. This small state has carved out a significant niche in corporate law, attracting not only large corporations but also smaller business entities. 

When you form a Delaware corporation, you're tapping into a system with a comprehensive and well-established set of corporate laws. These laws are overseen by the renowned Delaware Court of Chancery, known for its expertise in corporate cases.

The benefits of incorporating in Delaware include the appeal of potential tax advantages, like no state corporate income tax for companies that operate outside its borders. There is also a favorable franchise tax system. However, this doesn't eliminate your need to pay franchise taxes or annual reports.

There's also the anonymity that incorporating in Delaware offers. You do not have to put your name on the filing documents as you do in other states, so it can assist in giving a bit more protection and privacy.

Delaware incorporation offers flexibility to entrepreneurs. For example, there is no minimum capital requirement. Delaware allows the issuance of stock for capital, services, personal property, or real estate. The ease of managing corporate affairs, such as the non-requirement of in-state meetings and the ability to have one person hold all officer positions, makes Delaware a compelling choice for many. 

It's important to remember that incorporating here involves understanding and navigating these unique features. You also need to consider how they align with your business's specific needs.

You Might Not Save on Taxes

One of the big reasons business owners think about incorporating in Delaware is for tax benefits. However, small businesses don't always experience major tax savings. Delaware doesn't have a sales tax or inheritance tax and the corporate income tax can be considered favorable. However, you'll still have to pay an annual franchise tax and file an annual report with the state. If you're not operating in Delaware and still operating in your home state, your home state may still tax your state income tax.

Your Small Business Still Needs To Qualify in Your Home State

A second consideration is that although the fees to incorporate a business in Delaware may be lower than in your home state, you will still have to qualify to do business in your home state if you choose to have a Delaware business.

Going through both of these processes at once and in different states will probably cost you just as much, if not more, than if you had just incorporated in your home state in the first place. This means you could face additional costs like foreign qualification fees.

In addition, if you choose to incorporate in Delaware over your home state, you will have to find an agent of register in Delaware. If you do not already have someone in mind who lives in Delaware, you will end up paying more to hire a Delaware-registered agent.

Your Small Business Might Be More Protected in Your Home State​

Your home state may offer laws that protect your business in a stronger manner than do laws in Delaware. Suppose you're incorporating your tech start-up company, which you run out of your garage in California. You have invested a bunch of time with your one co-founder to develop your idea. Your corporation is a success, and you lure many investors who buy preferred shares of stock.

At some point, your shareholders, who own a majority of the preferred shares of stock, want to liquidate your company, but you and your original partner object to your common shares. If you had incorporated your business in Delaware, you would be out of luck because only a majority of all shares need to agree in order to sell a corporation.

In California, you and your partner could stop the sale because in order for a corporation to be sold, every class of shares must agree and approve the sale before it can go through.

You May Have To Go to Delaware for Any Related Legal Issues With Your Small Business​

If you ever run into legal problems, you may be called into court in Delaware. This could involve substantial travel time and expense. In addition, if you already have a lawyer that you regularly use in your home state, they may not be familiar with the laws of Delaware. Delaware's court system is geared towards complex court cases. It is not always ideal for smaller businesses.

Meet With an Attorney Before You Incorporate in Delaware

If you operate a small business, you probably will not benefit from incorporating within Delaware, unless you're already located there. Every business has different needs, so there may be instances where a small operation would, in fact, benefit from doing so.

Before you make a decision, though, it's important to get professional advice from a business law attorney in your state.