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 companies 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 popular among many business owners because they 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 case law. Trials are before chancery court judges without a jury. This framework allows for predictability of legal actions

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 file annual reports.

There’s also the anonymity that incorporating in Delaware offers. You do not have to put your name on the initial 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 governance, 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 conduct business in your home state, you may have to pay 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 a registered agent in Delaware. If you do not already have someone in mind who lives in Delaware, you will end up having to pay for registered agent services for an agent to represent you. Registration is done with the Delaware Division of Corporations by filing articles of incorporation and paying an initial filing fee.

You May Have To Go to Delaware for Legal Issues ​

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 whom you regularly use in your home state, they may not be familiar with the laws of Delaware and may not be licensed in Delaware to practice law. 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.