If you are going to form a business, you should form it in Delaware, right?
Well, no. Maybe not.
You’ve probably heard at some point from somewhere that every startup should incorporate in Delaware. However, despite what you may have heard, Delaware is not a one-size-fit-all solution. There are a number of factors to consider when choosing where you should incorporate your business.
Let's review some of the advantages and the disadvantages of incorporating in Delaware instead of your home state.
First, there are indeed some advantages to forming a business in Delaware:
- Delaware´s corporate law is highly favorable to and friendly toward publicly traded companies and companies about to go public.
- Delaware makes it fairly quick and inexpensive to form a business entity, and doesn’t require you to physically do business in the state.
- Their government services are efficient, professional, and accessible.
- Other advantages include flexible corporate structures, including the ability to have one person to make up the entire board of directors even if there are many more shareholders.
- Furthermore, Delaware’s corporate law gives the majority shareholders power over the minority shareholders. (Keep in mind, though, if you are a startup founder who accepts venture capital, the minority shareholder will likely be you.)
- Delaware also has an entirely separate court system that deals only with corporate law. Corporate litigation is decided by a judge, not a jury. These judges rely on previous written decisions, and there are a lot of cases which have been decided. Because of this long history and expertise in deciding corporate litigation, Delaware has an extensive body of corporate law that can be relied on by corporations when a dispute comes up. Corporations can look to the body of law and see how a judge might deal with their issue, which helps to resolve disagreements and negotiate settlements.
- Lastly, Delaware allows for anonymity. Board directors and officers do not have to be listed in the corporate direction documents.
Now let's discuss the major disadvantages in incorporating in Delaware when Delaware is not your home state.
First, if you incorporate in Delaware, you´ll have to register as a foreign entity in your home state because that is the state where you do business. In other words, all of the time you saved by using Delaware’s quick and easy business formation process will now be spent registering your business in your home state. You will also have to comply with corporate government laws in two states.
In addition, you will be subject to tax liability in your home state, where you are actually doing business, so forming a business in Delaware doesn’t save you money in taxes. In fact, forming your business in Delaware will mean the extra expense of paying for a registered agent.
Those things may not seem to be a big deal, but they can increase your administration and tax burden at a time when your resources are limited. As a startup, you need to use the time and money you have to focus on developing the business, not keeping track of the corporate requirements of two different states.
For many startups, especially small businesses, it won´t make sense to incorporate in Delaware. If, however, you become a large corporation, or you eventually receive venture capital, then you can reincorporate your business in Delaware at that time.
Obviously corporate formation for startups can be particularly complex, so its always good idea to hire an attorney to help you figure this out.