Delaware is widely regarded as a favorable place to incorporate, and the state is home to several domestic and international businesses. This guide will explain why Delaware is such a popular place to incorporate and how Delaware compares to other states in business formation and registration. Here’s what you should know.

What’s in this article?

• Why businesses choose Delaware for incorporation
  
• Disadvantages of Delaware incorporation
  
• Incorporating in Delaware vs. other states
  
• Overview of Delaware franchise taxes
  

Why businesses choose Delaware for incorporation

When choosing which state to incorporate in, businesses should consider factors such as state court systems, tax obligations, costs and fees, and applicable laws and regulations. The following features make Delaware an attractive choice for incorporation.

• Court of Chancery: Delaware has a specialized Court of Chancery that deals exclusively with corporate disputes. This court’s focus on corporate law creates an efficient legal environment, and Delaware’s substantial body of case law provides clear legal precedent and reduces uncertainty for corporations.

• Flexibility in corporate structure: Delaware’s General Corporation Law is one of the most advanced and flexible corporate statutes in the United States. It provides maximum flexibility in the structure and governance of corporations, making it easier for companies to conduct their business as they see fit, while still taking advantage of high-level protections for directors and officers. For example, one individual can hold all officer positions and be the sole director, which can be particularly helpful for small businesses or solo entrepreneurs.

• Tax benefits: Corporations in Delaware enjoy several tax advantages. These benefits can be particularly helpful for businesses that incorporate in Delaware but conduct their operations elsewhere. Corporations that conduct their operations out of state do not have to pay state corporate income tax or personal income tax. This can result in substantial savings, although businesses should also consider how these benefits align with their broader tax strategy and the potential implications for federal and other state taxes.

• Investor and market recognition: Many investors and venture capitalists see incorporation in Delaware as a sign of a business’s credibility and stability, due to the state’s established legal framework and corporate-friendly environment.

• Efficient filing and administration: Delaware’s Division of Corporations, which processes incorporations and other corporate filings, offers efficient, reliable services with expedited options.

Disadvantages of Delaware incorporation

Despite the many benefits of incorporating in Delaware, there are a few potential drawbacks to consider.

• Costs: Incorporating in Delaware comes with some higher fees and taxes compared to other states.

  • Filing fees: Delaware charges higher initial filing fees than some other states.
    
  • Franchise taxes: Delaware requires corporations to pay an annual franchise tax, which is calculated based on either the number of authorized shares or the company’s capital.
    

• Registered agent requirement: Corporations in Delaware must maintain a registered agent with a physical address within the state, which can be an additional cost if your business does not have a physical presence there.

• Complexity: For small businesses that are not planning to attract venture capital or go public, the simplicity and cost-effectiveness of incorporating in their home state might outweigh the benefits of incorporating in Delaware.

• Public perception: While many people view Delaware’s favorable corporate laws as a benefit, others argue that incorporating in Delaware can raise concerns about a lack of transparency or accountability, particularly in the context of corporate governance and ethics.

Incorporating in Delaware vs. other states

In addition to Delaware, several other states are popular choices for incorporation due to waived taxes, additional privacy protections, and other business-friendly legal structures.

• Wyoming: With no state corporate income tax, franchise tax, or individual income tax, Wyoming is known for its business-friendly tax system. The state also offers substantial privacy for LLC owners and managers and has no minimum capital requirement for forming a corporation. However, Wyoming’s advantages might not apply if you’re not a resident, or if you operate your business outside the state.

• Nevada: Nevada has strong privacy protections, strong asset protection laws, and no corporate income tax, franchise tax, or individual income tax. Small businesses might find the state’s annual report filing fees high.

• South Dakota: South Dakota has low ongoing filing requirements, legal protections that shield personal income and assets from corporate debts or liabilities, and no corporate or personal income taxes. Not all benefits are available to businesses that aren’t physically based there.

• Florida: Florida has no state individual income tax and exempts S corporations from state corporate income tax if they don’t pay federal income tax. The state is known for its excellent online business infrastructure. Software businesses enjoy tax exemptions for software-as-a-service (SaaS) sales.

• Alaska, New Hampshire, and Montana: Alaska, New Hampshire, and Montana have no sales tax. Alaska and New Hampshire do not impose individual income taxes. Montana offers business tax incentives.

When considering incorporation in these states, weigh the benefits against potential drawbacks such as additional fees or the need to register as a foreign entity in the states in which you operate. This chart captures some of the key differences between incorporating in these popular states.

Overview of Delaware franchise taxes

Delaware franchise taxes are annual fees that corporations registered in Delaware must pay to maintain their legal status in the state. This tax is not directly related to the company’s operations, sales, or profits but is rather a fee businesses pay for the privilege of being incorporated in Delaware. Companies should factor in these taxes when planning their annual budgets.

• How to calculate franchise taxes in Delaware
  There are two ways to calculate the franchise tax in Delaware: the authorized shares method and the assumed par value capital method. Companies can choose the method that results in the lower tax amount. The authorized shares method bases the tax on the number of shares the corporation is authorized to issue, while the assumed par value capital method calculates the tax based on the corporation’s gross assets and issued shares.

• Minimum tax
  There is a $175 minimum franchise tax amount that corporations are required to pay, which rises to $400 for companies using the assumed par value capital method.

• Due dates
  The franchise tax for corporations is due annually by March 1. Companies must meet this deadline to avoid penalties and interest charges.

• Exemptions and lower rates for smaller businesses
  Delaware has provisions that set lower minimum tax amounts and provide exemptions under certain conditions for smaller businesses.

• Online payment
  Delaware allows corporations to file and pay their franchise taxes online.

• Noncompliance consequences
  Failing to pay Delaware’s franchise tax can result in penalties, interest charges, and the potential loss of good standing in the state, which can have broader implications for a company’s ability to conduct business.