Should I incorporate in Delaware?
As you start your company one of the first questions you may ask is: should I incorporate in my home state or in Delaware. After all, according to the Delaware Department of Corporations, over 65% of Fortune 500 companies are incorporated in Delaware. If it is good enough for the vast majority of Fortune 500 companies, it should be good enough for you. While it may make sense for a Fortune 500 company to incorporate in Delaware, does it make sense for every business?
Advantages
To incorporate in Delaware, it is quite simple. Everything is automated and you can complete your filings online and in one hour. Since the Delaware court system has been around since the 18th Century, there is a body of court case law that you can use to evaluate the outcome of a business dispute. A business dispute will also be decided by a judge, not a jury which can sometimes be unpredictable. Unlike California, in Delaware you can keep the names and information on all directors and officers private. Delaware can also be favorable for tax purposes as it charges no income tax for corporations that do not operate inside the state.
Disadvantages
If your business operates primarily in one state and you incorporate your business in Delaware, you likely have to register to do business in your home state. In California, you would be registering as a foreign corporation. The registration and qualification process is as long or longer as incorporating directly in California.
Although there might be significant tax advantages for billion dollar companies to incorporate in Delaware, there might not be much of an advantage for a small, privately held business to incorporate in Delaware. A Delaware company that qualified to do business in California will have to pay an annual tax to the California Franchise Tax Board. Additionally, any income earned in the state may be subject to income tax. Additionally, a Delaware corporation operating in another state (like California), the Company will be subject to two sets of filings, fees, registrations and reporting.
So, should I?
If your business plans are to remain privately held and not raise investment capital, or “go public,” it does not make sense to incorporate in Delaware. Incurring the extra layer of costs, fees, corporate governance and reporting may outweigh any benefits that a Delaware incorporation may provide. On the other hand, if you do plan to seek outside investors, scale to a go public some day or operate internationally, incorporating in Delaware may be beneficial. Also, if you are an international company and want to sell your goods and services to the United States, Delaware may be a good state for you. Fortunately, you may not have to make the decision to incorporate in Delaware immediately. You always have an option to convert your business to a Delaware corporation when you starts planning a public offering or seek investor financing.
If you would like to learn more about incorporating your business, please reach out to us at (818)539-2245 or info@brunogroupinc.com
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