By NiNi Vo

When you have decided your small business is ready for incorporation, the first step is to choose which state you want to incorporate in. A popular place that many companies choose is the state of Delaware, but you will rarely see any headquarters physically located in the area.

As a matter of fact, more than fifty percent of publicly traded and Fortune 500 companies elect to incorporate in Delaware. Why is this the case?

Delaware provides a large number of advantages for big companies. This is not the case for the average small business, as it may never get to use the benefits offered. Another aspect of incorporating there is high cost (and a complex administrative process.) Before deciding on Delaware, consider other potential options available for your startup; each state has positive and negative considerations in terms of incorporation. In this post, we will take a deep dive into why companies incorporate in "The Blue Hen State."

Advantages of incorporating in Delaware

Listed below are a couple of key advantages for incorporating in Delaware:

1. The court system of Delaware is highly renowned and respected throughout the country. Delaware’s Court of Chancery in particular works well alongside corporate issues. If your business was to be involved in a litigation case, you would be provided with a judge who holds a high amount of expertise with the complex corporate laws. Additionally, corporate attorneys are usually familiar with Delaware business law practices. There is a likelihood that your startup's attorney would be already comfortable dealing with litigation there.
2. Delaware offers a considerable amount of flexibility when it comes to how you can structure your corporation. Their corporate statutes allow you and your company autonomy on decisions about the structure of your corporation and electing board members. For instance, shareholders, directors, and officers do not need reside in Delaware. In addition, one single person can be chosen as the director, shareholder, and officer of a sole corporation. In other states, a minimum number of people may be required to obtain the position of an officer of director.
3. Delaware offers far more privacy than other states. Corporations established in Delaware have the ability to legally deny disclosing officer or director names on formation documents. This provides an additional layer of protection, if needed.
4. Venture capital investors and investment banks favor Delaware corporations over other states and business structures since it is the most popular place companies incorporate in. If your company is considering venture capital funding or going public, this state is an option worth considering.
5. Delaware offers tax advantages. Some states such as Wyoming and Nevada are lacking with their state corporate income tax. However, Delaware upholds business-friendly tax laws. Many businesses decide to incorporate in Delaware but don’t conduct business in the state because they do not need to pay state corporate income tax (only franchise tax.) This saves your company money in the long haul. It’s also beneficial for owners of stock shares who reside outside of Delaware, since they are not given Delaware taxes.

Disadvantages of incorporating in Delaware

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Incorporating in Delaware is an excellent option for many businesses, particularly among large corporations that contain thousands of shareholders. Despite the fact that these companies reap benefits from incorporating in Delaware,  it’s important to know the downsides incorporating in this state may entail for smaller businesses.

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If you incorporate in Delaware but have no intention of conducting business (or having physical headquarters) in the state, you may encounter difficulties as a new startup. For example, if a company that is physically located in California decides to incorporate in Delaware, this enterprise faces paying the annual franchise tax in both states. This sum may pose a financial burden on the company. Additionally, you will have to follow the reporting requirements for both states, which could entail extended efforts (and resources) to complete. If the benefits of incorporating in Delaware do not outweigh these potential cons, save your company the trouble and look into other states to incorporate in.

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