A recent LawTrades user asked Are there any other clear advantages to a Delaware C Corp if you’re not planning to raise?
The quick answer is no. Of course, this answer can’t substitute for legal advice. How a company should be structured is something that needs to be carefully considered as part of a legal consultation since a business lawyer is going to be able help you identify potential blindspots. With that said, I find that most of the time, the best state in which to incorporate the future entity is the home state.
Delaware’s C-Corp Advantage
It’s true that Delaware dominates the incorporation landscape and is often an automatic default for new entities. It’s also true that Delaware has Chancery Courts that specialize in corporate law (without requiring a jury). And it’s true that Delaware offers C-corps many advantages, including not taxing royalties and other intangible assets, protecting the privacy of shareholder and director identities, and providing flexibility that favors directors and minority stockholders (e.g., cumulative voting) – all of which makes Delaware very attractive to VCs and companies planning to go public.
Home State Advantage
On the other hand, Delaware requires you to maintain a registered agent with a physical address in Delaware, which can add some expense. Additionally, all Delaware corporations are required to pay annual franchise taxes. These taxes are based on the company’s share value and range from $75 to $180,000 — plus a $50 filing fee. Furthermore, Delaware has mandatory annual reporting requirements, which you’ll need to file in addition to those in your home state or states where you are doing business.
If you’re not planning to raise or go public, your home state will usually provide you with the most advantages and favorable business treatment. In fact, in certain industries, incorporating in-state will not only be your best option, but also might be your only option.
Thinking About the Future
So as a general rule, if you don’t anticipate rapid growth or VC funding anytime soon, then speak with your attorney about the options that will best serve your company’s financial and business needs. Even if you don’t incorporate in Delaware and later find the need to do so, converting to a Delaware C-corp is relatively easy.
Final Thoughts About Delaware
The debate about Delaware’s superior corporate laws is certainly heating up – even for large C-corps and those who plan to go public. Take, for example, the August 2, 2015 front page article, “Dole and Other Companies Sour on Delaware as Corporate Haven.”
Take, as another example, “,” an article penned by two eminent legal scholars. After analyzing the long-term data panel, the authors concluded, “that financial markets place no economically consequential value on Delaware law relative to that of other states, which contradicts both of the leading schools of thought. This result suggests that lawyers are engaging in default decision-making based on Delaware’s past preeminence, rather than actively weighing the value-added Delaware and other states offer to their clients.”
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