How a company should be structured is something that should be carefully considered as part of a legal consultation because a business lawyer is going to be able help you identify potential blind spots. With that said, I find that most of the time, the best state in which to incorporate the future entity is the home state.
As others have correctly commented, many people incorrectly assume that Delaware is the best state in which to incorporate when that is often not the case. It could be depending on the nature of your company, but it often is not the best option.
Delaware is certainly well-developed and favorable toward corporations. This is reflected by lawyers across the country who seem to boast a fairly universal knowledge of Delaware corporate law. At the same time, this is often because state corporate law – particularly the further west you go – is often modeled after Delaware corporate law. There are other advantages to incorporate in Delaware:
- Delaware is attractive if you plan on raising capital through multiple financing rounds. Venture capital firms and investment banks ordinarily require startups to incorporate in Delaware for a host of reasons, including limit on liability for directors and officers.
- Delaware General Corporation Law provides a ton of flexibility for businesses to carry on their business in ways disallowed in other states.
- Delaware provides strong privacy protection for shareholders and directors.
- Delaware has Chancery Courts that specialize in corporate law without requiring a jury. The State of Delaware website provides that “Delaware’s judges are impartial and not beholden to special-interest donors or shifting political winds. Unlike in many other states, Delaware corporate law cases are tried exclusively by professional judges, and not by juries.”
- Delaware is not cheap when it comes to providing customer service. The State of Delaware states that “Delaware’s Division of Corporations is open 15 hours a day to accommodate requests for filings from around the world; it offers specialized and expedited services (including one-hour, two-hour, and 24-hour service) for urgent and time-sensitive matters. The Division of Corporations, in conjunction with expert Delaware lawyers and experienced supporting businesses such as Delaware registered agents, can handle nearly any situation.”
- Businesses incorporated in Delaware are not required to have an office there (but you will need a registered agent). Also, companies that do not conduct business in Delaware do not have to pay sales tax, corporate income tax, or property tax.
- There is no personal income tax for non-residents of Delaware.
- There is no minimum investment required to form a corporation in Delaware.
However, unless you’re forming a high tech startup or some lucrative company that you plan to take public, then consider the type of business you’re in and whether the state where you’ll be conducting business will better serve your financial needs; it often is. Delaware requires you to maintain a registered agent with a physical address in Delaware, which can add needless expenses. 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 $180k — plus a $50 filing fee. Delaware also 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. You’ll also want to keep in mind that if you incorporate in Delaware but will be conducting your business in another state (or states), you’ll need to also file a certificate with the state/s you’re doing business in to qualify as a foreign corporation.
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I hope this answer is helpful. Best of luck with your company! If there is anything else I can do to help, please don’t hesitate to reach out.