How Much Do Companies Save in Taxes by Incorporating in Delaware?

Your question assumes that companies incorporating in Delaware will save taxes, which may or may not be true. More importantly, that isn’t generally the reason why businesses choose to incorporate Delaware.

What will have the greatest impact on your taxes is the type of corporate structure you choose. So selecting the corporate entity that makes the most sense to serve your company’s plans and needs requires a bit of planning. Sometimes a C-corp will be the right selection and sometimes incorporating as an LLC or S-corp is the better choice. 

Unless you’re forming a high-tech startup or some other highly lucrative company that you plan to take public, incorporating in the state where you’re doing business is usually your best option. The reason to choose Delaware for your incorporation is because you plan on raising capital through multiple financing rounds. Venture Capital firms ordinarily require Delaware incorporation for a host of reasons, including the flexibility and protections it offers directors and officers.

If you’re not planning on going 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. Most of the time it will be. You should really consult with a knowledgeable business attorney regarding your formation since unintended tax consequences can easily result if you’re not careful in your selection.

I’ve enjoyed helping startups successfully work through formation and tax planning issues. I have to say, I think this question – and all its variations – comes up way more than any other. I’ve seen people make a lot of mistakes when defaulting to Delaware, although it can also be a good choice for those seeking strong privacy protections and robust law favoring directors and officers. As I’ve already mentioned, it’s almost always the way to go if you foresee your company heading into multiple financing rounds with VCs and possibly going public.

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.

Some of the factors you need to consider – in addition to weighing in future financing and going public – are the costs of incorporation, the advantages and disadvantages of the state’s tax structure, and the pros and cons of the state’s corporate laws that are relevant to your company. Other states that are seeing rising popularity among businesses include Nevada, Texas and Florida.

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