1. Client Inquiry
Client contacts to our office frequently request a Delaware incorporation. Clients indicate (without any legal/tax basis whatsoever) they “Read it on the Internet” or “Have a friend who recommended a Delaware incorporation.” Upon analysis, the Client rarely has a reason to incorporate in Delaware and, in truth and in fact, should incorporate anywhere other than Delaware.
2. Comfort in Numbers. We have over four hundred fifty 450 current corporate clients. Less than three (3) of them are incorporated in Delaware. In fact, we spend more time converting Delaware corporations to other jurisdictions or dissolving Delaware corporations than we do incorporating them in Delaware. Clients who have incorporated in Delaware frequently complain about fees, penalties, compliance issues and Franchise Tax Reports. Delaware (1) has multiple fees for virtually everything, (2) is quick to assess penalties and (3) pompously insists on fees for senseless acts.
3. An Example of Absurdity. By way of example, consider the following scenario. Corporation X incorporated in Delaware but never did any business. Consequently Corporation X never filed any Delaware Franchise Tax Reports. Delaware assesses a penalty to file the Franchise Tax Report even though no business was transacted. Delaware suspends the Corporate Charter. Hypothetically, three (3) years later the Clients Canadian CPA recommends dissolving the Corporation to cut off the need to file US tax reports. Delaware senselessly requires that the Franchise Tax Reports be filed and a penalty paid for each year. Note—that Corporation X has done no business on the Franchise Tax Reports are “Nil” reports.
Once the Franchise Tax Reports are filed and the penalties are paid we can dissolve the inactive entity—Right? Wrong! Delaware now requires the Client to “Reinstate” the entity and pay a reinstatement fee. Think this through—The Client has paid a CPA to file the “Nil” Franchise Tax Reports, paid penalties to Delaware and incurred an accounting fees. What Next—Delaware requests a Reinstatement Fee to reinstate the entity. The Client pays the Reinstatement Fee and an Attorneys Fee.
Perfect, we can dissolve the entity now? Wrong! Delaware requires a fee to dissolve the entity and pays an Attorneys fee to dissolve.
Now think about the absurdity—Corporation X that has never done any business and wishes to dissolve must pay multiple fees and penalties to reinstate and then dissolve.
4. Delaware Boast of a Corporate Friendly Legal System.
Delaware has a Court of Chancery, which only handles business and corporate disputes. The judges are experts in corporate law, and their decisions tend to be more predictable than those in other states. This is partly because the court operates without juries, so the judges rely more on legal precedent and business principles rather than persuasion.
Over multiple decades, Delaware has developed one of the most extensive bodies of corporate case law in the country, covering everything from shareholder rights to mergers and acquisitions. For corporations and their attorneys, this generally means fewer surprises and more certainty when making decisions.
Our Response—So what! Do you really intend to be flying from Canada to Delaware to access their Court system? History tells us that Clients do not want to be in Court in Delaware or any other state.
5. Privacy Protection
When you file the Certificate of Incorporation to start your company in Delaware, you don’t need to disclose your directors’ and officers’ names to the state, allowing you to keep your personal information out of the state’s public records.
You’ll still need to provide details for your Registered Agent—that is, a person or company located in Delaware that accepts legal filings on your behalf. But if you use a Registered Agent service, the company’s information appears in public records instead of your personal details.
Keep in mind that this only applies to the initial formation paperwork filed with the state. You may need to list officers or directors on federal and state tax returns, bank records, or other required business filings—some of which may be publicly accessible. Nonetheless, Delaware can certainly make it easier to protect your personal information.
Our Response–In the current day and age this information is going to be public one way or another.
6. Potential Tax Benefits
Delaware is sometimes referred to as a tax haven. For starters, Delaware doesn’t impose corporate income taxes on corporations registered in the state that don’t conduct business there. The state itself also has no general sales tax. While residents are still subject to personal income tax, shareholders who reside outside of Delaware don’t pay state taxes on their corporate shares.
Our Response—Big representation. So do multiple other states.
7. Investor Appeal
If you’re looking for angel investors or venture capital funding, there’s a chance they’ll prefer that you incorporate in Delaware. In some cases, investors may even require incorporation in Delaware as a condition of their investment.
Our Response—We have seen it only once in fifty (50) years.
8. What Are The Disadvantages of Incorporating in Delaware?
While Delaware offers distinct benefits, there are also significant drawbacks to incorporating in the state. Here are other factors to consider.
9. Higher costs
Although Delaware doesn’t tax corporations in the state that operate elsewhere, your home state will tax your company, so you do not avoid taxation. In addition, you’ll need to pay the Delaware Franchise Tax based on the value of your company shares. This is generally minimal for small businesses, but it will increase as the number of shares increases and as your share value goes up.
As a result, for many small business owners, it makes more financial sense to incorporate in their home state rather than Delaware.
10. Dual Compliance Requirements
Even if you incorporate in Delaware, you will still need to meet your state’s registration and licensing requirements for conducting business there. For example, you’ll likely need to file annual reports in both locations. You’ll also need to stay on top of permit renewals, tax filings, and other registrations related to your occupation or industry.
Put simply, incorporating in Delaware may mean twice the work to keep your business compliant if you are registering in two states.
11. Legal Disputes Require Travel
Because cases involving your company must be heard in the Delaware court, you’ll need to travel to the state to handle any legal disputes. You’ll also have to retain a Delaware attorney to handle the case instead of the attorney you use in your home state. Happy Delaware Attorney=Happy Attorney Fees.
12. Should You Incorporate in Delaware?
While Delaware represents that it offers considerable benefits to companies that incorporate in the state, large corporations typically derive the greatest advantage. This is especially true for corporations with complex structures, multiple investors, or plans for significant growth.
However, the added expenses—franchise taxes, extra filing fees, and compliance costs—may outweigh the benefits if you’re just operating locally with no plans for outside investment.
13. Do Delaware corporations pay income tax?
Yes, but only on income earned within Delaware. Corporations doing business outside Delaware generally aren’t subject to the state’s corporate income tax. For those that are, the tax rate is a flat 8.7% of their federal taxable income.
14. Why are Corporations Leaving Delaware?
Generally speaking—the benefits of incorporating in Delaware are a myth!