If you have decided to incorporate your business, this is usually a wise step. You may incorporate in your home state. However, you may have heard or read that Delaware is a good state in which to incorporate. There is a reason that over 50% of Fortune 500 and public companies incorporate in Delaware. Consider the type of business you run first, and check out the laws of your state as compared to Delaware, to determine the best financial choice for your company.
Advantages to Incorporating in Delaware
Delaware has many advantages when you look into how to incorporate a business there, especially for larger companies. Their business laws are some of the more flexible laws in the United States. Their Court of Chancery, which rules on business issues, focuses only on the laws of business, and they use judges, rather than juries.
You will pay a franchise tax when you form a Delaware LLC, if it applies to your business, but there are not any state corporate income taxes if your company forms in Delaware, but transacts business in other states. Taxation requirements in Delaware are usually favorable to companies with a high number of authorized stock shares and/or complex capitalization structures.
Tax Benefits in Delaware
Delaware has no personal income taxes for those who do not reside there. Managers and members of a limited liability company and officers, shareholders or directors of a C Corporation or S Corporation are not required to live in Delaware to enter incorporation there. In addition, stock shares that are owned by people in other states are not taxed by Delaware.
The Court System in Delaware
Usually, a state's court system is not a main factor when you choose where you will be forming an LLC or incorporating. However, the courts in Delaware are extremely business-friendly. The Court of Chancery in Delaware is considered to be advantageous if your company faces lawsuits by shareholders. This court only hears business cases, and there are no unpredictable juries - they only use judges. This is a plus for large companies with many shareholders.
Conducting Business in other States
Consider, too, whether your company will need to be registered to transact business in a state other than Delaware. This is known as "foreign qualifying" a company, and an LLC, S Corp or C Corp is considered to be "foreign" in every state other than the state in which they are incorporated. This type of registration requires your company to transact business in a state other than your home state. LLCs and corporations incorporated in Delaware may also need to "foreign qualify" within their home state, since their physical location and their employees are there.
If you are thinking about incorporating in Delaware, factor in the low initial and ongoing costs for companies who incorporate there. Consider also the costs for foreign qualifications and any other fees in your home state. Delaware is so popular because it is advantageous tax-wise and asset-wise to incorporate there.