Key Summary
- Delaware has a vast body of corporate law precedents. This makes its legal outcomes predictable and favored.
- The state offers privacy protections for business owners. Many other states do not have these protections.
- There are significant tax advantages and flexible business structures.
- Delaware offers many tax and legal benefits. However, the state also requires extra fees and specific corporate regulations. These may not be present in other states.
- Delaware’s appeal is evident in its track record of attracting major corporations.
Advantages and Disadvantages of Incorporating in Delaware
| Advantages | Disadvantages | |
|---|---|---|
| Favourable Tax Environment | Additional Franchise Taxes | |
| No Corporate Income Tax For Companies Outside of DE | Enhanced Reporting Requirements | |
| Ease of Business Formation | Foreign Qualification Costs | |
| Flexible Business StructuresCosts and Efficiency | ||
| Costs and Efficiency | ||
| Attraction of Major Corporations (e.g., Google) |
Advantages of registering in Delaware?
1. Favorable Tax Environments
Delaware offers helpful corporate tax rates. This particularly benefits companies that operate beyond the state’s borders. It reduces their tax liabilities.
- No Inheritance Tax on Non-Resident Stock: Beneficiaries are not taxed on inherited assets, including stock. This is because Delaware does not tax non-resident stock. This makes it an advantageous option for inheritors.
- Absence of State Sales Tax: Delaware exempts intangible personal property from state sales tax. This provides an advantage to owners of assets such as royalty payments and stocks.
- Corporate Tax Shelter: Delaware is known as a corporate tax shelter. That’s because it has favorable tax laws. Out-of-state companies don’t pay sales tax or corporate income tax. They also don’t pay taxes on intangible assets.
- Privacy and Efficiency: Delaware appeals to businesses forming there because of its privacy and efficiency. In addition to the mentioned tax benefits, it offers businesses privacy, efficiency, legal protection, and liability protection.
2. No Corporate Income Tax On Companies Outside Of DE
Delaware does not impose corporate income tax on companies that are not physically operating in the state.
- According to the Delaware Division of Revenue, every domestic or foreign corporation in Delaware must file a corporate income tax return. However, a corporation is exempt if the company does not physically operate in Delaware. This means that if a company is registered in Delaware but does not have employees, assets, or physical presence in the state, it is not subject to Delaware state income tax.
3. Ease of Business Formation
Delaware’s business formation is easy in comparison to other states due to several key factors:
- Efficient Registration Process: Delaware provides an efficient registration process – which makes incorporating there easy for businesses. The Secretary of State’s office processes filings quickly, providing a user-friendly experience.
- Minimal Requirements: Delaware has minimal requirements for business formation. This makes it straightforward for businesses to start. Delaware’s corporate laws offer great flexibility, allowing businesses to customize their company structure and roles to fit their specific needs.
- Streamlined Company Formation Process: Delaware offers a range of business structures, each with its advantages. This allows businesses to choose the right entity for their needs.
- Business-Friendly Ecosystem: Delaware has a well-developed infrastructure, including an extensive transportation network. The state has access to major markets on the East Coast. It is near big cities like Philadelphia and Washington D.C and this infrastructure makes it easier for businesses to operate as it helps them reach customers and find suppliers.
4. Flexible Business Structures
Delaware’s diverse business structures, such as corporations, limited liability companies (LLCs), and partnerships, offer significant advantages over other states.
- Unmatched Flexibility in Company Structure: Delaware’s corporate laws enable unparalleled flexibility, allowing businesses to customize their structures to meet specific needs and objectives.
- Tailored Roles and Growth-Friendly Environment: The state’s legal framework allows companies to define roles and responsibilities that suit their operations. This creates a tailored environment for growth.
- Consistency and Protection in Corporate Law: Delaware’s legal system is known for its consistency, predictability, and emphasis on quality. It offers a strong framework for protecting the interests of the public and investors.
- A Model for Incorporation: Over 65% of Fortune 500 companies and most U.S. publicly traded companies choose Delaware for incorporation. They set it as a benchmark for corporate law nationwide.
5. Costs and Efficiency
Delaware offers speedy corporate filing, typically within hours, but with associated fees and franchise taxes.
| Entity Type | Franchise Tax | Minimum Tax | Maximum Tax |
|---|---|---|---|
| Delaware LLC | Flat Annual Rate | $300 | $300 |
| Delaware C-Corporations | Based on Authorized Shares | $175 | $200,000 |
| Assumed Par Value Capital Method | $400 | ||
| Delaware S-Corporations | Based on Authorized Shares and Par Value | $175 | $200,000 |
| Delaware Non-Stock/Non-Profit | Exempt | N/A | N/A |
| Delaware LPs, LLPs, General Partnerships | Flat Annual Rate | $300 | $300 |
You must always be aware of the fees of each entity before registering.
6. Delaware's Proven Appeal to Prominent Corporations
Delaware’s track record of attracting industry giants like Google, Tesla, Walmart, American Express, and Disney for incorporation underscores its business-friendly laws, tax benefits, and legal expertise. These real-world case studies demonstrate why a wide range of companies prefer Delaware as their corporate headquarters, enjoying the advantages of a supportive legal environment that fosters stability and operational efficiency.
Disadvantages of Incorporating in Delaware?
Additional Franchise Taxes
Delaware corporations are liable for annual franchise taxes, starting at $75 plus a $50 filing fee. Larger corporations may face taxes exceeding $100,000.
Enhanced Reporting Requirements
Delaware mandates annual reports, increasing administrative duties, even if similar obligations exist in the company’s home state.
Foreign Qualification Costs
Corporations operating in multiple states must undergo foreign qualification expenses, incurring extra fees and financial overhead.
These disadvantages should be viewed in the broader context of incorporation in any state. While Delaware offers unique advantages, these challenges are not specific to Delaware and can be encountered when incorporated in other states as well.
Frequently Asked Questions
Is Delaware a tax haven for businesses?
Yes, Delaware is widely recognized as a tax haven for businesses. When a company incorporates in Delaware, it chooses to have its internal affairs governed by Delaware law, offering a layer of protection for businesses in terms of corporate law.
Why is Delaware considered the best state to incorporate?
Delaware is often considered the best state to incorporate due to its reputation, legal precedents, and expertise in corporate law through its Court of Chancery. It’s a preferred choice for businesses seeking venture capital or angel investments because of its predictable legal environment and established corporate governance lawns.
What factors should I consider when deciding between Delaware and Wyoming for incorporation?
For small businesses considering incorporation, Delaware often stands out as the preferred choice over Wyoming. Despite Wyoming’s benefits in tax optimization and confidentiality, Delaware’s business-friendly environment and esteemed legal system provide significant advantages.
What is the purpose of Delaware's tax credits and incentives?
Delaware offers these incentives to promote business growth and operations within the state, supporting various economic activities and employment opportunities.
Who administers these tax credits and incentives?
The Delaware Division of Revenue and other state agencies administer these programs.
Can you explain the Business Finder’s Fee Tax Credit?
This credit incentivizes existing companies to bring suppliers and service providers to Delaware. Companies must submit a joint application, and the new business must create at least 3 new full-time jobs.
What is the Delaware Strategic Fund (DSF)?
The DSF offers businesses low-interest loans and grants to help with job creation, business expansion, relocation, and redevelopment of brownfield sites.
What are EDGE Grants?
These are competitive matching grants for small businesses. STEM companies can get up to $100,000, and others can get up to $50,000. The grants cover eligible expenses.
Is Wyoming or Delaware better for forming an LLC?
The choice between Wyoming and Delaware for LLC formation depends on the business’s specific requirements and size. Delaware is favoured by larger businesses, including many public and Fortune 500 companies, due to its flexible business laws and corporate-friendly environment. Wyoming, on the other hand, is a more suitable option for smaller, cost-conscious businesses, offering enhanced privacy, asset protection, and lower fees.
What about Workforce Training Grants?
Delaware provides matching grants for businesses. They can receive up to $100,000 annually for customized workforce training.
Are there additional credits for businesses in specific areas?
Yes, businesses creating jobs in targeted growth zones can receive up to 25% more credits. This includes incorporated municipalities and former Brownfield sites.
Wrapping Up: Understanding Delaware Incorporation
Delaware’s strong corporate laws and privacy protections attract businesses. This includes major corporations like Google and Tesla. While offering significant tax advantages and ease of formation process, it’s important to consider the state’s additional franchise taxes and specific corporate regulations. Despite these, Delaware remains a strategic and favorable destination for business incorporation.
