“More than 66% of the Fortune 500 have chosen Delaware as their legal home”, and if it’s good enough for the vast majority of the Fortune 500, it’s good enough for your startup – right?
Well, not always.
Delaware has long been favored by US corporations. It offers state tax advantages for large corporations, has efficient and well-developed corporate laws, and it’s generally a business-friendly state. However, it doesn’t automatically mean that Delaware is the state for every business. After all, if it did, 100% of the Fortune 500 would move there.
Here’s what to think about before incorporating in Delaware (when your business is located elsewhere):
1. First things first, is incorporation the right move?
Before you incorporate in Delaware, it’s worth considering whether incorporation is the right move for your business. There is no hard and fast test to confirm whether you should incorporate, register an LLC or opt for a different business structure. Typically, if you intend to finance the business via venture capital, you would elect to incorporate – however, even this is changing, and we’re beginning to see angel investors investing in LLCs.
The best way to determine which corporate structure suits your startup is to speak with an experienced corporate attorney. The consultation fee can save significant clean up costs in the future.
2. Do you know that you will likely need to ‘foreign’ register your business in your ‘home’ state?
If you live in Delaware and you’ll be operating your business within the first state, then incorporating in Delaware may be the right choice for you. But if you live outside of Delaware but choose to incorporate there, you’ll also (likely) need to register your ‘foreign’ corporation in the state you physically live in – which comes with more fees, more paperwork, and increased complexity. There are also likely to be tax implications that come with your ‘foreign’ incorporation in your home state.
For it to be worthwhile, you need to be certain that the legal and business benefits of incorporating in Delaware outweigh the drawbacks of foreign registration. Again, this will depend on the unique circumstances of your startup and you’re best to consult with an experienced startup attorney.
3. Are you prepared to comply with double the reporting requirements if you register in Delaware?
This drawback comes with ‘foreign’ registration. Essentially, if your corporation is registered in Delaware and registered as a foreign corporation in California (or elsewhere), you will need to meet the reporting requirements in both states. This means additional costs for corporate consultants, including tax professionals and attorneys. These costs can quickly negate any potential savings that (sometimes) come with incorporating in Delaware.
4. In which state would you prefer to defend a lawsuit?
While founders generally hope (and even assume) they won’t be sued, there is risk associated with running a growing company. By incorporating in Delaware, you’re agreeing to be bound by the corporate laws of that state. As we outlined, those laws are efficient and well developed. However, those benefits might be outweighed by the costs and inconvenience of fighting a lawsuit from across state lines.
5. Are you willing to move to Delaware?
The final thing to think about before you incorporate in Delaware is whether you’re willing to move there. Your business can access the benefits of incorporating in more tax-and-business-friendly states (like Delaware, Wyoming and Nevada), but these are generally only attainable if you physically operate within that state.
If you’re willing to make the move to access the corporate benefits, then incorporating in Delaware may make sense.
If you would benefit from some help answering these questions (and more) for your startup, reach out. We’re here to help!
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