Delaware is one of the most popular states where people setup their businesses for liability and asset protection purposes. It also provides ownership privacy, an efficient legal system for business disputes, and tax benefits for assets. Here are some of the top reasons why Delaware may be the best state for you to form your next business.
1. Privacy Protection
Delaware LLCs are not required to list member names and addresses in their filings. Members and managers are only specified in the LLC’s operating agreement, which is private by nature. Therefore, ownership and management information is not recorded and available as public records. For asset holdings and protection, LLCs are generally the preferred way to go. Corporations can also be filed without listing shareholders, directors or officers on the public record if you were to make use of a third party incorporation service. However, every Delaware corporation is required to make a Franchise Tax payment every year and, in doing so, must list the names and addresses of the company’s directors and one officer. Shareholders, however, do not need to be specified and therefore have privacy protection. While privacy is not 100% guaranteed in some cases, it does offer more privacy protection compared to other states like California.
2. Asset Protection
Delaware LLCs protect an LLC owner’s assets. Many startups create an LLC structure to protect their assets from lawsuits. In addition, Delaware is one of the few states that only allows a charging order as the sole remedy for collecting debt on single-member LLCs. In contrast, many other states treat single-member LLC as a disregarded entity and allows judgment collectors to pierce the corporate veil and go after the single member’s personal assets.
3. Tax Benefits
Delaware does not tax companies that operate outside of its borders. This means you do not end up paying Delaware state taxes if you have no physical office or do business directly within the state. Additionally, Delaware does not have taxes for the following:
- No state sales tax that you need to collect from customers. This makes it easy to start an online business and stay competitive in the e-commerce market.
- You may have to pay a gross receipts tax if you do business in the state, but the tax is fairly low and only applies in certain situations.
- No corporate tax on interest or other investment income in a Delaware holding company. Fixed-income or equity investment gains are also not taxed on the state level.
- No personal/business property tax. There may be estate taxes on the county level, but those tend to be fairly low. This is extremely beneficial if you happen to own tangible property such as an office building.
- No value-added taxes, use tax, or even inventory tax.
- No inheritance tax.
- No capital shares or stock transfer taxes. This is great for startups who are expecting to obtain venture funding.
- No tax on intangible assets such as trademarks, patents, and naming rights. This is great for intangible asset holding companies.
4. Business Friendly Laws
Delaware has a well established and highly respected Court of Chancery that focuses on resolving corporate disputes. The Court of Chancery is a non-trial court that focuses solely on businesses and examines issues involving real property and commercial litigation. It consists of only judges and no juries. The Court of Chancery allows business issues to be resolved quickly by a judge who specializes in corporate law and has expertise in resolving complex corporate disputes. On top of that, Delaware business laws tend to be more favorable to businesses compared to other states. They also have a long history of precedents that the court can use to help with disputes. As a result, corporations that register in Delaware will receive a robust legal system that offers protection of their business if it is involved in litigation.
5. Cheaper filing fees
Filings fees and running costs for LLCs and Corporations tend to be cheaper, but not necessarily the cheapest, compared to other states. For LLCs, the filing fees are only $90 and the annual tax is $300. LLCs do not need to file any annual reports. Corporation filing fees are more complicated and are based on your authorized stock shares and assume par value. Fees start at $89 + $9 / page plus additional fees for extra services like the 24-hour expedited service ($50). Annual reporting and franchise tax fees starts at $175 / year if calculating using the Authorized Shares Method and $350 / year if using the Assumed Par Value Capital Method. Use their handy Franchise Tax Calculator to get an accurate value for filing taxes.
6. Investor appeal
For a new company looking to attract outside investment funding from angels, venture capitalists, and private equity firms, incorporating in Delaware will offer a better environment for raising capital for your business.Investors are more likely to consider investing in your company due to Delaware’s business-friendly laws. Top investors and business leaders understand the Delaware system and often Venture Capitalists and investment banks prefer Delaware corporations.Additionally, if you are considering venture funding or going public it would be wise to incorporate in Delaware from the beginning rather than having to convert the company to a domestic Delaware entity at a later time. The initial running cost may be higher, but it saves costs in the long.Overall, by incorporating in the state of Delaware you will be exposed to a greater range of investment options.
Doing Business in Another State
If you are incorporated in Delaware, but have an office or do business in another state, you will most likely need to file for foreign qualification in that other state. There will be additional costs, so it’s good to check your state laws regarding doing business within that state.
Unsure whether your company is doing business in another state? Ask yourself the following questions.
- Does your company have a physical office or warehouse in the state?
- Does your company derive income in the state?
- Does your company hold any assets in the state?
- Do you have employees working in the state?
- Do you have a local business bank account in the state?
If you answer yes to any of the above questions, you may need to register as a foreign entity in that state.
What is Foreign Qualification?
When you form your business entity, the state where you initially registered is the domestic state for your company. If you are doing business in other states, you would be considered a foreign entity in those states. Foreign Qualification (also known as Certificate of Registration or Certificate of Authority) is the process of registering your entity in other states that you operate or do business in.
Incorporating in Delaware offers many benefits to businesses and asset holding companies. They provide ownership privacy, a dedicated court for speedily resolving business disputes, and great tax benefits. It is one of the best states to register your business if you are using the company to hold assets or plan to obtain venture capital funding.