Have you wondered if you should start your business in Delaware to save taxes? Many of my clients, who are small business owners, asked me the same question. Here is my detailed answer on whether you should start your business in Delaware, form an INC or LLC, and the benefits and risks of forming your company in Delaware.
YES, start your business in Delaware if are venture capital-funded, foreign, want privacy and have thousands of shareholders. NO, do not start in Delaware if your company is small, headquartered in another state with few shareholders because the costs outweigh the benefits.
Read on to learn more about how to make the right decision for your business company formation.
Delaware Corporate Business Background
Perhaps you’ve heard that 66% of Fortune 500 large publicly traded companies (including Apple, eBay, Walmart and Verizon) have been incorporated in Delaware and you are wondering why. (according to Delaware.gov)
The reason is that there is a historic, business-friendly court system called the Delaware Court of Chancery. It was established over 200 years old and is the basis for most of the current US corporate law. This court is business-friendly, flexible and experienced at resolving disputes.
As a center of national commerce and incorporation, the Delaware government has expert staff to provide professional services to clients, attorneys, and corporate registered agents.
Delaware No Income Tax?
Don’t be fooled into thinking that by forming a company in Delaware you get away with not paying income. It’s simply not true. The only income that is not taxed is that of the corporation’s net profits – not the individual shareholder’s income.
Unless you are a major corporation with thousands of shareholders, a team of high-paid corporate attorneys, and are a non-US citizen that wants to keep their identity private – then the benefits of registering a Delaware corporation or LLC typically outweigh the costs and added paperwork.
Benefits of Registering a Business in Delaware
These are the primary benefits of registering your business in Delaware. Be aware that there are different benefits for INC and LLC. Read on to make the right decision for your new business formation.
The state of Delaware has extremely flexible corporate statutes. These laws will govern how you structure your corporation, board members’ responsibilities, roles, conduct, and corporate share regulations.
One of the most advantageous benefits is the flexibility that shareholders, directors & officers of the corporation need not be residents of Delaware, America nor be US citizens.
Delaware also allows a single person as the sole director, shareholder, and officer of a corporation. This allows you to set up a corporation with a single shareholder. Many other US states require a minimum of three people for corporate officer positions.
If you want a greater level of privacy for your business affairs Delaware offers the maximum secrecy. Delaware does not require corporations to disclose either officer or director names on their business formation paperwork.
Business Friendly Courts
Delaware’s Court of Chancery expertise is business corporate issues and also does not use juries. What this means for your business is that if you are involved in a court case you will be assigned a judge with excellent corporate business experience.
Most corporate lawyers are very familiar with business law in Delaware. As such your company attorney may be more familiar with Delaware law than your particular state laws.
Venture capital firms, angel investors and investment bankers prefer to fund Delaware Corporations as opposed to other state business structures.
The reason is that they are fully aware of the Delaware corporate law and its support of business investors.
So if your business will be getting VC funding or going public in the future, you would be well-advised to incorporate in Delaware.
This will save you the hassle, delay, and cost of later having to convert your company from an LLC or INC from another state into a Delaware Corporation – when an investment banker chooses to purchase your company stock.
Delaware’s business-friendly tax law allows companies that are formed in their state, that do not conduct business in Delaware, to not have to pay the state corporate income tax.
However, be aware that there is an annual franchise tax for an LLC is $300.
For corporations, it is calculated on issued and authorized shares plus total gross assets. The minimum is $175 up to 5000 shares, up to 10,000 shares is $250 then each additional 10,000 share adds $75 to a maximum franchise tax of $180,000. An example, if your corporation has one million shares your annual franchise tax will be approximately $7,500.
Stock shares of Delaware corporations owned by people outside of Delaware are not subject to being taxed inside of Delaware.
Delaware corporations are an ideal option for foreign entrepreneurs who are not US citizens to form business corporations in the USA. This is due to the fact that Delaware does not require US citizenship nor residency to form business companies.
No Minimum Capital
Delaware requires no minimum capital in order to set up any type of business entity – INC, DBA or LLC. This is the same as all US states which now have no minimum capital requirement as of January 14th, 2020. Source
Risks of Registering a Business in Delaware
Duplicate State Tax Payments
If you operate a small business outside of the state of Delaware you could save taxes by NOT registering in Delaware. Because you may be paying more taxes in total, even though you’re not paying corporate income tax in Delaware. You could get hit with duplicate state tax bills.
It works like this, if you incorporate in Delaware but your company is headquartered in New York you will have to pay franchise taxes in both states essentially doubling (or more) your tax bill.
If you start your business in Delaware but reside in Florida, and your company is headquartered in Florida, you will have to prepare multiple income tax forms and send returns to both states. This additional paperwork (which can be complex) will take extra time and increase your tax preparation fees.
How to Make The Right Choice for Your Business
Yes – Do Form your company in Delaware IF
Your business is VC funded, issued thousands of shares, or a single shareholder and are a non-US citizen who wants privacy
No – Do Not Form your company in Delaware IF
You are a small business operating in a different state with less than 5000 corporation shares and are a US citizen.
Ask the professionals at Legalzoom who have helped millions of small businesses get started right – and affordably
Check out my guide on how to start your business right with tons of useful tips I learned by successfully starting, building, and selling multiple companies.