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Incorporating in Delaware: Pros, Cons, & Alternatives

Incorporating in Delaware: Pros, Cons, & Alternatives | Swyft Filings

For corporations, it's hard to beat Delaware. This state boasts more than a million business entities from around the world who have chosen to call Delaware home. While it may surprise some that Delaware ranked first in our 2021 Industry Report for the highest volume of business applications, more than 66% of all Fortune 500 companies have still chosen to incorporate there. 

So, with many other viable states, why do so many businesses, big and small, choose to incorporate in Delaware? The answer may surprise you. Keep reading to learn if incorporating in Delaware is right for you. 

Why Do So Many Businesses Incorporate in Delaware?

While many assume that the choice to incorporate in Delaware is purely financial, there is much more to the story. Delaware has striven to become a favorable state for corporations by creating laws and a judicial system that companies want, including a specialized court to handle corporate disputes without a jury. Delaware can also make a company more attractive to investors with advantageous tax laws. All of these factors have worked together to make Delaware the state with the most incorporated U.S. businesses.

Pros & Cons of Incorporating in Delaware

There are many well-documented benefits and some possible downsides to forming an LLC in Delaware. Below, we'll explore some of the most common reasons a business may choose to call Delaware home.

Pros of Incorporating Your Business in Delaware

Delaware has not become such a popular place to conduct business by accident. State representatives have worked for decades to provide favorable conditions in which corporations can operate. Below, we will explore the pros of incorporating a business in Delaware.

Tax Benefits

The first benefit people mention when discussing the possibility of incorporating in Delaware is the favorable corporate tax laws. Sole proprietors, partnerships, and C Corps who incorporate in Delaware will not have to pay corporate income tax on monies earned outside of the state. There is no sales tax, but there is a gross receipts tax of 0.0945% to 0.7468% and a net income tax of 8.70%. Delaware also has no state property or value-added taxes (VATs).

Access to a Corporation Court

Corporations also prefer filing in Delaware because of its court system. Known as the Delaware Court of Chancery, this specialed state court lets corporations resolve disputes quickly and without a jury. This allows for more flexibility and efficiency when dealing with corporate legal disputes.

The rest of the country often looks at Delaware's corporate courts for precedence. That means what happens in Delaware will usually have repercussions for business law throughout the country.

Quick Filing & Paperwork

Delaware has also done its part to make incorporating your business quicker and easier compared with most other states. This includes the possibility of getting same-day filing for your business.

Enhanced Privacy

Rules set by the state of Delaware provide better privacy for companies looking not to disclose the personal information of their owners, directors, or officers. Delaware allows companies to incorporate without sharing the names or other private information, helping provide anonymity and privacy for those connected to the business.

No Residency Requirement

Delaware allows nearly anyone in the world to form an LLC or corporation in their state. They have no residency requirements for officers, directors, or shareholders. 

Fewer Corporate Structure Requirements

Delaware could also be advantageous for any small businesses looking to form an LLC. This is because they have slimmed-down corporate structure rules that allow a single person to hold multiple roles, including officer, director, and shareholder.

Preferable Tax Advantages for Investors

Delaware also is an attractive state to incorporate for companies looking to gain the attention of investors. Shareholders who do not live in Delaware will not have to pay taxes on their shares, making Delaware-based companies a favorable option to all types of investors, including sought-after angel investors.

Incorporating in Delaware: Pros, Cons, & Alternatives 2 | Swyft Filings

Cons of Incorporating Your Business in Delaware

While there is no doubt that Delaware offers some unique advantages, it is not without some downsides. Below, we'll discuss some of the cons of incorporating your business in Delaware. 

Tax Advantages May Not Benefit Small Businesses 

While some may like to think of Delaware as a tax haven for any business, that is not the entire story. If you are a small business conducting business in another state, you will likely still be on the hook to pay taxes to other states.

Filing Fees Can Be Expensive

While long-term businesses expect to save money by incorporating in Delaware, the short-term expenses may be higher. Delaware filing fees are expensive and significantly higher compared with some states. As a result, some companies may save money in the short term by incorporating elsewhere.

There Are Franchise Taxes to Consider

Another area where Delaware is more expensive is its franchise taxes. This is a fee that is based on the company's shares' value. While this may not impact a startup or small business, as the company grows in value, so will the associated franchise taxes. Franchise taxes may also be due in other states the business operates in outside of Delaware, increasing potential costs.

You Still Must Adhere to Other State's Rules Where You Conduct Business

Incorporating in Delaware does not negate the laws of other states in which a business operates. Every state and local area in the U.S. can require additional registration requirements, taxes, and fees. Often this means incorporating in Delaware is not enough on its own to save you from paying taxes or following the rules in other locations where you conduct business.

Your Registered Agent Must Reside in Delaware

While the corporation or LLC owners may not need to reside in Delaware to incorporate there, the registered agent has different requirements. Registered agents, which are the people responsible for receiving notice should the business entity be sued or have a legal summons, must be located somewhere in the state.

Popular Alternative States to Incorporate Your Business

Based on our 2021 Industry Report, Delaware had the highest volume of business applications out of all 50 states. Still, several states beat Delaware for the most growth in business filings. Here are a few alternative states to consider when incorporating your business:

Wyoming

Often, Wyoming and Delaware are lumped together in lists of best places to incorporate a business. While each location offers business-friendly laws and tax structures, there are some distinct differences. For small companies forming an LLC, Wyoming could offer cost savings with lower filing costs and annual fees. 

Nevada

For many years, entrepreneurs have looked to Nevada as a top alternative to Delaware for forming their LLC. Landing right behind Delaware in our Industry Report growth rankings, Nevada offers low business taxes and perhaps higher than average filing fees. Nevada also has no personal or corporate net income tax.

Texas

While Texas has not traditionally been considered the ideal location to incorporate, this state has gained popularity recently. Texas offers some distinct advantages that may cause you to rethink Delaware as your state of choice to start a business. The state has low taxes, low cost of living, and ties several other states for residents that choose to incorporate in their home state. 

Your Home State

No matter where you live, you may be better off filing with your home state. Until you grow larger, filing for your LLC, S Corp, C Corp, or DBA within the state you reside and do business could cut back on paperwork, fees, and other responsibilities that may involve travel back and forth from Delaware. You can see how your state stacks up to the rest by viewing our 2021 Industry Report.


Incorporate Online Today in Just Minutes

No matter where you decide to incorporate your business, Swyft Filings can help. We've made starting an LLC simple and affordable in any state you choose. Best of all, you can form your LLC today online in as little as 10 minutes. Find out how by using our Incorporation Wizard.

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