Discover why Delaware is a beacon for entrepreneurs in our exploration of the benefits and risks of starting your business in this strategic location. Arm yourself with knowledge to make an informed decision about your venture's future.
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Have you wondered if you should start your business in Delaware to save taxes? Here’s our detailed answer on whether you should start your business in Delaware, forming a corporation versus a limited liability company (LLC), and the benefits and risks of forming your company in Delaware.
Yes, start your business in Delaware if you are venture capital-funded, foreign, want privacy, and have thousands of shareholders.
No, don’t start in Delaware if your company is small or headquartered in another state with few shareholders because the costs generally outweigh the benefits.
Read on to learn more about how to make the right decision for your business company formation.
Perhaps you’ve heard that 67.6% of Fortune 500 large publicly traded companies (including Apple, eBay, Walmart, and Verizon) have been incorporated in Delaware, and you’re wondering why. One reason is that there’s 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 U.S. 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.
Don’t be fooled into thinking that by forming a company in Delaware, you get away with not paying income tax. It’s simply not true. Delaware has a corporate income tax rate of 8.7%, not to mention a state gross receipts tax. It’s the corporations that are registered in Delaware but don’t do business there that avoid corporate income tax. At the individual level, Delaware has a graduated state individual income tax, the rates of which range from 2.2% to 6.6%. (These rates are accurate as of 2024.)
Unless you’re a major corporation with thousands of shareholders and a team of high-paid corporate attorneys, the benefits of registering a Delaware corporation or Delaware LLC typically outweigh the costs and added paperwork.
These are the primary benefits of registering your business in Delaware. Be aware that there are different benefits for a corporation and an 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, their roles and conduct, and corporate share regulations.
One of the most advantageous benefits is the flexibility: shareholders, directors, and officers of the corporation need not be residents of Delaware or U.S. citizens.
Delaware’s Court of Chancery expertise is business corporate issues, and it 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 often prefer to fund Delaware corporations as opposed to other state business structures. The reason is that they are fully aware of Delaware corporate law and its support of business investors.
So, if your business will be getting venture capital funding or going public in the future, you may want to incorporate in Delaware. This can save you the hassle, delay, and cost of later having to convert your company from an LLC or corporation 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 formed in Delaware but not conducting business in Delaware to avoid paying the state corporate income tax. Delaware also has no state sales tax, inheritance tax, or estate tax. However, be aware that an annual franchise tax for an LLC is $300.
For corporations, the franchise tax 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 $85 to a maximum franchise tax of $200,000. These numbers are accurate as of 2024.
Stock shares of Delaware corporations owned by people outside of Delaware are not subject to being taxed within Delaware.
Delaware corporations are an ideal option for foreign entrepreneurs who are not U.S. citizens to form business corporations in the USA. This is due to the fact that Delaware does not require U.S. citizenship nor residency to form business companies.
Delaware actually doesn’t require a corporation’s directors or officers to live in the state. That makes the state a great option for business owners who want to start a business away from their home state. You could, for example, live in New York State but start your corporation in Delaware.
If you operate a small business outside of Delaware, you could save taxes by NOT registering in Delaware. This is 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.
Is it worth it to incorporate in Delaware?
It can be worth it to incorporate in Delaware — but only for certain businesses. There are advantages and disadvantages to starting a Delaware corporation, and you should carefully weigh those before making your decision to incorporate.
Do I have to live in Delaware to incorporate there?
Technically, no. Delaware doesn’t require you to be a resident of the state to incorporate there. However, you must appoint a registered agent (For more information, please see our what is a registered agent page) who is a resident of the state or a business entity authorized to do business in the state of Delaware.
What is the best state to incorporate in?
Generally speaking, the “best” state to incorporate in is often the state where you live. That’s because it’s typically easiest to start and run a business as a domestic corporation.
Obtaining qualification as a foreign corporation is perfectly legitimate and legal, but it can be complicated and expensive. The more states you operate in, the harder it is to track your ongoing costs and corporate requirements.
What about forming other business entity types in Delaware?
Delaware does present a favorable environment for other registered businesses, such as limited liability companies. These businesses can still take advantage of limited personal liability, the Court of Chancery, and favorable business laws, but there are fewer tax benefits for most LLCs. They’ll still pay a franchise tax, too.
Plus, it can be harder to attract venture capitalists to invest in your LLC. Capital firms are much more likely to back businesses that issue stock shares.
Why even bother creating a registered business like a corporation?
Registered business entities like corporations and LLCs enjoy personal asset protection because they have a corporate veil. If the business loses a corporate lawsuit or defaults on a loan, the business owners usually can’t lose their personal assets.
If you operated as another business type, like a sole proprietorship or general partnership, you would not have personal asset protection. Your business would not be a separate legal entity from you as an individual.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Written by Team ZenBusiness
ZenBusiness has helped people start, run, and grow over 700,000 dream companies. The editorial team at ZenBusiness has over 20 years of collective small business publishing experience and is composed of business formation experts who are dedicated to empowering and educating entrepreneurs about owning a company.
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