Should we incorporate our Small Business in Delaware?

More often than not, a small business operating out of New York is well advised to incorporate in the Empire State.

While you could theoretically incorporate in any of the 50 states (including Delaware), incorporating in another state such as Delaware adds additional costs and almost no benefits to the small business corporation.

Let's look at the usual statements offered in favor of Delaware:

You don't pay income taxes in Delaware

That may be true, but you will pay taxes in New York if you do business in New York regardless of your place of incorporation.  All corporations doing business in New York are subject to New York's so called "franchise taxes, " (see Section 209 New York Tax Law).

More than 50% of all corporations listed at the New York Stock exchange are incorporated in Delaware

True; but just because big company does it, small company doesn't have to do it.   If you have no plans of going public any time soon or attracting big shot investors who might want to take the corporation public at one point, there is no benefit gained here.  Even if you do want to go public, being a Delaware corporation is not a prerequisite.

Delaware is the most sophisticated jurisdiction when it comes to corporations

Granted, Delaware  and its laws are known to be very business friendly.  According to Delaware's Department of State, Division of Corporations website:

The Delaware General Corporation Law is the most advanced  and flexible business formation statute in the nation.  The Delaware Court of Chancery is a unique 210 year old  business court that has written most of the  modern U.S. corporation case law. Delaware's State Government is business-friendly and accessible.  Our Division of Corporation is a model state-of-the-art efficiency and our staff provides prompt, friendly and professional service to clients,  attorneys, registered agents and others. These factors have all contributed to making Delaware a premier legal home to companies around the world.

Sounds all very nice and dandy, but a small business corporation doing business in New York is unlikely to encounter situations where the differences in New York law and legal system to Delaware law and legal system really matter.

It saves you money to incorporate in Delaware

May be the actual fees for incorporation are cheaper in Delaware than in New York (I didn't check), but that is where that argument ends.  If you incorporate in Delaware, but do business in New York, you face additional expenses not due from a domestic New York corporation:

1.  A foreign corporation has to get authorization to do business in New York (Section 1304 Business Corporation Law).  The fee is $225.

2. A foreign corporation has to pay a license fee to do business in New York (Section 181 (1) New York Tax Law).  The one time fee depends on the number of issued shares (par value or non par value).

3. A foreign corporation has to pay an annual maintenance fee of $300 (Section 181 (2) New York Tax Law).

4. A Delaware corporation has to appoint a registered agent in Delaware who is responsible for receiving governmental and legal papers for the corporation.

****Legal Information is not Legal Advice****

Comments

[Kate Hinchcliff]

More than 50% of all corporations listed at the New York Stock exchange are incorporated in Delaware

Wow. We learned about Delaware not long after we started a small business (in FL, tho I'm originally from NY). I had no idea that so many business incorporate there. Don't they also allow incredibly high interest rates, which is why a lot of credit card company's are based there?

Anyway, found your blog while surfing around for Joomla-based web designs and somehow landed here. :)