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Incorporating in Delaware - Is It worth It for My Small Business?

Question:

Like many business owners, I have often heard that incorporating in Delaware is well worth it for many businesses because of the favorable business laws that Delaware has. However, is it worth it for my small, two-owner business to incorporate in Delaware, or should I stick with my home state?

Answer:

Delaware must have hired some great public relations people to spread the gospel of their pro-business laws. It seems that if you ask almost anyone in the country where the best place to incorporate a business is, and "Delaware" is almost the first answer you will get.

However, although it may seem like the common consensus, incorporating in Delaware only really makes sense for large corporations. It is generally not worth the time or the effort for a small business to incorporate in Delaware (unless you already happen to be in Delaware!).

Below are a few considerations to keep in mind before incorporating your small business in Delaware.

You may not save on taxes. The first thing to keep in mind is that you are probably not going to save any money on taxes by incorporating a small business in Delaware. If your corporation is doing business in your home state and is pulling in revenue in your home state, you are still going to have to pay your home state's income taxes.

Your small business still needs to qualify in your home state. A second consideration is that although the fees to incorporate a business in Delaware may be lower than in your home state, you will still have to qualify to do business in your home state if you choose to incorporate in Delaware. Going through both of these processes at once and in different states will probably cost you just as much, if not more, than if you had just incorporated in your home state in the first place. In addition, if you choose to incorporate in Delaware over your home state, you will have to find an "agent of register" in Delaware. If you do not already have someone in mind that lives in Delaware, you will end up paying more to hire such an agent.

Your small business might be more protected in your home state. Your home state may offer laws that protect your business in a stronger manner than do laws in Delaware. For example, suppose you are incorporating your tech start-up company which you run out of your garage in California. You have invested a bunch of time with your one co-founder to develop your idea. Your corporation is a success and you lure many investors that buy preferred shares of stock. Now, later on, your shareholders own a majority of the preferred shares of stock and want to liquidate your company, but you and your original partner object with your common shares. If you had incorporated your business in Delaware, you would be out of luck because only a majority of all shares needs to agree in order to sell a corporation. However, in California, you and your partner could stop the sale because in order for a corporation to be sold, every class of shares must agree and approve the sale before it can go through.

You may have to go to Delaware for any related legal issues with your small business. Lastly, if you ever run into legal problems, you may be called into court in Delaware. This could involve substantial travel time and expenses. In addition, if you already have a lawyer that you regularly use in your home state, he or she may not be familiar with the laws of Delaware.

Next Steps
Contact a qualified business organizations attorney to help you
choose the best formation for your business.
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