Delaware is an extremely popular state to set up a new business. They have a variety of laws and policies that are very attractive to young companies.
Delaware has great tax benefits.
There are no taxes for companies that operate outside the borders of Delaware. So you are not paying any type of Delaware State Taxes if you have no physical office within the state.
The following tax benefits also apply to Delaware:
- You do not have to collect sales tax from customers. This makes it easy to start an online business and stay competitive in the e-commerce market. You may have to pay a gross receipts tax if you do business in the state, but the tax is fairly low and only applies in certain situations.
- Delaware has no corporate tax on interest or other investment income in a Delaware holding company. This includes fixed-income or equity investment gains which are also not taxed on the state level.
- The state has no personal/business property tax. The county-level estate taxes are fairly low. This is extremely beneficial if you happen to own tangible property such as an office building.
- No value-added taxes, use tax, or even inventory tax.
- Delaware has no inheritance tax.
- No capital shares or stock transfer taxes. This is great for businesses who are expecting to obtain venture funding.
- The state has no tax on intangible assets such as trademarks, patents, and naming rights. This is great for intangible asset holding companies.
The Delaware Court of Chancery
The laws of Delaware are extremely business-friendly. The Court of Chancery is a non-trial court dedicated solely to businesses. It handles issues that involve real property and commercial litigation. This court operates with only judges that specialize in complex corporate law. The Chancery Court does not have juries. This allows for a fast and efficient system of justice.
The Delaware laws are favorable to business when compared to other states. Courts often use Delaware business precedents to settle disputes. The state’s robust legal systems allow businesses to feel confident about filing in that state.
Delaware LLCs protect an LLC owner’s assets. An LLC structure is attractive to startups because it protects their assets from lawsuits. In addition, Delaware is one of the few states that only allows a charging order as the sole remedy for collecting a debt.
A court issues a charging order to direct an LLC manager to pay the creditor for the debtor-owner’s personal creditor any distributions of income or profits that would otherwise be distributed to the debtor-member.
Creditors with a charging order usually can only obtain the owner/debtor’s financial rights and cannot participate in the management of the LLC. This means the creditor cannot order the LLC to make a distribution subject to its charging order. Usually, creditors who obtain charging orders end up with nothing because they can’t order the LLC to make any distributions.
A lot of other states treat single-member LLC as a disregarded entity and allow judgment collectors to pierce the corporate veil and go after the single member’s personal assets.
Starting a Delaware liability company is a great way to protect your assets from lawsuits.
Protecting your privacy
Delaware does not require it’s LLCs to list members’ names and addresses in their filings. The names of the members are only found in the operating agreement, which is private. This allows ownership and management information to be available through public records.
Delaware corporations can also be filed without listing shareholders, directors, or officers in the public record as long as you use third-party incorporation services. The state does have a Franchise tax payment requirement every year where the corporation must list the names and addresses of the company’s director and one officer. Shareholders do not have to be listed and still have privacy protection.
Delaware has great investor appeal
Investors love a company that incorporates in Delaware. Everyone ranging from venture capitalists and angel investors to private equity firms loves Delaware’s business-friendly laws. Overall, investors understand the Delawares system and banks often prefer Delaware corporations.
If going public is a goal then it is wise to incorporate in Delaware from the very beginning rather than having to convert the company to a domestic Delaware entity at a later time. This saves both time and costs in the long run.
Overall filing a business in Delaware makes you much more attractive to investors and gives you more options for funding.
What are the advantages of filing your business in your home state instead of Delaware?
Taxes are paid where your business is making money.
If your business operates mostly in another state then you are still liable to pay taxes to that state. A business does not often receive the supposed tax benefit of Delaware unless they are a multi-million dollar operation. This is true even if you conduct most of your business online.
For example, you live in the state of California, it’s a particularly bad idea to form a Delaware LLC, because you’ll be seen as doing business in California no matter where your company is formed.
You will have to file as a foreign entity in your residential state.
If Delaware is not your home state that means you will automatically have to keep up with two businesses. A domestic business in Delaware on top of registering as a foreign business in your residential state. This means extra filing costs and administrative fees and headaches.
So filing in Delaware leads to the following additional costs:
- Paying for an extra Registered Agent,
- Paying annual reports in 2 states,
- Having tax liabilities in 2 states,
- Dealing with the headaches of maintaining 2 LLCs
First, there are three other states that allow LLCs to keep their ownership information private. These states are New Mexico, Nevada, and Wyoming. If you in one of these three states, then the privacy protections of Delaware might not be as valuable.
Is your state litigious? What are the chances that your company will be facing litigation in the future? If you do not think that future litigation is very likely for your business than the advantages of the Delaware Court of Chancery might not be needed.
Overall, where you register your business depends on numerous factors. You should be aware of the tax laws in your state in order to correctly asses whether filing as a domestic business in Delaware is truly giving you any real tax advantage.
You should also understand what are are the goals for your company. Do you want to grow into a large multinational corporation? Is your company’s growth dependent upon attracting investors? Is it important for you to maintain privacy regarding owners or do you foresee your company going through a lot of litigation issues? If you answered yes to any of these questions then a Delaware filing might be a great option.
If your business is a relatively small operation than maintaining a domestic filing in Delaware and a foreign company in your home state might just not be worth the extra cost and hassles. If your business trades in goods and service, a tax resale certificate is alway a great idea.
Hopefully, our article can help you navigate your way to the correct decision so you can begin your path to success for your business to achieve its goals.