Despite being a tiny state, Delaware has great importance in the corporate world. The small state incorporates some giant corporation and traded companies such as Wal-Mart, Coca Cola, and Google. It is because Delaware has a history and reputation of corporation-friendly laws. So when it comes time to launch their businesses many entrepreneurs immediate think of registering their companies in Delaware.
However, what if your company is not located physically in Delaware or you run an online business? Will it offer the same benefits to your company?
Unfortunately, the answer is, “No.” In case your business is based in any states other than Delaware, you will have to face additional obligations and costs when you form your business in Delaware. While Delaware offers plenty of benefits to its home businesses, it also has some disadvantages that outweigh these benefits if you are not aware.
Where to Register
Whether you are a startup or you own an established business, you need to follow certain rules to determine if you should incorporate your business in any state.
Remember that regardless of the type of business you have, it has to be registered in the state where you are physically present. There are set up rules for all types of businesses that help entrepreneurs determine whether they have a physical presence in any state and should register there.
For example, your business will be considered to have a physical presence in any state and needs registration if:
- You have a bank account in that state
- You have working employees in that state
- One of the shareholders or owners lives in that state
- You have office or workspace in that state
Simply put, if you live in Texas, you need business registration in Texas. If you have employees in California, you have to register your business in California, even if you do not physically have a location within the state.
Reasons Why Registering in Delaware May Not Be a Good Idea
It is important to note that registering in Delaware does not offer the same benefits to every business. No matter how advantageous business incorporation in Delaware may seem, if you are a startup or runs a small business, registering in Delaware may not be a good idea.
● Double Annual Franchise Tax
This is, without a doubt, one of the main drawbacks of registering in Delaware. When you register your business in Delaware as your home state but your business also has physical nexus in other states, it doubles your registration fees. Having nexus physically in any other state requires business owners to register in that state as well. That means businesses need to pay annual franchise taxes in both Delaware and the other state.
That is to say, if the advantages of registering in Delaware do not mean much to your business, there is no point in taking an additional expense or administrative time for incorporation in Delaware.
● State Tax
No matter where your business is registered or what tax requirements a specific state has, as long as your corporation has a connection with any state, the state demands its share of profit. So even though Delaware does not require state tax filing if no income is generated in Delaware, this doesn’t necessarily mean that your business can totally avoid state income taxes or state sales taxes in other states.
● Added Cost of Registered Agent
To incorporate in Delaware, the corporation needs a registered agent who must be a Delaware resident. Business owners need to provide his/her Delaware’s street address to receive all legal documentation on behalf of their corporation. A registered agent is hired to provide these services to businesses, which is definitely an additional expense.
Benefits of Registering in Delaware
Registering or incorporating your business in Delaware holds several benefits, especially for home-based businesses. However, many small businesses do not notice these benefits due to complexity and cost. Some of these benefits include:
● Friendly Law for Business
There is no denying that Delaware has some great friendly laws when it comes to structuring your business. The state offers flexible terms and working environment for board members and corporations. This might sound surprising for you. Delaware has a gold standard when it is about the corporate law environment.
Many giant corporations register businesses in Delaware due to its “corporate veil.” Because Delaware’s corporate veil is considered the thickest among 50 US states, that is what makes forming LLC in Delaware less risky as compared to other states.
Moreover, Delaware runs a separate court system named” Court of Chancery” to deal with corporate issues. The well- established court system expertly resolves complex corporate and law matters. The corporate attorney in the court specializes in the business laws of Delaware that make business matters hassle-free to handle.
● Suitable for C Corp Looking for VC and Outside Investors
You might have seen many investment banks and VC backed ventures and startups choose to register in Delaware. If you are considering VC funding, choosing Delaware would be undeniably a smart choice. By choosing Delaware, you will not have to convert your corporation when a venture capitalist demands it.
However, if you are currently registered in state other than Delaware and want to convert your business to be a Delaware corporation in the future, this can easily be done and the process is usually very painless.
● Foreign Owners with Absolute No Physical Nexus in Any States
This is another benefit of registering a business in Delaware if you are a foreign owner. The flexible business statute and laws of Delaware not only permit but also provide efficient business procedures to the foreign owners who do not have any physical nexus in any other state. Foreign businesses can easily manage mergers, conversions, transactions, and transfers due to flexible tax laws.
Understanding the corporate laws and navigating the various state jurisdiction requirements can be complex for business owners. Instead of just going with the “norm” or taking advice from the internet business owners should consult with their CPA to make sure that they are launching their businesses in the right foot and avoiding unnecessary expenses and administrative headaches.