09 Apr Delaware Corporations: They’re Not For Everyone
One of the first issues a new business will face is determining which state to incorporate in. It’s no secret that incorporating in Delaware (as a Delaware C corporation) is extremely popular, and this is likely because there is abundantly available information about Delaware tax and corporate laws being favorable to businesses.
While this may be true for some businesses, it isn’t true for most. Businesses that do not intend to have their principal office in Delaware, are located in another state, do not intend to realistically obtain venture capital funding or do not intend to grow beyond a certain limited size, have little reason to incorporate in Delaware.
Rather, most businesses should incorporate in the state in which their business is located (I’ll call this the “home” state). This article will set forth the reasons why, as a startup, you should seriously consider not incorporating in Delaware, and instead consider incorporating in your home state.
Reasons Not to Incorporate In Delaware
1) Your business is not going to be funded by venture capital. Yes, venture capitalists love investing in Delaware C corporations, but you’re realistically not ever going to get venture capital unless you’re in the extreme minority. According to this article in Entrepreneur.com, only about .06 percent of businesses will ever get venture capital funding. Consider those odds.
2) Your business is not actually located in Delaware. Instead, you have an office or business address in another state–your “home” state. If that’s the case, then you’ll need to pay someone to act as your registered agent in Delaware, and you’ll still need to register your business as a foreign entity in your home state. You’ll need to pay taxes on any revenues that originate in your home state, and you’ll be subject to annual reporting requirements both in Delaware and your home state.
3) Delaware has a franchise tax. Not all states have franchise taxes. Oregon, for example, does not.
4) By incorporating in Delaware, you’ll be consenting to the jurisdiction of its courts. This means that if someone wants to sue your business, even over a simple matter, they can sue your business in Delaware, and you’ll be stuck having to hire Delaware licensed lawyers and possibly travel there to defend your business in the lawsuit. For businesses located far away from Delaware (on the West Coast, for example), this could be a significant burden.
5) Just because you own a purely web-based business does not mean that you can avoid registering your business in your home state. Even if you have no physical storefront, and only operate on the web, you are still a human being sitting in chair somewhere, looking at a computer screen for the purpose of generating money. If that chair is anywhere in the 50 United States, that’s your home state, and you’ll need to register with that state, whether by incorporating there from the get-go, or by registering there as a foreign entity. (The only exception to this may be where a business is actually located outside of the United States.)
For smaller businesses that are not realistically going to get venture capital funding, and that will be transacting any sort of business in their home state, it usually makes the most sense simply to incorporate in that home state.
Some on-line document filing service companies don’t make this clear to their customers. Instead, they sell incorporation packages to customers, who presume that they’ve taken care of all of the necessary paperwork by filling out some on-line forms and becoming a Delaware C corporation, only to later find out that they still will have to register their company in their home state and comply with all of their home state’s laws anyway. Like all other matters in starting a business, be careful about who you take legal advice from, and be hesitant if an offer seems too good to be true.
Author: Andrew Harris
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