Delaware Corporation Advantages
1. Corporate laws and the Court of Chancery
The main reason large corporations choose to incorporate in Delaware is because of our state’s reliable business laws. Because of Delaware corporation history, nearly every type of lawsuit for or against a corporation has already been argued in front of a judge and ruled on by a judge. In fact, Delaware even has its own court system for businesses—it’s called the Court of Chancery. Business law is argued and ruled upon by judges not juries. And our business laws and rulings are so well known that it’s what most lawyers study in law school, so at one point or another, every lawyer in the US has had to study Delaware business law. This system and history has numerous advantages for businesses, but the main one is that prior to going to court, a corporation will already know the likely outcome based on previous cases, so they’ll know whether to settle or keep fighting. If you have a huge Delaware corporation and are routinely involved in lawsuits this could be extremely advantageous.
2. Tax advantages
Delaware corporations offer a unique tax savings strategy. In our state’s tax code, (1902(b), Title 30), holding companies are exempt from paying Delaware’s corporate tax. In a simplified way, it works like this: Say you own a corporation that does business throughout the US. You want a tax savings. To receive a tax benefit, you can form what’s called a holding company in Delaware. You assign the holding company all of your corporation’s “intangible investments” (patents, trademarks, trade names, etc.). The holding company “holds” these assets. The corporation doing business throughout the US can then lease the use of the trademarks, trade names, and patents from the newly formed holding company (a Delaware corporation). On the profits the Delaware holding company makes from the leases, it will pay no Delaware corporate income tax because Delaware doesn’t tax income from intangible assets. You’re basically creating an expense which you pay to yourself and don’t have to pay taxes on. For larger corporations, this Delaware corporate tax benefit can equal a large savings.
3. Simple filings
Corporation filing fees bring in massive amounts of money for Delaware, so the Division of Corporations has a vested interest in making the incorporation process as simple as possible to encourage more corporate filings. Delaware corporations, compared to other state corporations, requires little personal information on its corporate filings, so directors and shareholders can keep their personal information secure.
4. Simple maintenance
A Delaware corporation’s annual reports can be filed online, they’re due on the same day year after year, and our state requires a minimal amount of information. These reports can be filed quickly and with little effort.
A Delaware corporation is like a name brand suit. It looks professional and investors tend to take you more seriously if you have one. Investors, bankers, and other professionals feel comfortable with Delaware corporations—they know how a business incorporated in Delaware works, the responsibilities of its shareholders. It’s familiar, which to many means security.
Are Delaware Corporations Advantageous for Small Businesses?
The most simple answer is yes. The primary reason for business to incorporate, in Delaware or anywhere else, is asset protection. Delaware corporations provide small businesses the exact same limited liability afforded to large businesses. A Delaware corporation allows for a separation of personal assets from business assets, and if your business is sued, your corporation should, ideally, keep your personal assets safe from the lawsuit.
Delaware corporations can give small businesses other benefits, as listed below:
- No business license required
Most holding companies in Delaware, according to our state’s General Service License requirement (Section 2301(b) and (d), Title 30), are not required to obtain an occupational business license or pay Delaware’s gross receipts tax.
Delaware Articles of Incorporation (the document that forms your corporation) require minimal amounts of personal information. This helps to secure your private information against identity theft, and it makes filings really simple.
- Less expensive than an LLC
Delaware corporations only have a slightly smaller filing fee than LLCs in Delaware (the difference is $1) if you authorize 1500 shares or less. But in the long run, small business corporations can be less expensive to maintain than an LLC. LLCs do not file an annual report, they pay an annual tax of $300. Corporations, however, are required to file an annual report and pay the Delaware Franchise Tax. However, annual reports fees cost $50, and if your small business has authorized 1500 shares or less, you could qualify for the minimum franchise tax payment of $175, bringing your total annual payment to $225, annually saving $75 you would have spent if you’d formed an LLC.
- Corporate tax exemptions
According to § 1902, a corporation that maintains a corporate office in our state, but doesn’t do business in Delaware is exempt from paying the state corporate tax. Corporations in Delaware that elect with the IRS to be taxed as an S corporation are also not required to pay the state’s corporate income tax.
Can I incorporate in Delaware if I live in a different country or state?
Yes. The only physical requirement Delaware corporations have is that the corporation must have a registered agent in Delaware. A person doesn’t need to live in Delaware to incorporate in Delaware. In fact, some advantages of Delaware corporations are available only to nonresidents. The benefits of incorporating in Delaware as a nonresident are listed below:
- No inheritance tax
Delaware does not impose a state inheritance tax on nonresidents, according to § 1502, Title 30. If the heir of your Delaware corporation and its intangible assets (stock) is not a resident of our state and the corporation does no business in Delaware, they will not have to pay the inheritance tax. Residents could pay up to a 16 percent tax.
- No sales tax
Delaware does not have a sales tax, which means your corporation in Delaware can make purchases without paying sales tax.
- No state income tax
Delaware corporations that do no business in Delaware do not pay state corporate income taxes. Residents of other states and other countries may be obligated to pay their home state’s income taxes, but they will not have to pay Delaware’s income tax.
- No ad valorem tax
Our state doesn’t have an intangible personal property tax. If the state or country in which you live doesn’t have one either, you shouldn’t have to pay any intangible personal property taxes.
Should I incorporate in Delaware or start an LLC?
The main differences you’ll notice between running a corporation or LLC in Delaware won’t be the difference between stocks and ownership percentage. What you’ll most likely notice is that corporations are much more formal than LLCs. Corporations require resolutions and shareholder meetings, and the recording and filing of forms showing meetings were held and voting majorities made the decisions. LLCs are much more flexible. They don’t require annual shareholder’s meeting, and you can file forms with the IRS to be taxed as an S corporation or a C corporation. Corporations are by default taxed as “C corps” and can register with the IRS to be taxed as an “S corp.” To some investors, however, a Delaware corporation does carry some prestige, and if you want to raise money, some investors will feel more comfortable with stock agreements as opposed to buying a percentage of ownership in the LLC. The final decision, of course, as whether you should incorporate in Delaware or start an LLC will best be decided by you.