Delaware has become the ideal domicile for corporations with numerous perks and opportunities. Particularly, there were 67,8% of all Fortune 500 companies incorporated in this state of the US.
There are also a variety of business entity types in Delaware so you can choose the one that suits your business needs. Corporations were the entity constituting 18.6% of new formations in 2021. Below are the main reasons why you should consider Delaware corporations.
Delaware corporation in the US explained
According to IBISWorld, Delaware’s population growth ranks 14 out of all 50 US states, which offers abundant labor resources at lower costs compared to other states. The state also holds number sixth among states in terms of the business environment that boosts the development of corporations.
A Delaware Corporation is a prominent type of legal entity incorporated in Delaware, regardless of where the firm’s headquarters are located. This type of business entity can operate business not only in the US but also all over the world, namely 50 states in the US and more than 100 countries.
Furthermore, A Delaware Corporation can also engage into contracts, conduct business, purchase and sell property, can sue and be sued in its own name. It is also personally liable for any arising debts or obligations. That corporation’s shareholders will have no personal liability that goes beyond their capital contributions.
Research conducted by an NYU law professor, Mr. Rober Deniel, succinctly stated that companies incorporated in Delaware were worth 5% more than ones incorporated elsewhere. The professor discovered in his research that Delaware enterprises were substantially more likely to get a takeover bid and be acquired. Enterprises domiciled in states raised large barriers to hostile bids were much less valuable and might get fewer bids. His research also showed Delaware law encouraged the sale of public firms, thereby increasing business value.
In the matter of tax, Delaware is one of the most friendly taxation systems among other states in the US with 8.7% of federal taxable income, for example. Moreover, Delaware corporations have several techniques for small and large businesses to keep business and personal assets legally separate.
Choosing Delaware for corporate setup enables the companies to hold financial advantages at the starting point and more add-on benefits further.
8 Benefits of Delaware Corporation
The popularity of Delaware regarding business incorporation comes from a tax-advantage system, favorable legal process, privacy protection, flexible stock system attracting Venture Capitalists to corporation investment, and more.
To better understand why Delaware is one of the best choices for incorporation, let’s explore corporate merits in the state as follows:
1. Favorable taxation imposed on Delaware corporation
The taxation system is the key factor leading to the state’s dominance in incorporating businesses. Delaware offers some significant advantages for corporations by imposing business-friendly tax laws.
No state income tax. The state offers big benefits to corporations by levying no state corporate income tax on those companies conducting business outside Delaware. There might be a small amount required for franchise taxes based on the number of the company’s authorized shares, but still at the preferred rate compared to other states.
Those who own stock shares but reside outside the state are also exempted from Delaware personal income tax under certain conditions.
No sales tax. Corporations in Delaware also gain benefits from no sales tax subjected to goods and services provided by the corporations, even physically located in the state or not. With this figure, tax burdens for corporations are scaled-down.
Favorable tax policies on investment income and property. If you register a Delaware corporation, it helps you break free from a corporate tax on investment income or interest. Earnings from fixed investment or equity capital on the state level are not subjected to tax.
Furthermore, personal property is not taxable or taxed at a very low rate if it is county-level property. The corporations can gain tax advantages by owning their own offices to minimize property tax in Delaware.
Other tax benefits. Besides those tax advantages, corporations operating in Delaware are free from some other taxes including inventory, unitary tax, value-added taxes on business transactions, inheritance tax, and capital shares or stock transfer taxes.
Forming corporations in Delaware helps to solve thorny tax-related problems as compared to other states of the US.
2. Superior legal process
One fact that makes Delaware benefit corporations more than other states is the separate court called the Court of Chancery. The court uses judges, who are competent and experienced in tackling corporate issues, instead of juries like in other states.
Delaware also has an extensive set of precedents, statutes, and business cases over decades, which helps to review corporate cases fastly and efficiently. Due to the predictability and stability of Delaware business laws, the legal process will be smooth, which facilitates corporations in addressing current issues and minimizing negative effects on business operations.
The state is also known for its corporation-friendly usury laws. This is a big plus for banks and credit card companies to charge interest at any wanted rate on loans.
3. Anonymity maintained in Delaware
One plus point of forming a corporation in Delaware is the privacy protection of business. The State doesn’t require companies to publicize shareholders’ personal information such as names and addresses, but not for directors, unfortunately. Only the name and address of the registered agent are required in filing corporate papers. This factor is one of the reasons why many big businesses choose Delaware Corporation.
4. Investment attraction from Venture Capitalists
There are two main types of corporations in Delaware which are S-corporations and C-corporation. These corporations are not taxed at the federal level. Plus, all income and losses will pass through the shareholders.
However, Delaware C-corps are preferable to Venture Capitalists due to preferred stock offerings, thus preferred shareholders can get higher dividends and vote. And because of the flexibility of preferred stock, investment bankers can minimize investment risk in corporations.
5. Flexible corporate statutes
In contrast to Delaware, in other states, companies in other states need at least 3 people to hold positions in it such as officers, shareholders, or directors. Residency in Delaware is not needed, the state just requires those crucial positions to be held by one person. Foreigners are also welcomed to serve as officers or directors of Delaware corporations.
Delaware’s Division of Corporations expedites the incorporation paperwork processed swiftly because it always invites entrepreneurs from all over the country and the world to establish their firms here.
Delaware also does not require business owners to name their company staff or shareholders. As a result, no identities appear on the public record, and the firm retains its anonymity.
6. No seller’s permit requirement
All businesses in Delaware must get a state-regulated business license. Fortunately, a seller’s permit is not required in Delaware since customers do not need to pay sales tax.
Furthermore, certain local municipalities may demand extra general business licenses or specialty licenses for particular professions or industries in which companies may operate.
7. Delaware corporation predictability
Corporations have always desired to function in a place that defines who they are and what they are not permitted to do. To be able to attract more firms to the state, Delaware constantly seeks assistance from corporate law specialists to develop and execute political consensus to retain laws.
8. Affordable and prompt registration process
Low business cost is an outstanding aspect of Delaware that encourages businesses to incorporate in the state. The cost is 25% lower than the national average, which makes Delaware hold the lowest operating expenses.
In comparison to many other states, Delaware makes registering a corporate corporation relatively simple. The Delaware.gov website contains a one-stop shop with step-by-step instructions for registering a new business or filing paperwork for an existing one.
Disadvantages of Delaware corporations
Besides many benefits for Delaware corporations, there are some difficulties that corporations have to be faced. The disadvantages are more subjected to the corporations incorporated in the state but physically operated elsewhere.
In terms of franchise tax, it could be disadvantageous to big corporations with more complicated structures. The filing fee could be more expensive and more complex to be settled. For companies formed in Delaware but do business in another state, it is compulsory to register for a foreign qualification to conduct its operations there.
Furthermore, multiple reports are required. Although a company is incorporated in Delaware, the home state’s filing and licensing requirements to conduct business are needed to meet. Business owners may encounter twice the expense and work because the annual reports in both locations are required to file.
If a company is incorporated but does not do business in Delaware, the state does not tax it. However, avoiding any tax liability is impossible, because the home state of that company will surely do.
Besides, a Delaware registered agent is also necessary. When filing, the corporation needs to provide the registered agent’s name within Delaware, a person or company situated in-state who may accept legal filings. Hiring someone to manage this will lead to an added cost.
Travel is required when legal disputes arise. Because proceedings related to the business must be heard in the Delaware court, the company is required to travel to Delaware and retain a Delaware attorney rather than an attorney in its home state to resolve any legal disputes.
Cost is the main factor affected by those disadvantages, but Delaware still gives the greatest benefits to corporations. When it comes to the decision about choosing Delaware for the incorporation, think carefully if it suits your business situation.
With all these characteristics, Delaware offers the bulk of benefits for corporations operating there. Forming corporations in Delaware has become popular but requires businesses to have a comprehensive understanding of Delaware corporate issues, taxation system, business laws, and much more. These findings help you to answer why you should form corporations in Delaware.
In addition to corporation, LLC is also one of the most widely-selected entity types in Delaware, so it may be a better match for your business. Should you have any questions or concerns regarding Delaware company formation, don’t hesitate to get in touch with us via email@example.com or chat with one of our friendly consultants.
Disclaimer: While BBCIncorp strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact BBCIncorp’s customer services for advice on your specific cases.
- Delaware corporation in the US explained
- 8 Benefits of Delaware Corporation
- 1. Favorable taxation imposed on Delaware corporation
- 2. Superior legal process
- 3. Anonymity maintained in Delaware
- 4. Investment attraction from Venture Capitalists
- 5. Flexible corporate statutes
- 6. No seller’s permit requirement
- 7. Delaware corporation predictability
- 8. Affordable and prompt registration process
- Disadvantages of Delaware corporations
- 4. Conclusion
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