Why incorporate in Delaware? Pros and cons in 2024

Nearly two million businesses — including more than 50% of all publicly traded companies in the U.S. and almost 70% of all Fortune 500 companies — are incorporated in Delaware, and for good reason.

It’s considered one of the most business-friendly states in the nation, thanks to its laws, courts, ease of incorporation and tax benefits. However, incorporating in Delaware doesn’t make sense for every business. In this article, we look at the pros and cons of incorporating in Delaware and show you the steps you need to take to incorporate there.

Pros of incorporating in Delaware

Delaware offers corporations advantages that other states don’t, at least not bundled together. For that reason, it is considered one of the most business-friendly states in the nation. Here’s why incorporating in Delaware may be a good idea for your business.

Tax savings

Businesses that incorporate in Delaware enjoy several tax advantages they wouldn’t have in other states. For example, Delaware corporations don’t have to pay state income tax on earnings outside the state. Instead, they pay an annual franchise fee ranging from $175 to $200,000.

Other tax benefits include: 

• Companies that conduct business nationally can avoid paying taxes on money earned in-state by setting up a subsidiary or shell company.
• Delaware does not tax stock shares held by non-Delaware residents.
• The state does not tax royalty payments and intangible assets held by business owners.

Quick and easy setup

Incorporating in Delaware is fairly simple and can be completed within an hour if you’re willing to pay the fees ranging from $50 to $1,000 to expedite the process. To get started, you need to decide on a business name and structure. 

Although you’ll need a registered agent, one person can hold all the positions, keeping things simple. Additionally, that person doesn’t need to live in Delaware as long as the registered agent does.

Privacy 

In Delaware, only the registered agent’s name and address need to be filed on the certificate of incorporation. The owners’ information does not and, as a result, will not be part of the public record. Additionally, shareholders do not need to be listed on the state’s annual report. Nellie Akalp, CEO of CorpNet.com, said this affords owners and shareholders anonymity, which might be attractive to some businesses. 

Even so, Delaware law requires corporations to appoint a “communications contact” within the company who can receive information from the registered agent. This information must be kept on file by the agent and can be subpoenaed.

Uses judges instead of juries 

The Delaware Court of Chancery — seven chancellors and three magistrates that specialize in corporate law — settle business disputes in the state, not juries. Because outcomes do not rely on juries, cases can be tried and decided more quickly than in other states. Delaware also has predictable legal precedents, and corporations can file appeals directly to the Delaware Supreme Court.

Corporations also favor Delaware because case law has established the “business judgment rule,” which dictates that judges shouldn’t second-guess a business’ decisions when they are made in good faith and with due care, even if those decisions have negative consequences.

Venture capital

Angel investors, venture capitalists and investment banks prefer to invest in Delaware companies for all the reasons above. Dave Mawhinney, professor of entrepreneurship at Carnegie Mellon University’s Tepper School of Business, said most investors actually “demand” the businesses they invest in be incorporated in Delaware. 

“It boils down to [how] Delaware is perceived to be the friendliest state for business formation and residency, and venture capitalists want standardization across their portfolios,” he explained.

Cons of incorporating in Delaware

Incorporating in Delaware doesn’t make sense for all businesses. In fact, it can be expensive and involve a lot of unnecessary work, especially for small businesses. 

No small business tax savings

Most small companies won’t benefit from Delaware’s tax laws. Even though the state does not tax companies unless they do business within the state, you will still need to file an annual report in Delaware and pay franchise taxes there. Plus, you’ll have to pay taxes and possibly file an annual report in your home state.

Don’t think you can shift your earnings to Delaware and avoid your home state’s taxes. According to Delaware’s government website, more than 20 states have laws preventing companies from transferring in-state income to another state with a more favorable tax climate. 

Twice the work

When you incorporate in Delaware but do business in your home state, you have to register your business in your home state, get licensing in both states and file annual reports in both states. You end up doing twice the work (and paying twice the fees) than if you simply incorporated it in your home state. For most small businesses, it’s not worth it.

“If a business has a small team, is not planning to seek funding and does not mind publishing their private information, they would be better off in their home state,” said Akalp. “Incorporating in one state but living in another requires additional paperwork and filing fees.”

Expensive for small businesses 

Incorporating in Delaware can be expensive. As the state explained on its website, “We are far more like Bergdorf Goodman or Tiffany than we are like the Dollar Store. You pay for quality and service.”

Delaware charges a minimum fee of $109 to incorporate, $50 for a certificate of good standing and fees to expedite the incorporation process. You must hire a registered agent and pay $50 each year to file an annual report, plus a minimum $175 franchise tax. However, that franchise tax can go up to $200,000. Plus, you’ll need to pay fees and taxes in your home state and any other state where you do business. 

Travel to Delaware

When you incorporate in Delaware, any legal disputes involving your company must be heard there. This means you’ll have to travel there for depositions, arbitration and court proceedings. Additionally, you’ll need to retain an attorney licensed in Delaware to handle your case. 

Delaware incorporation requirements

To incorporate in Delaware, you must hire a registered agent who is at least 18 years of age and is present at a Delaware address during normal business hours. In addition, you’ll need to obtain an employer identification number (EIN) and file for incorporation with the Division of Corporation. 

You’ll also need to file for any necessary licenses, certificates and registrations at the federal, state and local levels. Finally, you must submit an annual tax report and pay franchise taxes by March 1.

How to incorporate in Delaware

Incorporating your business in Delaware follows the same general steps you would take to incorporate in any other state, from choosing your business name to issuing stock. However, there are some differences.

1. Choose a business entity

The business entity you choose can impact everything from your daily operations to liability and taxation. Even though you probably have decided to incorporate since you are reading this article, there are different types of corporations. 

The most common are C corps and S corps, but the State of Delaware recommends contacting an attorney or certified public accountant who is well-versed in the state’s corporate laws for advice on which business entity is right for your business.

2. Select a name

Your business name should be meaningful, memorable and unique enough that your business isn’t easily confused with any other company or corporation. However, be aware of what’s acceptable in the state and what’s not as you brainstorm. 

Delaware’s naming regulations specify that your business’ name can’t contain discriminatory language, inspire violence or criminal activity, or be misleading. Once you have a name, run it through the Division of Corporations’ Name Reservation tool to see if it is available. If it is, you can reserve the name for 120 days for $75.

3. Appoint a registered agent

Every business entity in Delaware must have an in-state registered agent who can receive legal and tax documents on its behalf. That agent can be an individual or a business entity authorized to do business within the state.

If the registered agent is an individual, that person must be at least 18 years of age, maintain an office in Delaware and be present at the office’s street address during business hours.

4. File a certificate of incorporation

The next step is to file a certificate of incorporation that includes the company’s name, registered agent, number of shares and price per share. You can submit this online using the Document Filing and Certificate Request Service or by mail with a cover sheet.

5. Obtain a certificate of good standing

Many financial institutions require a certificate of good standing to open a corporate banking account. You can request a short form (provides name and status) for $50 per certificate or a long form (provides status and all documents ever filed) for $175 while filing your certificate of incorporation.

6. Get an employer identification number (EIN)

You’ll need an EIN from the Internal Revenue Service (IRS) to file taxes, open a bank account and apply for business licenses. To get one, you can apply by mail, phone or fax, but the easiest way is using the EIN Assistant on the IRS’ website. Although there’s no charge to apply, it can take up to two weeks before your EIN is part of the IRS’ permanent records.

7. Secure business licenses and permits

Businesses incorporated in Delaware need to have a general business license from the state’s Division of Revenue and local licenses based on where they intend to do business.

Additionally, there may be local and federal licensing, certification or registration requirements depending on your industry. If you have employees, you’ll need to file a form to determine your unemployment insurance liability and to carry workers’ compensation insurance.

8. File an annual report and pay franchise tax

All Delaware corporations must file an annual report and pay franchise tax no later than March 1. The report fee for corporations that are exempt from paying taxes, such as religious institutions, is $25. 

The fee for non-exempt corporations is $50. The minimum franchise tax is $175, while the maximum is $200,000. Businesses that owe more than $5,000 or more pay their estimated taxes in quarterly taxes.

Should you incorporate in Delaware?

If you own a large business or hope to raise venture capital, it makes sense to incorporate in Delaware. The state offers corporations tax advantages and privacy for owners and stockholders. Plus, disputes are settled by judges specializing in corporate law instead of juries.

Because of its business-friendly climate, venture capitalists like to invest in companies incorporated in Delaware, so it’s advantageous for businesses that need major funding to incorporate in the state.

However, most smaller businesses won’t see tax savings on a significant enough scale to make incorporating in Delaware worth the additional work and effort. For these entities, it makes more sense to incorporate in the state where they will do most of their business.

Frequently asked questions (FAQs)

Why do so many companies incorporate in Delaware?

Delaware is one of the most popular states for companies to incorporate in because it offers tax savings for larger businesses and protects the privacy of business officers and stockholders. Additionally, professional judges, not juries, hear corporate disputes, allowing for quicker settlements. Cases can then be appealed directly by the Delaware Supreme Court.

How much does it cost to incorporate in Delaware?

The cost to incorporate in the state of Delaware starts at $109 and goes up depending on the number of shares the company has. There is also a $100 expedited fee to have a business incorporated the same day you file and a $50 expedited fee for incorporation within 24 hours.

How long does it take to incorporate in Delaware?

You can incorporate a business in Delaware in as little as one hour using the Division of Corporations’ expedited services. You can also elect to incorporate within two hours of submitting your paperwork, on the same day or the following day. Expedited service fees range from $50 to $1,000.