AZIZ LAW Blog
Incorporating out of State: Is Delaware worth it?
When forming an LLC or incorporating a business, the proprietors will have to decide which state to file in. Many people believe that Delaware has the friendliest environment for a business and that their fees and taxes will be lower if they file in Delaware. This, however, is not always the case. Sometimes, particularly for small businesses, the costs to file in Delaware may be greater.
While Delaware has one of the lowest filing fees for incorporation and has no state income tax for businesses formed there, Delaware requires corporations whose principle place of business is outside of Delaware to pay the incorporation fee for both Delaware and the state the business operates in. The business will also have to pay local income taxes. Furthermore, companies that operate exclusively outside of Delaware must have a registered agent in the state and pay a fee for the registered agent.
Delaware tax structures are most typically beneficial for out of state businesses with complex capitalization structures and a large number of authorized stock holders. For instance, Delaware has more flexible corporate formality requirements and permits one individual to hold all officer positions in the company. However, companies operating in states other than Delaware must comply with the reporting requirements of all states they operate in not just Delaware. This adds an extra layer of compliance for foreign corporations.
When it comes to potential litigation involving the corporation, Delaware handles all these cases in the Court of Chancery. Cases heard in the Court of Chancery are handled by judges. This often results in more predictable outcomes than cases heard by juries in other states. Small businesses must also consider the cost of litigation if they file in Delaware. For a small business, the cost of litigating a matter in Delaware may require significant travel and can be financially burdensome. In many cases, small businesses are better off filing in the state they operate in rather than filing in Delaware.
Aziz & Associates counsels businesses and proprietors on how to best structure their commercial ventures. We draft articles of incorporation, partnership agreements, shareholder agreements, by-laws, policy and procedure manuals, and other necessary documentation.
The information contained in this article is for informational purposes only and is not intended to constitute legal advice or create an attorney-client relationship. Further, the materials in this article are general in nature and may not apply to your particular circumstances. Every case is different and prior results do not guarantee future success.