Why Incorporate in Delaware? Benefits & Drawbacks

Delaware has long been a top choice for many incorporating businesses, from Fortune 500 companies to simple startup organizations. 

In this article, we aim to break down the reasons to incorporate in Delaware, while also informing you of potential pitfalls. 

Additionally, we’ll provide you with questions to think about as you choose your state of incorporation.

Whether you’re a new or seasoned entrepreneur, understanding why Delaware has always been the corporate epicenter of the United States is a must-do.

Why do companies incorporate in Delaware?

Delaware is a fantastic place to incorporate a business for several reasons.

Primarily, Delaware businesses can benefit from business-friendly laws, tax advantages, structural flexibility, and privacy from the government. 

Additionally, you do not have to be a Delaware resident to incorporate in this state.

Presently, there are nearly 1.5 million corporations established in Delaware.

In fact, approximately ⅔ of Fortune 500 businesses are incorporated in Delaware. 

These small and big businesses have chosen to take advantage of the business protections and benefits that Delaware provides.

Why you should incorporate in Delaware

Incorporating in Delaware can be a great decision, as long as you’re aware of your business needs and goals. 

So, here are 8 reasons why you should consider incorporation in Delaware:

Delaware corporate laws

Delaware’s popularity with corporations is due to well-liked corporate laws.

In this state, there is a legal distinction between directors, shareholders, and officers, which is ideal for efficient and reliable corporate decision-making. 

Also, Delaware allows corporations to be flexible when they formulate their structure. 

For instance, corporations can elect a board of directors for either one-tier or two-tier structures.

In a two-tier structure, a board of managers can be included in the hierarchy.

Tax benefits

In Delaware, corporations have no state or local sales tax obligations. For their favorable tax program, Delaware was ranked 21st in the 2024 State Business Tax Climate Index. 

Additionally, Delaware provides a lower corporate income tax rate than other states, which is around 8%.

There are also no taxes on intangible assets, such as trademarks.

Corporation court

In Delaware’s legislative branch, there is a specialized corporate business court named the Court of Chancery, which is designed to deal with corporate matters. 

This court is a boon for corporations in Delaware for their legal expertise and efficiency, especially in managing professional disputes. 

Additionally, Delaware is notorious for being very business-friendly in a legal sense.

For example, the Delaware General Corporation Law (DGCL) offers a legal framework that is regularly altered and updated for corporations and their activities.

Privacy

Delaware’s privacy laws keep business matters confidential in corporations.

In Delaware, corporations do not have to disclose the names of their directors and officers for the public to view. 

Shareholder records also remain private in Delaware and are not included in public filing documentation. 

However, they are displayed in annual reports, as mandated by federal corporate laws.

Quick business filings

To file for incorporation in Delaware, you can begin your application online through their user-friendly website.

Electronic submission makes applying easier and more instantaneous. 

The filing procedures in Delaware are clearly displayed on the website, so forming a corporation is straightforward – no matter your structure.

No required residency

In many states, you are required to establish residency or prove that you live in the state that you’re incorporating in.

However, Delaware residents and nonresidents can apply to be incorporated in the state.

Preferred by investors

Delaware corporations are preferred by investors because they are widely recognized around the globe as being legally sound and straightforward. 

Also, the corporate laws in Delaware are well-liked, especially for their support of proxy access.

Proxy access allows investors to have a greater say in business formation and director nominations.

One-person corporate structures

You can establish a single-member corporation in the state of Delaware. 

This structure type can be applied to LLCs as well. In short, the benefits of running a corporation or LLC are given to one person who opens the single-member entity.

Why you shouldn’t incorporate in Delaware

Although we have established that Delaware is a great place to incorporate, here are some reasons why you might want to reconsider incorporating in this state, depending on your specific business.

Franchise taxes

Delaware imposes franchise taxes annually. This fee is unchanging for LLCs, but can vary for corporations.

With corporations, the franchise tax is based on the authorized shares of the corporation and is $175 at minimum.

Expensive business filings

Business filings in the state of Delaware are expensive, especially if you choose to add on costs like that of the expediting filing expense. 

The cost that contributes the most to the expensive business filings in Delaware is the franchise tax, which is a variable expense every year for corporations.

Required Delaware registered agent

The registered agent that you use to establish and run your corporation must be registered with the State of Delaware prior to incorporation.

This barrier can limit your options for registered agents.

Must meet requirements in your own state

Along with meeting Delaware’s requirements, you might prove that you have met the requirements for establishing a corporation in your own state. 

Make sure to compile the requirements and complete them for both locations before filing with Delaware.

Legal disputes require travel

If you live outside of Delaware and are choosing to incorporate in this state, you will need to travel in order to handle legal disputes in Delaware’s court system. 

This travel can add additional fees (such as hotel stays, plane tickets, etc.) that would not be relevant if you incorporated close to home.

How to Incorporate in Delaware

Incorporating in Delaware requires a few simple steps and the payment of some filing fees.

Take a look at the list below:

1. Choose a business entity – Choose the corporate structure that you would like to file for in the state of Delaware, whether it be a C-corporation or an S-corporation.
2. Obtain a registered agent – Your registered agent must be licensed in the State of Delaware if you are to file in this state. The registered agent manages the filing process and oversees all decisions made about the business during this time.
3. Pick your entity name – Have you thought of a name for your business? If so, now you’re able to put it in writing. Choose an entity name and fill out all legal paperwork with reference to this name.
4. File all your paperwork – All paperwork, such as articles of incorporation documents, business licenses, and more, should be filed in your online account with the State of Delaware on their government website.
5. Submit annual tax report and pay franchise taxes – Once you have received confirmation that your business has been successfully incorporated in Delaware, make sure to submit your annual tax report and pay franchise taxes.

Quickstart: To expedite the process, use a business formation service like LegalZoom to handle the entire process. Visit the LegalZoom website today!

Should I incorporate in Delaware?

You’ve made it to the end of this exploration of why incorporating in Delaware can be so lucrative.

Remember, it is important to consult all professional and legal matters with a subject matter expert prior to making decisions about incorporation in Delaware. 

If incorporating in Delaware aligns with the goals of your business, you’re now informed and able to begin the process of incorporation.

Good luck with your future endeavors!

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