Should You Form Your Business In Delaware? Pros and Cons

Delaware has long been considered the gold standard for business incorporation. Over 60% of Fortune 500 companies are incorporated there, but is it the right choice for your small business? Let us examine the pros and cons.

Why Delaware Is Popular

Delaware offers a well-established body of corporate law, a specialized business court (the Court of Chancery), no state income tax for out-of-state businesses, and strong privacy protections for business owners.

Advantages of Delaware Incorporation

• Business-friendly courts: The Court of Chancery specializes in business disputes and uses judges instead of juries
• Flexible corporate laws: Delaware's General Corporation Law is considered the most advanced in the nation
• Privacy: Officers and directors do not need to be listed in the Certificate of Incorporation
• No state income tax: For businesses that operate outside of Delaware
• Investor familiarity: VCs and investors are comfortable with Delaware entities

Disadvantages for Small Businesses

• Foreign qualification: If you operate in another state, you will still need to register there
• Double fees: You may end up paying fees in both Delaware and your home state
• Franchise tax: Delaware imposes an annual franchise tax that can be significant
• Registered agent requirement: You must maintain a registered agent in Delaware

When Delaware Makes Sense

Delaware incorporation is most beneficial for businesses seeking venture capital, planning to go public, or operating in multiple states. For small, local businesses, incorporating in your home state is usually more practical and cost-effective.

Conclusion

While Delaware offers undeniable advantages for certain types of businesses, the additional costs and complexity may outweigh the benefits for small business owners. Consider your specific situation, growth plans, and funding needs before making this decision.