Pros and Cons of Delaware Incorporation

It seems nearly everyone wants to incorporate in Delaware these days. But, not everyone should. Here's a discussion of some of the pros and cons of Delaware incorporation.

Pros:

Delaware has a pro-business environment. Taxes are generally low and Delaware corporate law generally is favorable to business. Corporate management and preferred stockholders enjoy various advantages that can give them more power than other stockholders. Also, Delaware corporate law is well settled (respected even internationally) and most business lawyers are familiar with it. This is usually beneficial to settling disputes and law suits relatively easily and inexpensively.

For all these reasons, venture capitalists will often favor investing in and/or purchasing Delaware corporations over other corporations. So, even start-up companies that plan to "cash-out" or go public will often just start as a Delaware corporation in the fist place; rather than starting as a corporation in another state and then changing.

Cons:

If you are not located in Delaware then there will be complications from having two states to deal with. You will have to qualify (and file taxes) as a "foreign" entity in the state you are located in -- and, of course, file, and pay taxes, in Delaware as well. While Delaware does not have a sales tax for consumers, it does have a business and occupational license tax and also has a flat corporate tax rate. Also, other states have made changes in recent years to compete with Delaware for new businesses. So, you really have to evaluate closely the business environment in your state and compare it to Delaware. It could be just as good or even better. And, you will avoid the hassles, time and expense of doing business and complying with the laws of two states.

Having said all that, most large and mature corporations in the United States are Delaware Corporations as at that point the advantages of Delaware incorporation outweigh the disadvantages. It's just that, as a start-up -- one has to try to keep things as simple as possible since there will be so much to do. A small start-up likely can't afford to pay accountants lots of money to handle regulatory and tax compliance in multiple jurisdictions.

So, as a rule, I'd say -- if you are not located in Delaware already -- normally you'll be better off waiting till you are a bigger and more profitable company before potentially incorporating in Delaware.

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