Should You Incorporate in Delaware? The Truth About Delaware Corporations

By: Tarn Faith, JD Candidate, Narwhal’s Summer Legal Fellow

For the vast majority of businesses, incorporating in Delaware is not simply irrelevant, but can often be actively bad advice that adds additional costs and work to small businesses with effectively no benefit. “But I have heard it one thousand times since yesterday from every old white man in the country who started a business in 1949! How could they possibly be wrong?” Well, let's talk about Delaware; why does it have this reputation as a business friendly state, when it might be a good idea to incorporate in Delaware, and what the reality is for the vast majority of small business owners. 

Why do people choose Delaware for corporations?

First, let’s start by covering why Delaware has gained this distinct reputation. Delaware has spent over a century trying to become a very business friendly state. It has done so through four unique characteristics: The Delaware General Corporation Law (DGCL), The Delaware Court of Chancery, the flexibility Delaware provides business owners, and the legal consistency and predictability of interpreting Delaware's legal statutes. The DGCL is considered by many legal scholars to be the most developed legal codex in the country, it is very detailed, and very clear. The Court of Chancery is a unique court in Delaware that specifically handles business law cases. Delaware gives their corporations broad flexibility in structuring, governance, issuing stock, indemnifying officers, and carrying out mergers and acquisitions. Finally, the predictability of Delaware law comes from the fact that so many cases have been tried in and ruled on in the Court of Chancery, and is sometimes favored by businesses because it means they know what operations are acceptable and what is not. Sounds impressive right? Well it is, if you are going to utilize these advantages.

A Delaware Corporation means Double the Paperwork

Here is the thing though, you likely are not going to use these advantages. Let’s use an example: Jane has an etsy shop making jewelry, she is very talented and wants to open up her own company. She has heard, repeatedly, that she should incorporate in Delaware for its structural advantages, so she opens in Delaware. First, she needs to get foreign authority in Oregon so that she can operate her business there, but this is expensive and complicated; she could have avoided this by opening in Oregon. Second, she needs to file Delaware filing fees, which are expensive because Delaware knows they can charge more than Oregon for them; they could have been cheaper had Jane filed in Oregon. Delaware also has expensive annual fees, and since Jane incorporated there she will need to pay them; she could have paid cheaper fees had she just incorporated in Oregon. But unfortunately that isn’t even the end of it, because Jane also has to pay Oregon's fees since she is operating here; she could have only needed to pay these fees instead of these fees on top of Delaware's had she incorporated in Oregon. Finally, Delaware has registered agent fees that are more expensive than most states; Jane could have paid less in fees had she incorporated in Oregon. As you can see, it is more expensive to operate in two states rather than one. But I’m not quite done with the disadvantages yet because we also need to talk about paperwork. Jane is a craftsperson, and wants to craft, she does not want to spend lots of time filing paperwork or paying her attorney for another legal project to file for her. But Jane filed in Delaware and operates out of Oregon, so nearly all of her regular paperwork is doubled, because she has to submit forms in both states who have different requirements, different websites, and different names for these files. 

Am I more protected if I file in Delaware?

But hey, at least Jane’s operating documents can be predictably litigated in Delaware's business courts right? Well, how often do we think Jane is going to be sued relating to her specific business practices? The answer is very rarely. Even if Jane gets sued, what are the odds she is going to be sued in Delaware, where any of these advantages would come up? The answer is very very rarely. So the very advantages of incorporating in Delaware are nearly completely irrelevant for Jane, while simultaneously meaning that she has to do more paperwork and pay extra fees.

Are there advantages for LLCs in Delaware?

Again, not for the vast majority of LLCs. Many of the corporate advantages in Delaware I laid out above do not carry over to LLCs. Delaware does have some soft advantages for LLCs, primarily the fact that they have the most flexible LLC Act in the country which allows LLCs to: waive many fiduciary duties, create virtually any economic arrangement, customize voting rights, heavily modify management structure, design unique profit allocations. However, these simply are not relevant for many LLCs that are not trying to game the corporate system in an extremely complex and involved way; and for single member LLCs there are essentially no advantages to opening in Delaware. The reality is simply that, like incorporating as stated above, the advantages for a typical business establishing in Delaware are often minimal and come with great costs.  

Are there tax advantages to Delaware?

What about corporate income tax? Delaware has no corporate income tax, this is a fact. You know what is also a fact: Oregon has corporate income tax that hits any cooperation operating within the state regardless of where it is incorporated. So while Delaware does not tax you, Oregon still will, meaning you are not escaping any corporate income tax by incorporating in Delaware if you are still operating outside of Delaware. 

Okay, so when should I incorporate in Delaware? Well, massive corporations such as Google and Amazon often incorporate in Delaware because they need these advantages. They are often being sued, have massive and deeply complex operating documents, and have fleets of people analyzing the tax and business codes in the state. They also conduct lots of operations out of Delaware, such as running warehouses and operating offices. Another time you might want to is if you are engaging with venture capital, because investors with a ton of money like the legal consistency and predictability of Delaware's laws. Delaware also requires no domicile to be established in order to open a business, so it is very easy to start up a business in Delaware. Of course, you still have to be both registered as a foreign authority in the state in which you operate, and pay whatever tax (such as income tax) that the operating state requires.  

Ultimately, if you are not going to engage with Delaware's structural legal advantages consistently as an inherent part of your operations, there is no reason to incorporate in Delaware unless your business is operating within the state.  

If you still have questions, feel free to reach out to us here at Narwhal! We can offer further explanation as to why Delaware is likely not the answer to all your questions, and answer your other business law questions as well!