One of the questions I get asked most frequently is “I hear a lot about Delaware, should I incorporate in Delaware?” The answer depends on the client’s responses to three questions that I pose: Where do you live? Where do you do your work? Do you plan on going public or selling shares on a public stock market? The answer usually becomes pretty clear once we discuss the answers to my questions.
Delaware is a great state to form or incorporate your business. I spent more than ten years in Delaware incorporating corporations and forming limited liability companies, limited partnership and business trusts. The laws are well written and the state bar is active in updating and modifying the corporate and LLC laws when an issue comes up. Corporate law textbooks are full of Delaware Chancery and Supreme Court cases – they literally wrote the law on corporations. Such a large body of Delaware corporate law also allows for an answer to many corporate questions. Rarely is there “not a case on point.”
Additionally, from a practical formation standpoint, the Delaware Secretary of State’s office is top notch. “Same day” service for formations is typical and if you are in a hurry and want to spend the additional fees, you can even form a corporation or LLC in as little as thirty minutes – compared to other states with burdensome requirements to get filings in by 10:00 am for a same-day stamp and a multi-day wait for confirmation.
However, unless you live and work in Delaware or intend to go public with offering stock, forming a Delaware entity will typically cost you more money throughout the life of the company, without much discernible benefit.
Questions to consider when deciding “should I incorporate in Delaware?”:
1) Where do you live?
Each year, you will have some fixed “corporate” costs for your entity, most notably franchise taxes and registered agent fees.
Your state of formation/incorporation will charge an annual base tax on your company (a franchise tax) depending on the type of entity and possibly the number of shares of stock authorized to be issued. In Delaware, corporate franchise taxes start at $175 and can reach hundreds of thousands of dollars if you have millions of shares of stock authorized. Virginia is slightly lower, with corporate rates starting at $100.
Registered agent fees are fees paid to a private person or entity serving as registered agent to your company. When you form an LLC or incorporate a corporation in any jurisdiction, you must publicly list a registered agent and registered office located in the jurisdiction of formation/incorporation. That person will receive notice of any lawsuits against the company. If you are resident in the state of formation, you can serve as the registered agent, however, if you do not live in the applicable state, you will need to hire a registered agent to act in that capacity. This agent service can run between $150 and $400 per year.
In terms of jurisdiction selection, if you live in Virginia and incorporate in Delaware, you will need to pay Delaware taxes and hire a Delaware registered agent for the company. If you formed the company in Virginia, you could save some money on the registered agent fees by serving in that role.
2) Where do you do your work?
Companies doing business in a state that is not their state of formation or incorporation must “register for doing business” in that state. The registration process is typically pretty simple – you file a statement of registration, list a registered agent and office and pay a filing fee. However, the entity will be subject to ongoing costs in the new state: annual fees similar to franchise taxes, and any registered agent fees for the additional state if you are not a resident.
If you form your company in Delaware, but live and operate the business in Virginia, you will almost double your fixed corporate fees by having to pay annual state fees to Delaware and Virginia, and a registered agent fee in Delaware. In the Washington DC area these costs can quickly multiply if you work in the three local jurisdictions (Virginia, Maryland and DC) each looking for registration and associated fees.
3) Do you intend to go public?
Currently more than 50% of all publicly-traded corporations, including 64% of Fortune 500 companies, are incorporated in Delaware. There is no one reason why publicly-traded entities choose Delaware. As previously mentioned, the laws are well written and kept up-to-date, the judiciary is highly regarded and the Secretary of State is incredibly responsive. All of these factors come together so there is more certainty about what a company can and cannot do and how litigation would be decided. Investors crave this type of certainty.
Frequently, if a company is not already a Delaware corporation, they will file paperwork to domesticate in Delaware as a corporation and change their state of incorporation to Delaware. More than 70% of the companies doing an IPO will be Delaware corporations. The domestication can be done, but it can be very costly for legal expenses and possible tax consequences. If you have any intent for the company to go public or be listed on a stock market, you should be looking to form in Delaware.
Currently, I live and practice law in Virginia and most of my clients live and work in either Virginia, Maryland or the District of Columbia. For many of my clients that don’t intend to go public, the benefits of forming in Delaware are not worth the additional fees, no matter the ease of formation or the cache of Delaware’s body of law.