Incorporating In Delaware: The Myth

Irrespective of the location of incorporation, it is common wisdom that individuals should always consider conducting business under a separate entity; But where? Choosing the right location for incorporating your business may get tricky and you may find yourself hearing or reading why you should incorporate in the State of Delaware. But, who should incorporate in Delaware?

Delaware has became a popular place to form a corporation in the early 1900s. Compared to other states in the U.S., a huge percentage of companies are incorporated in Delaware. In fact, half a million businesses - including more than half of all U.S. publicly-traded companies and 60% of Fortune 500 companies - have decided to make Delaware their legal home.

A company with complex corporate structure that is designed to manage and receive U.S. and/or foreign derived income should give incorporating its' U.S. entity in Delaware serious consideration. Similarly, a new technology startup hoping to raise funds from institutional or private investors may have no choice but to form its company in Delaware. Or, a company established solely to collect passive income from "... investments in stocks, bonds, notes, and other debt obligations (including debt obligations of affiliated corporations), patents, patent applications, trademarks, trade names, and similar types of intangible assets" may want to include Delaware on its short-list.

One of the most expressed reasons for forming an entity in Delaware is its well drafted corporate statutes, and Delaware's well-respected Court of Chancery; specifically designed to preside over corporate disputes. Delaware's corporate laws afford significant flexibility and autonomy in devising the rules by which entities are expected to abide. If a dispute arises either amongst the interest holders or between parties to a transaction, Delaware courts are well equipped and well versed in resolving such issue. There are also the tax advantages from which large corporations may benefit.

However, those who do not live or conduct business in the State of Delaware and only wish to incorporate an entity as a shelter against personal liability should be weary of this option. In those circumstances, incorporating in the state where they either reside or expect to conduct most of their business transactions may be the best option. Here is why:

Every State in the U.S. is an individual jurisdictions, all having their own rules about to how to conduct, regulate, and maintain business within their respective territories. This essentially means that an entity incorporated in one state will need to obtain a business license to conduct business in any of the other 49 jurisdictions. For example, a company formed in Delaware will need to "file a certificate of registration within 10 days after it starts to transact business in the Commonwealth of Massachusetts." This requires paying filing fees and other annual fees in the state where the company transacts business, in addition to, fees necessary to incorporate and to maintain an entity in the home state. In other words, the business owner will not only have to concern themselves with the fees and the regulations of their home state but also those of the state where they transact business. So, when contemplating forming an entity, smaller businesses with less complex business structures should focus their attention on the source and location of their main stream of revenue when considering their state of incorporation.

Although there are ways to limit and reduce a company's legal exposure in jurisdictions where they conduct business, they require advance and well-tailored planning that can often be overlooked. At Breeding Henry Baysan we represent local and foreign companies in all phases of corporate formation and governance. Contact us to discuss legal solutions that suit your personal and business goals.