In the HBO series Silicon Valley, wizard programmer Richard Hendricks is advised by lawyer Ron LaFlamme to incorporate his new tech startup in Delaware. When Richard asks why Delaware over all other states, Ron smiles knowingly and says: “I got your back,” punctuating just how obvious this decision is.
But incorporating in Delaware isn’t just a fictitious no-brainer. It’s a standard real-world practice, with more than half of America’s publicly-traded corporations and 60% of Fortune 500 companies calling Delaware their legal home. Whether a C-Corp or S-Corp incorporation or a statutory trust, limited liability company or limited partnerships, all businesses legally formed in Delaware enjoy a host of logistical and regulatory advantages.
Here are a few of them. (For related reading, see: Best States to Start Up a Business In.)
Courts in Action
Delaware’s legal system-at-large is decidedly business friendly. The state legislature works diligently to keeps business laws current, and the Secretary of State’s office functions more like the corporations it caters to than a traditional bureaucratic governing body.
But the crown jewel of Delaware’s court system is the Court of Chancery, a non-trial court that focuses solely on business, adjudicating issues involving real property, trusts and commercial litigation. With only judges and no juries, the Court solves legal disputes for the majority of America’s largest corporations.
Delaware-based LLCs have a built-in rule stating that exiting board members must first offer their interests back to the company before they can sell them on the open market. The law also prevents members from selling their interests to people whom the business owners dislike while also giving owners the discretion to approve incoming members as either voting or non-voting entities. If it’s the latter, members are purely economic beneficiaries, without votes or governance clout.
Of course, this is a non-issue for companies that exploit Delaware’s law permitting single-member boards of directors. (For related reading, see: Taxes in Texas for Small Business: The Basics.)
Delaware law allows corporations to be taxed at a lower rate in that state while avoiding higher taxes in their home states. The State has a flat corporate income tax rate of 8.7% of gross income.
A breakdown of Federal corporation tax schedule is as follows:
- 15% federal income tax on taxable income up to $50,000
- 25% tax on income from $50,001 - $75,000
- 34% tax on income from $75,001 - $100,000
- 39% tax on income from $100,001 - $335,000
- 34% tax on income over $335,000
Sole proprietors who file federal income tax returns under a married, jointly-filed status pay the following tax rates:
- 15% federal income tax on taxable income up to $35,800
- 28% tax on income from $35,801 to 86,500
- 31% tax on income over $86,501
Personal Asset Protection
As in some other states, Delaware LLCs protect an LLC owner’s personal assets. Let’s say a husband and wife own a tech company with $50,000 in profits currently sitting in the LLC’s corporate bank account. If hubby has a gambling problem and owes a casino $100,000, the casino may come after the husband’s property and personal bank accounts, but the LLC’s assets are untouchable, preventing the wife from having a very bad day and possibly saving a marriage in the process. (For related reading, see: 8 Fastest Growing Tech Startups.)
Delaware laws are designed to help simplify the inner-workings of corporations, aiding them in executing smoothly. For instance, committees of the boards of directors can still conduct meetings even if a member is absent by tapping an alternate member to sit in. And if a typographical or grammatical error slips into a document, certificates of correction can be easily filed with the Secretary of State. Also, corporations wishing to become an LLC, limited partnership or statutory trust may do so with simplified procedures aimed at cutting red tape and saving time.
Delaware does not require the names and addresses of company directors and officers to be listed in its formation documents. And in a world where people can search via a 3D map for just about anything with a few simple keystrokes, Delaware’s extra layer of anonymity can be a great comfort.
One Word of Caution
The advantages of incorporating a business in Delaware are vast, but they benefit the company's owner, and not necessarily its shareholders, who aren’t granted the same favorable tax treatments. In fact, shareholders may get zinged with overall higher taxes because dividends paid to them are not deductible form business income, therefore such income may be taxed twice.
The Bottom Line
According to statistics, eight out of 10 entrepreneurs who launch businesses will fail within the first 18 months of operation. Incorporating your business in Delaware can give you the logistical, structural and judicial leg up you need to beat those odds and flourish. (For related reading, see: Tips to Improve Chances of a Small Business Loan.)