Each state has a different approach to corporation tax. Selecting the right place to incorporate can save you thousands at tax time. Interestingly, it’s estimated that 68 percent of Fortune 500 companies have chosen to incorporate in Delaware.

This poses an obvious question, why does everyone incorporate in Delaware? Let’s find out.

Reasons To Incorporate In Delaware

It’s not just multi-national corporations who are registering in Delaware. Small businesses are also attracted to the generous tax laws on offer in this state. In fact, in 2022, 79 percent of companies decided to incorporate in Delaware when doing their initial public offering (IPO). So, why do companies register in Delaware? Turns out there are a few compelling reasons:

Paying less tax. Incorporating in Delaware allows you to slash the amount you need to pay in taxes. If you don’t do business in Delaware, you don’t need to pay income tax. You also don’t need to worry about sales taxes, investment income taxes, and personal property taxes.
Friendly laws. Delaware also has a unique court system. Issues get sent to the Court of Chancery. This is focused solely on corporate law. This can give businesses a leg-up and means that business disputes get sorted out faster than in other states.
Incorporating in Delaware is easy. Registering your company in Delaware is simple. Often, it only takes an hour to fill out the application. If you are willing to pay $50 extra, you can get the LLC application processed within 24 hours.
Keeps your details private. If you value your privacy, Delaware is the perfect option. You only need to give the name of the registered agent to incorporate your company. Any directors and investors can keep their details private. This is part of the reason why investors prefer to give money to companies that have registered in Delaware.

Downsides Of Incorporating In Delaware

Incorporating in Delaware might be a good way of shielding yourself from taxes. But that doesn’t mean it’s the right solution for your business. Here are some things to consider before registering your business in Delaware:

Costs of registering in Delaware. The minimum Delaware incorporation cost is $89. But that’s not the only factor that you need to consider. You’ll need to pay an ongoing franchise fee. Plus, you’ll need to pay income taxes on sales made in your home state. Some states, like California, level additional taxes on businesses registered in other states. Because of this, registering in Delaware might not give any tax benefits to smaller companies.

Tax laws can get complicated quickly, so it’s best to call in a professional to assess the taxes you’ll need to pay. This will allow you to decide if it is more tax-efficient for your business to register in Delaware.

Local registered agents are needed. Before you register in Delaware, you need to have a local registered agent. This is an additional cost you’ll be expected to pay.
Becoming a Delaware PBC comes with additional responsibilities. Before registering, you should ask what is a Delaware corporation. You might be surprised to find that you have additional regulations to follow. For-profit businesses need to register as Delaware Public Benefit Companies (PBCs). This means that you are legally required to show that you are making a positive impact, often by making social or environmental improvements. These objectives need to be tracked in a yearly report, which can be time-consuming. Being a Delaware B corporation is more difficult than being a traditional corporation, which can focus solely on making money for shareholders.

Other Popular States To Incorporate In

If you suspect that registering in Delaware might not be right for you there are plenty of other options you can consider. Some of the best states to incorporate a business in include:

Your home state. This is the simplest option, especially if you are still a small business. You only need to worry about one set of laws and paying one set of taxes.
Texas. Registering in Texas has become a lot more popular in recent years. Like Delaware, you can expect relatively low taxes.
Nevada. This is another state that is known for having low taxes. There’s no need to pay a corporation net income tax. Even better, there isn’t a franchise tax.
Wyoming. Lastly, it’s worth thinking about registering in Wyoming. Again, the main highlight is the ability to pay low taxes. However, you can also expect lower filing fees and fewer annual fees than in Delaware.

Conclusion

The answer to why do companies incorporate in Delaware can be answered in two words. Lower taxes. For larger businesses, this can save them thousands each year. But, for smaller companies, the benefits are less clear. Before making a final decision it’s worth going over the potential taxes you’ll incur with an accountant. This will let you decide if registering in Delaware will be worth it.