Posted by: Robin Gronsky | February 22, 2012

Should You Incorporate Your Business in Delaware?

Every so often, I get new clients who ask me whether they should incorporate their new business in Delaware.  As a true lawyer, my answer is “it depends.”

First off, I should explain the Delaware question.  Many years ago, Delaware decided that it wanted to attract businesses to pay franchise taxes instead of raising income taxes.  The legislature deliberately created a corporations law that was very business-friendly and the courts in which businesses litigate are also business-friendly.  That is why many multi-state corporations incorporate in Delaware.

However, most businesses that I see have a small vision.  My clients want to start a local business and they pretty much intend to stay local.  If that is your mindset, and you are not physically located in Delaware, there is no good reason to incorporate in that state.  I practice business law in Ridgewood, New Jersey and most of my clients are from a 10 mile radius of my office.  Their businesses tend to start in their home or a local office or store.  They have no intention of expanding to other states.  I advise them to incorporate (or form their limited liability company) in New Jersey.

On the other hand, if a client comes to me with a big idea and is thinking that his business will grow to become a franchise or his 5-year plan involves numerous locations in different states, I may change my answer.  When you start doing business across state lines, you need to obtain certificates of authority to transact business in each state in which you want to conduct business.  If you are going to be paying the extra fees to do business in several states, it may be worth it to you to incorporate in Delaware for their business-friendly climate.  If your business intends to seek financing from venture capital firms, they may insist that you incorporate in Delaware.

So, as usual, there is no one answer for every business start-up.  You need to think about what your ambitions for your business are and then talk to a business lawyer to get answers to your questions about how the different possibilities work out for you.


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