Delaware has earned a highly favorable reputation among the business community for the numerous corporation laws it has. Various large corporations are incorporated in Delaware even though they may have originated elsewhere. A question many small business owners ponder is whether it is worth it for them to incorporate in Delaware as well. Unless you already live in Delaware and that is where your mom-and-pop shop is located, it is generally not worth the time and effort to incorporate in a different state.
Small Businesses Generally Do Not Save on Taxes
The reason why many larger businesses incorporate in Delaware is because of tax incentives. However, for a smaller business, you likely are not going to enjoy the same benefit. As long as your business is gathering revenue from your home state, that state’s income taxes are still going to have to be paid on whatever income you earn.
It Is an Inconvenience If Legal Troubles Come Up
In the hypothetical scenario that you do decide to incorporate your small business in Delaware, you will need to go to Delaware court to deal with any legal matters. This means that if your small business does business in Washington, you would need to fly all the way to Delaware in order to address whatever is happening. This entails large expenses that your small business may not be able to afford. Another inconvenience is the matter of legal representation. Your business may have a lawyer you hire in your home state, but he or she may not be knowledgeable about state laws in Delaware.
Your Home State May Actually Offer Better Protections
Numerous businesses flock to Delaware because it has some great laws on the books that are advantageous to larger corporations. However, the possibility still exists that the state you live in is actually more beneficial to what your small business needs. Using California as an example, two individuals may decide to start up their own business. It gathers traction, steadily grows and garners investors over time. The two could not be happier with where their small business has gone, but a majority of the investors decide it is time to liquidate the company. The two founders do not want to. In this scenario, the two company founders would actually be better off incorporating their business in California because every shareholder needs to agree to the liquidation before it can occur. Even if all the investors hold a majority of shares, the two founders could block the sale. However, if this small business had been incorporated in Delaware, then a simple majority would be enough to liquidate the business. Again, Delaware laws tend to be good for larger corporations, but they are generally not in the best interest of smaller organizations.
You Would Need to Qualify in Both Delaware and Your Home State
One reason many larger businesses incorporate in Delaware is that it has lowers incorporation fees than other states. However, your small business would still need to qualify in your own state in order to do business even if you were to incorporate in Delaware. This means you would have to pay two fees and go through two different processes in order to get your business up and running. Another inconvenience is that in order to incorporate in this different state, you would need to find an agent to assist you. Hiring this agent of register can be a hassle if you do not know anyone in Delaware. Naturally, if your small business would already be located in Delaware, then by all means, go ahead and incorporate in the state. However, small businesses located elsewhere would be better off incorporating in their own state regardless of how good the laws may be in Delaware.
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