Many websites and online sources push Florida business owners to form a Delaware corporation, as this is the alleged “gold standard” of business entities. In some cases, forming a Delaware corporation can be advantageous based on your operations and plans for the future, but in many cases, if you’re operating your business primarily in another state, it can be expensive and a bit of a headache.
Here are key reasons to not form a Delaware corporation if you live and do business in another state:
1. Extra Costs (State and Franchise Taxes)
- Delaware Franchise Tax: Delaware requires an annual franchise tax, which can be expensive. The amount depends on the size of your company, and for larger businesses or those with lots of authorized shares, it can run into the thousands of dollars. Even smaller companies might pay hundreds.
- Foreign Qualification Fees: If you form a Delaware corporation but your primary operations are in another state, you’ll need to register your business as a “foreign corporation” in the state where you actually operate. This often comes with additional fees and paperwork.
- Multiple State Filings: Filing taxes in both Delaware and your home state means extra paperwork and potentially higher compliance costs, especially if your home state has high business taxes.
2. Ongoing Compliance and Administrative Complexity
- Two Jurisdictions to Manage: You will need to keep up with legal and tax filings in both Delaware and your home state, which could lead to confusion, missed deadlines, or costly penalties.
- Registered Agent Requirement: Delaware requires that you have a registered agent in the state. If you don’t have one on-site, you’ll have to pay a third-party service to act as your registered agent, adding an additional cost.
3. State Taxes in Your Home State
- Even though Delaware is known for its business-friendly tax laws (such as no sales tax and low corporate income tax), if you’re doing business in another state, that state may tax your income and activities. Many states impose taxes on companies that are considered to be “doing business” in their state, regardless of where the corporation is formed.
- Nexus Issues: If you form a Delaware corporation but do business in another state, you might still create a “nexus” in that state, which means you’ll be subject to that state’s taxes, even if your business is legally incorporated in Delaware. This can increase your overall tax burden.
4. Inconvenience for Local Operations
- If you’re physically based in another state and all your business operations are there, forming a Delaware corporation could be unnecessary and create extra distance between you and your state of operations.
- It could also complicate the legal process if you need to deal with local matters like lawsuits, licenses, permits, or state-level regulatory compliance. Dealing with Delaware law while also complying with the laws of your home state might be cumbersome.
5. Lack of Tangible Benefits for Small Businesses
- Limited Advantages for Small, Local Operations: The benefits of forming a Delaware corporation, such as favorable corporate laws and access to sophisticated legal infrastructure, are often more significant for larger businesses, tech startups, or those planning to raise venture capital. For small businesses or those not planning on significant growth, these advantages might be irrelevant.
- Fewer Local Legal Advantages: If you’re not in a situation where you need the specialized protections of Delaware’s corporate laws, like strong protections against hostile takeovers or better management flexibility, you may not see any tangible benefit to incorporating in Delaware.
6. Complicated Tax Filings
- Double Taxation: In some cases, incorporating in Delaware could subject you to taxes in both Delaware and your home state. Additionally, there could be complications with apportioning income between the two states for tax purposes.
- State-Specific Deductions and Credits: Your home state may offer tax credits or deductions that are not available to a Delaware corporation doing business out of state. Forming a corporation in Delaware might prevent you from taking advantage of some local benefits.
7. Perception and Credibility Issues
- Business Perception: In some cases, clients, customers, or investors may be skeptical about your business being incorporated in Delaware if you’re based in another state. They might view it as a tax-avoidance strategy or something that complicates understanding the structure of the company.
- Difficulty in Building Local Relationships: If you are operating primarily in a local market, having a corporation registered in Delaware might make it harder to establish strong relationships with local regulators, suppliers, or customers who are more familiar with local business practices.
8. State-Specific Regulations May Apply Anyway
- Even if you’re incorporated in Delaware, your home state’s laws will still govern your day-to-day business operations. Issues such as employment laws, consumer protection regulations, and other local laws may still apply to you, and Delaware’s corporate laws won’t shield you from them.
Here are some situations where Delaware incorporation is actually beneficial:
Delaware is generally the best choice for businesses that:
- Plan to raise capital from venture capitalists or investors.
- Have a large or growing number of shareholders.
- Wanting to take advantage of Delaware’s business-friendly corporate laws (especially regarding the ease of forming and managing the company, shareholder rights, and dispute resolution).
- Are you going public or considering an IPO?
But if you’re running a small or local business and don’t need these advantages, it may be simpler and cheaper to incorporate in your home state. Roberts Law, PLLC can assist in setting up your Florida businesses based on your goals and needs. Contact us if you need more information or assistance.Disclaimer: The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction or the jurisdiction applicable to your issue/matter. No information contained in this post should be construed as legal advice from Roberts Law, PLLC or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction
