Most California business owners are aware that many corporations choose to legally form under the laws of Delaware. Fewer Californians are aware of what specific benefits this strategy provides or what specific tax benefits that companies incorporated in Delaware enjoy. An experienced startup attorney can help you analyze the risks and benefits of an out-of-state incorporation, and determine whether this is an appropriate tax or business strategy for your business.
Why Incorporate in Delaware vs. California?
Delaware corporate law has long been considered favorable to business owners. This is due, in large part, to corporate-friendly tax laws. This “tax haven” does not collect corporate taxes from companies that do not conduct their business in the state. State law also does not impose tax liability on royalty payments and other intangible assets. There are also certain administrative benefits to incorporating in Delaware: unlike other states, the law does not require the public disclosure of corporate shareholders or directors. It is also faster to incorporate in Delaware than nearly any other state.
From a legal standpoint, there are also certain benefits to litigating business matters in the courts of Delaware. The state hosts a separate Court of Chancery which is dedicated to corporate lawsuits. The judge on this bench have backgrounds in corporate law and can decide cases quickly, and without the need for a jury. This effective system has allowed Delaware to develop a notably predictable and well-developed body of corporate case law. This, in turn, enables corporations to make better informed decisions about litigation and settlement of corporate claims.
The Downside to Incorporating in Delaware
Predictably, there are costs and inconveniences associated with incorporating a company in a state where the business is not physically located. A business which is not physically located in Delaware must file for foreign qualification in all states in which is does business. This status offers the legal protections of corporate status to businesses which have not incorporated in the states in which they do business. This process incurs legal costs and state fees. Another cost commonly incurred by out-of-state businesses is that of a registered agent. Any business incorporated in Delaware must name a registered agent who is authorized to accept service and process of legal documents. This person must have a physical street address in Delaware. If the corporation does not have an employee or agent present in the state, they must hire a company to provide this service for them. Out-of-state businesses incorporated in Delaware must pay franchise taxes and are also subject to annual reporting requirements.
Reliable Legal Advice to Start Your Business Profitably
Let the experienced startup attorneys at Startup Company Counsel help you build a successful business from the ground up. Schedule a consultation today by calling (855) 353-5377, emailing admin@startupcompanycounsel.com, or submitting a request through our online contact form. We work with your business, as partners, to find the solutions that are best for your business. From risk management to Delaware corporate compliance, we will help guide you through every step of your business launch.
