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Why Registering a Corporation in Delaware Is Not for Everyone?
Everyone knows that big companies are registered in Delaware. In fact, more than 60% of the Fortune 500 companies are incorporated there. The State of Delaware has many advantages for big corporations, including:
- Most advanced system of corporate law.
- A special court for commercial litigation – The Delaware Court of Chancery.
- No state taxes for companies that do not do business in Delaware.
The Delaware C-Corporation is a well-known business format for raising venture capital, launching an IPO, and doing business internationally.
Who Does Not Need to Register a Corporation in Delaware?
But what if your business is not that large, and you don’t intend to raise venture capital or launch an IPO? Then, probably a corporation in Delaware is not for you. Interestingly, more than 90% of companies incorporated in Delaware don’t do business there. At the same time, if you register a corporation in Delaware but do business in another State, you will have to register your company in that other State also as a “foreign company,” and in some cases, pay state taxes in both states.
It usually is not a problem for big multinational corporations, which operate in many States and abroad. For them to register a corporation in Delaware is a way to structure their global business better and maximize their tax advantages. But for small businesses, it could be a real headache, including ongoing extra expenses on accountants and lawyers in both States.
In What State Should Your Register a Company?
So, if a Delaware corporation is not for you, what is the best State where to register a company? The answer to this question is quite simple. The best State for this purpose would be the State where you live and do business. Usually, it is the same State. However, if you have your business in one State, for example, in the State of New York, and live in Connecticut, i.e., another neighboring State, you probably need to register your company in New York.
Even though over 60% of the Fortune 500 companies are incorporated in Delaware, only 2 of them have offices there. On the other hand, 53 companies from this list have offices in New York and the same number in California. In other words, very few business people choose to do business and live in Delaware. If you have a prominent business structure, it probably operates in more than one State. And Delaware could be its State of incorporation. On the other hand, if your company is not that big, it’s better to choose a State where it will be most comfortable and convenient for you to live and do business.
Corporation vs. LLC?
The next question is whether to register a corporation or LLC. Both types of companies have limited liability for their owners and adequately protect them against business risks. At the same time, they have significant differences. The corporation usually means having a big and well-structured company with its board of directors, company officers, annual shareholders meeting, etc. The LLC, on the contrary, does not require having that kind of formal structure and meetings. It can be managed in a relatively informal way.
Another essential difference is taxation. Corporations have so-called “double taxation.” The declared corporate dividends are subject to tax on the corporate level first. And then, after they are distributed, the shareholders must include them in their taxable income. On the other hand, LLCs have “pass-through” taxation, meaning that there is no taxation at the company level in the case of LLCs. Instead, the dividends are distributed to the owners who pay their taxes.
It’s noteworthy that most of the existing companies formed as corporations don’t distribute dividends to their shareholders but find other ways of incentives and wealth distribution. If a corporation is a public company, its primary care is the stock growth and not the dividends distribution.
Whatever business structure you choose, we are here to help you with any legal questions. Our office is conveniently located at 110 Wall Street in New York City. Get in touch with us and see what we can do for you.