Why Incorporate in Delaware

Discover Why Incorporating in Delaware Can Be A Smart Business Decision

Greg McFarlane is an advertising copywriter who lives in Las Vegas and Lahaina. He recently wrote Control Your Cash: Making Money Make Sense, a financial primer for people in their 20s and 30s who know nothing about money. Buy the book here (physical) or here (Kindle) and reach Greg at Greg at ControlYourCash dot com.

Welcome to Delaware, the least descript state in the Union. With little to distinguish it from its 49 more populated, more scenic, less crowded sisters.

Delaware’s famous for…being first to ratify the Constitution. That’s the best you can do? An official nickname chosen just because the Pennsylvania delegate took his time finding a pen?  You’ll understand if people find it hard to take seriously a state that could fit in my county 3 times over, and that appears on the inset in maps of the United States.

That being said, Delaware is the one state that deserves the most credit for keeping our economic engine humming. Generally speaking, Delaware is the best state in the Union to visit live in come from incorporate in. The phrase “a Delaware Limited Liability Company” has become a catchphrase, but have you ever wondered why?

If you’ve started a business of any size and know enough to incorporate, you need to do it in a particular state. Lots of budding entrepreneurs don’t realize this, but…no law says you have to incorporate in the state your business does business in. An Idaho business license is fully compatible with a Delaware incorporation. Tens of thousands of businesses from around the country – from ExxonMobil to the fastest-growing chain of dry cleaners in the Sioux Falls metro area – have chosen a particular state to incorporate in. One you can drive through in about 12 minutes.

The largest businesses in America, and a goodly number of medium-sized and small ones, choose Delaware to incorporate in, even if their business dealings with the state are only tangential. Microsoft is headquartered 2400 miles from Dover, yet is incorporated in Delaware. The Bank of Hawaii is more than twice as far, same thing.

So why incorporate in Delaware? Not for the scenery. The filing fees are low: it costs $50 to file ($175 for bigger companies), and $250 to re-up annually. But that’s only incidental. The big advantage to incorporating in Delaware is the protection. If you sue a corporation you have to do it in the state where it’s incorporated, and Delaware courts have a long and consistent history of judicial rulings that protect shareholder assets from creditors.

Shareholder. That’s you if you own a business, and don’t want to operate as a sole proprietorship or a partnership. Which you don’t, because those are the two most effective ways to leave yourself financially vulnerable when forming a business. Go into business as anything other than a corporation, and you could get sued for everything you’ve got, beyond what you’ve invested in the business.

Instead, you want to form what’s called an S corporation or a limited liability company, keep the taxman a couple of steps away and write off expenses that you use to build said business. And you probably want to do that in Delaware. Google “entity formation”, find a company that specializes in that, and you’re halfway there.

Delaware isn’t the only good place to incorporate in. Nevada’s courts aren’t quite as friendly to businesses as Delaware’s are, but from top to bottom, Nevada is America’s 2^nd-friendliest state for corporations, with even cheaper filing fees than what Delaware charges. Nevada also keeps the paperwork minimal. In Nevada, once a year you have to report whom your business’ directors and officers are, and if your business is anything like the advertising shop I own, your directors are your officers. They’re also you.

If you do file in a state other than your own, you might need to register with your state’s secretary of state as a “foreign” S corporation or limited liability company. Should your state pride compel you to incorporate at home, then fine. But whatever you do, don’t incorporate in California or New York. Work under the table, conduct business only in cash, and borrow money from guys who operate out of pool halls before you send a check to Sacramento or Albany.

California’s courts are notoriously interventionist, usurping power from the people and placing it in the hands of everyone from labor commissioners to county sheriffs (if you doubt that, try carrying a handgun in Los Angeles.) Sure, sticking it to the bourgeoisie can be fun, but California’s case law favors employees to the point where you could go bankrupt because you didn’t provide a separate bathroom for transsexuals. In New York, the courts can hold your company’s 10 largest shareholders personally responsible if you go out of business and can’t pay your employees. Which sort of defeats the very purpose of incorporating.

Incorporate, and you’ll discover a world of tax advantages and other benefits that salaried employees can only faintly wonder about. Just make sure you take care of the downside and protect your business, its assets, and most importantly, yourself.

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