Pros and Cons of Filing an Entity in Delaware
It’s a common question from many San Diego entrepreneurs and start-up owners if they should file their entity in Delaware instead of California. They notice that many large companies are headquartered in Delaware. According to data provided by the Delaware Division of Corporations, nearly two-thirds of all Fortune 500 companies based in the United States are incorporated in Delaware. There is a reason for this: There are some benefits to setting up an entity in Delaware. It is not only an option for the world’s largest companies. Some smaller firms can also benefit from filing in Delaware. That being said, setting up shop in Delaware is certainly not the right option for every business entity. In this article, our San Diego business lawyer discusses the pros and cons of filing your company in Delaware. The Pros of Setting Up Your Business in Delaware As mentioned, filing in Delaware is the choice of a significant percentage of publicly traded companies in the United States because the jurisdiction offers some unique benefits. Here are four advantages of registering your business in Delaware:
- A Well-Established Corporate Law System: The single most important thing to know about Delaware is that the state has an unusually well-developed system of corporate law. The Court of Chancery in Delaware specializes in corporate matters. The system provides additional legal certainty.
- Additional Privacy to Officers & Directors: Delaware also has some unique rules that allow officers and directors of a corporation or a limited liability company (LLC) to remain confidential. It is an advantage for certain business entities.
- Often Easier to Raise Capital from Investors: Many start-up companies that have big growth dreams file in Delaware. For a number of different reasons, it is easier for businesses to raise capital from outside investors in Delaware.
- Possible Tax Benefits: Finally, Delaware also offers some potential tax advantages over other states. That being said, the tax issue is not always so straightforward. In some cases, there are other states, such as Nevada, that offer greater tax benefits.
- Dual Registration May be Required: This is the single biggest disadvantage for small businesses considering filing in Delaware. You may be required to dual register your company in California. Essentially, you would be doubling your filing fees and paperwork.
- You Need a Registered Agent in Delaware: To set up a company in Delaware, you must have a registered agent in the state. Essentially, this means you need someone with a business address. It is another compliance cost.
- Litigation Can be More Complicated: If your company is involved in a lawsuit, a Delaware registration can sometimes make things more complicated. Your company could potentially face a claim in California, Delaware, or a third state in which you are doing business.