You may have heard Delaware being called a tax haven, which many people find appealing when forming a company. While it’s true that there are many perks to using Delaware to open a business, it’s not the right choice for everyone. It’s a good idea to weigh the pros and cons, something that is best done by researching the process and how it would work for your specific business idea. There are certainly a plethora or advantages, but it’s also important to understand the disadvantages to forming a business in Delaware. Keep reading to find out everything you need to know.
You’ll Have to Register as “Foreign”
If the physical address of your company is outside the state of Delaware, you’ll need to register the business as “foreign” in the state of your physical address. For example, if that address is in Idaho, you will register as “foreign” in the state of Idaho. Applying to foreign qualifications for your company is an important step that cannot be skipped so keep this in mind as you make your decision.
You are Subject to Taxes in Both States
If you reside in one state but form your business in Delaware, you will be responsible for taxes in both states. You will pay the usual income taxes in your state of residence but will also be responsible for paying all fees and taxes associated with incorporating in Delaware.
You Must Have a Registered Agent
If you aren’t a resident of Delaware, you are required to have a registered agent with a physical address in Delaware that also operates during normal business operating hours (9am-5pm). A registered agent is someone who can send and receive legal documents and gather any other mail pertinent to your corporation. You must also have a registered agent in the state in which you reside and where you are operating your business. While both registered agents are important and can assist you with many things you might need, you will have to take the time to hire them and then pay them according to their fee structure for the services they provide.
You Must Pay Franchise Taxes if Forming a Business in Delaware
Even if you operate outside the state of Delaware, you’ll still have to pay the franchise taxes in the state. The amount is determined based on the number of shares in the business and starts at $175.00, with the amount going up, based on the size of the business and could be up to $250,000. The specific amount you pay will be based on company size and shares.
You Must Submit Annual Reports
Delaware has annual report submission requirements that you have to adhere to. These requirements are in addition to any that you must submit in your home state. Like the guidelines outlined above, this means double the paperwork and double the effort, so it’s something to be prepared for.
There are definite perks to forming a business in Delaware. But, while they sound great, it makes sense to balance the benefits with the potential drawbacks. If you need more information or are ready to form your business, contact Corporation Center today. We’ll help you every step of the way.