Q: Should I Register my LLC in Delaware?
A: It depends. This is a question often asked by small business owners as they learn that many companies, such as Amazon, Wal-Mart, Chase, Apple, and Bank of America, have chosen to incorporate in Delaware. In fact, more than half of the companies that make up the S&P 500 call Delaware home. While it is true that Delaware is considered a tax shelter and has favorable business laws, it is important to understand that not every business may benefit from such perks. Let’s look at what makes Delaware so great.
3 reasons why so many Fortune 500 businesses are incorporated in Delaware:
- Favorable Usury laws
Usury laws govern how much interest can be charged on a loan. The maximum rate is often referred to as a usury cap or ceiling. Creditors, such as banks, follow the usury laws of the state where they’re incorporated, rather than the state where their customers live. This makes it more beneficial to incorporate in a state where usury laws are favorable–a state such as, you guessed it, Delaware.
Mini history lesson: During a period of high inflation in 1980, Delaware passed the Financial Center Development Act (FCDA) , which eliminated usury ceilings and allowed out of state banks to set up shop in Delaware. This was a win-win for both banks and Delaware. Banks could charge high interest rates and Delaware’s economy would get a boost by having more businesses come into the state. The FCDA brought a surge of banks (who previously had been incorporated in New York) into Delaware and the rest is high-APR history. Today, about half of the nation’s creditors are incorporated in Delaware.
- Business Friendly Court System
Delaware has three court systems; Supreme, Superior, and the Chancery. The Delaware Court of Chancery is a non-jury, equity based court that often handles trust and estate disputes as well as commercial litigation. Delaware boasts that the Chancery has attracted the best corporate lawyers in Delaware to serve as Chancellors and that thanks to such highly talented legal counsel, Delaware corporate law is widely accepted as a national standard. If your business is going to get sued, you certainly want the judges hearing your case to possess a high level of knowledge and sophistication surrounding corporate law. Still, one might be skeptical as to how impartial a court can be when the state’s economy is dependent upon the very businesses it attempts to regulate, but that’s outside the scope of this discussion.
- Corporate Tax Shelter
A company can be incorporated in Delaware, while maintaining its Headquarters in another state (such as the state where they’re actually doing business). This provides opportunities for companies to shift certain types of income to Delaware where it may not be taxed such as intangible assets like royalties or copyrights. Delaware also does not impose a sales tax or personal property tax which can be very beneficial for certain businesses. While companies love the tax benefits that Delaware provides, there have been many complaints from lawmakers in other states who claim that Delaware is robbing them of their deserved tax dollars. Toys R Us has probably received the most scrutiny for this over the years, but don’t expect the practice of income shifting to change. The deal is simply too good to give up. Companies enjoy a reduced tax burden and Delaware enjoys the tax revenue collected from the many companies incorporated in the state.
Additional Considerations
After reading the above, you may have realized that incorporating in Delaware seems beneficial to big business. There’s also another consideration for small businesses that are considering registering in Delaware–the fees. If you register your business in Delaware, but are based in another state, you may be doubling your registration and/or annual fees. In Delaware, Limited Liability Companies (LLCs) must pay an annual fee of $300 to remain in good standing. If your business conducts its activity outside of Delaware (as would be the case if you’re operating as a single member LLC and do not live in Delaware), you will also need to register your business in that jurisdiction and pay any required fees there.
Now I’ll throw the question back to you. Would your business benefit from being registered in Delaware?
*Please note, all the information presented here is strictly for educational purposes and does not constitute tax or legal advice.
