Starting your business: Massachusetts v. Delaware

One of the first decisions confronting a new business is what is the most appropriate state in which to organize the

company.  A lot of new Massachusetts business owners I meet have “heard” that Delaware is the best place, and therefore who want to set up their business in Delaware.  However, in most cases, incorporating in Delaware does nothing but add to the tax burden of a small business.

The Benefits of Delaware

For a business that is looking to operate in several states, nationally, or internationally, or is looking to attract foreign or “angel” investments; Delaware is an attractive option.  In terms of the logistics of forming a corporation or limited liability company, Delaware’s requirements are in line with those of many other states. Moreover, Delaware laws are favorable to businesses and it has a separate Court of Chancery, which has jurisdiction over many business issues. The Court of Chancery is composed of merit-based appointed judges and it does not conduct jury trials, reducing the risk of runaway verdicts and outcomes that are based on issues other than strict construction of applicable law.

Although you will have to pay taxes in each state that you do business in, Delaware does not charge corporate income taxes on Income that was not earned in Delaware and it does not require you to publicly disclose the names of the corporation’s directors or shareholders.

Finally, most foreign and “angel” investors are familiar with Delaware laws.  This “familiarity” lends well to growth for businesses who are looking to attract investors, and/or are looking to grown into a national business, as opposed to a local or regional one.

Now the Cons

In Delaware, corporations and Limited liability companies are subject to an annual franchise tax imposed by the State of Delaware…. even if your business does not do business in Delaware.   Moreover, if your business is physically located in Massachusetts, or any state not named Delaware, then the business must register in that state as a foreign entity.  Your business will still have to pay taxes in each state it does business, or has a physical presence and your business must pay your annual maintenance fees in both Delaware and each state is registered as a foreign entity. It will also need to file its annual reports, and any changes will require multiple modification fees in each state.

Conclusion

In short, the decision to incorporate in Delaware is not one-size-fits-all. You’ll need to think about what’s right for your business.  If your business is small and does business in only one or two states, the additional costs of incorporating in Delaware may well outweigh the benefits.  For more information, contact a business law specialist at Grantham Law, LLC.