Why Some North Carolina Businesses Should Avoid Incorporating in Delaware.
Choosing where to incorporate is important to building a strong foundation for your business. It is common knowledge in the business community that Delaware is an ideal state for incorporation because of its corporate regulations and tax benefits. While these advantages are used to entice businesses of all sizes to Delaware, they are particularly favorable to larger and more complex companies. But what about the small businesses? There are 27.9 million small businesses in the U.S. economy that accounts for 99.7% of private sector firms. This article explains the consequences of incorporating in Delaware and why for your business - as the State’s slogan says - North Carolina just might be “a better place to be.”
Incorporating in Delaware is attractive to many businesses because the state sets the gold standard for regulation and corporate law. The Delaware state legislature is very business-friendly and works diligently to further the objectives of its corporations by adjusting its statutes as necessary. In addition, Delaware’s Court of Chancery is renowned as the nation’s best court for adjudicating business disputes from well-established case law. This provides increased stability and predictability for your business in the event litigation occurs.
A Realistic View
The reality is that most businesses formed in North Carolina primarily serve clients also located in the state and nearby states. This means that most North Carolina companies intend to remain headquartered in the state. To incorporate in Delaware, the incorporation documents require that an "agent" for the corporation be named. An agent is someone with an actual street address located in the state that is authorized to receive legal documents on behalf of the corporation. When a company that is headquartered in one state incorporates in another, it must pay for a service to act as its registered agent. Unless there is someone in Delaware who is willing to act as your registered agent, this is a necessary expense. Also, the business will be required to pay two separate filing fees, other annual fees, and taxes in both states. For example, the franchise tax for income earned in Delaware starts at $75, plus a $50 filing fee, and can be as high as $180,000. North Carolina has a similar corporate tax.
For a small business that operates primarily in one or two states, the benefits of incorporating the business in Delaware are likely outweighed by the cost. However, if you are certain that at some point your business may solicit or receive outside investments, it may be advantageous to incorporate in Delaware since venture capitalists are usually most familiar working within the Delaware corporate law structure. Additionally, for complex corporate arrangements such as employee stock vesting and equity compensation, a Delaware corporation may still be favorable because the state has simplified its administrative processes and requirements.
Simplicity is Key
For the average corporation with clients or customers primarily in North Carolina, the objective is simple: profitability. So why complicate things? Simplicity is often key to running an efficient business, and the incorporation laws of North Carolina are able to accomplish that. For example, in litigation, a company can be sued for non-tortious acts in its state of incorporation or where the business is headquartered. In such case, even as a regional business, you will be forced to defend claims brought against your business in a Delaware court.
If you are starting a business in North Carolina, let’s meet and discuss the best options for your business. Please visit www.craineylaw.com or call the Law Office of Cedric Rainey to schedule an initial consultation.
[This blog does not offer legal advice. If you need legal advice, contact the Law Offices of Cedric Rainey to speak with a licensed attorney.]