Should You Incorporate Your Home Business in Delaware?
Most home-based businesses are launched as sole proprietorships, but it is not unusual for the owner to decide that a different legal structure is needed. This is usually a situation that only arises after the business has expanded through perseverance, hard work, and a little luck. If you are pondering whether you should incorporate your business, you may have heard that there are advantages to incorporating in Delaware. Regardless of where you live, you can form a Delaware corporation. Before you proceed, however, you should consult an attorney who specializes in corporate law and taxation. You need to fully understand the benefits and disadvantages of incorporating, and you especially need to understand the ramifications of incorporating in Delaware.
What Are the Advantages of Incorporating a Home Business?
When you incorporate a business, it becomes a separate entity in the eyes of the law. This is not the case with a sole proprietorship. A sole proprietor is personally responsible for any business debts, including taxes, loans, fines, employee salaries, and credit card debts. Furthermore, if someone suffers an injury or property damage due to your product, action, or service, you could be sued. For example, if your delivery truck is involved in an accident, the injured party could sue you to collect any losses not covered by your insurance. If you sell a defective product that causes an injury, or you provide a service that results in property damage or personal injury, you could also be named as a responsible party in a lawsuit. As a sole proprietor, you could be legally required to use your personal assets to satisfy any debts or court-ordered settlements incurred by your company. As a corporation, your personal assets are not typically at any risk; the limit of your risk is the money you invested in your company. However, there have been instances of gross malfeasance that resulted in the seizure of certain personal assets.
There are other advantages to making your home-based business a corporation. A corporation continues until it is dissolved, so the business can be handed down through numerous generations. A private corporation offers greater privacy for the owners, but the extent of your privacy varies by state. Furthermore, corporations are still viewed as more stable and professional by many lenders as well as potential customers.
What Are the Disadvantages of Incorporating a Home Business?
The incorporation process can be lengthy and costly. After incorporating, there will be forms and reports to be filed, and this can increase your bookkeeping chores. You will also be facing the double-taxation scenario; your company will be taxed on its revenue, and you will be taxed on any money that you take out of the company as compensation.
What Is Different About Incorporating in Delaware?
For decades, Delaware has been known as the most business-friendly state for corporations. Delaware strives to process corporate filings within a day of receipt; other states can take weeks. Unlike most other states, Delaware does not require you to disclose the names of your officers and directors to the state, providing you with true anonymity. Furthermore, one individual can fill the role of director, shareholder, and officer, allowing you to have an extremely small corporate structure, and none of these individuals are required to have a business address in Delaware. There are also some tax benefits. Delaware corporations do not pay corporate income taxes to Delaware if they do not transact business in the state, and nonresident shareholders are not taxed on their shares by Delaware.
However, although this may sound like a great state for corporations, small businesses will reap few rewards. First of all, even though Delaware does not tax corporations that are not transacting business within the state, your home state will. The filing fees to incorporate in Delaware are significantly higher than most other states charge. You could also be facing double work and double expenses. Your home state will likely require you to register as a foreign corporation, and you will be paying franchise taxes to both Delaware and your home state. You will also need to file annual reports in both states. Should a legal case involving your business arise, you will have to travel to Delaware, and you will need to hire a Delaware attorney to represent you before the Delaware court. Lastly, you will need to have a registered agent in Delaware, and this can cost more than $200 per year.
Why Is Delaware Popular for Corporations?
The Delaware Division of Corporations tracks a number of statistics for the state. The report issued for 2019 revealed that almost 68% of all Fortune 500 companies are Delaware corporations. Large corporations are attracted to Delaware for several reasons, including the predictability of the state’s corporation court, the preference investors often demonstrate for Delaware corporations, and the flexible options for structuring the corporation. A large corporation likely transacts business in all or most of the states, so it considers the additional registration and franchise fees as simply part of doing business. Furthermore, corporations have attorneys and accountants on staff or retainer who can handle all the details involved. Therefore, although major corporations may find valid reasons to incorporate in Delaware, small business will see few or none of the benefits. However, every company is different, so you should base your decision on the advice of a reputable legal or financial representative who has a thorough understanding of your particular situation as well as the ramifications of incorporating your business. In most cases, you will find that it will be better to just incorporate in your home state.