Is Delaware a Good State to Start a Business?

Delaware is known mainly for being the first state to ratify the United States Constitution. But Delaware has also become a popular state over the years because it has become easy for people to start businesses there.

Delaware is one of the easiest states for businesses to incorporate in. It’s estimated that nearly two-thirds of all Fortune 500 companies are incorporated in Delaware. Nearly 300,000 businesses have their legal address at the Corporate Trust Center on North Orange Street in Wilmington.

You can form a limited liability company or LLC in Delaware with ease. Since the LLC is legally separate from your personal taxes, you will experience limited personal liability in your operations. It’s also easier to manage your tax paperwork after forming an LLC.

Your business will also be exempt from various taxes when it starts in Delaware. Delaware’s tax laws ensure that companies formed outside the state aren’t subject to many of the same taxes others residing in the state might bear. But you will also need to ensure you complete the necessary steps for starting your work in Delaware, as there are various specifics you’ll have to follow to get everything running right.

Understanding Why Delaware Is Popular For Businesses

Delaware’s effort to bring in more corporations started in 1899 following the creation of the Delaware General Corporation Law. This statute in the Delaware Code was established to help bring in more businesses, especially as nearby New Jersey also established some corporation-friendly laws to lure businesses away from New York.

The Delaware Code allows corporations outside Delaware to register in the state, so they won’t pay as many taxes. A company that is registered in Delaware will not have to pay any corporate income tax on operations taking place outside Delaware. The state also offers a way for businesses that do conduct operations in Delaware to avoid income taxes.

Thanks to the state’s favorable business law, many of the world’s most prominent businesses have incorporated in Delaware. For example, Walmart has its headquarters in Bentonville, Arkansas. But the company’s registered address is at the Corporate Trust Center in Wilmington.

The Delaware Court of Chancery is also part of why Delaware is a viable space for starting businesses. This constitutional court in Delaware helps resolve disputes and formation processes surrounding corporations listed in Delaware. This court is a court of equity and not law, so cases will be heard by judges and not juries. It is easier for disputes and other issues to be resolved because they won’t have to go through as many steps as other cases.

How Do You Start a Business In Delaware?

You can use a few steps to start your business in Delaware:

1. You will require a legal structure and name for your business.

The first step is to establish the legal structure for your business. An LLC is the most common option people use when starting in Delaware, as people can become exempt from various taxes when using this format.

2. You will then register your business.

You will likely require a Federal Tax Identification Number or Employer Identification Number when you start your business. The IRS can assist you with this process.

3. Some businesses in Delaware will require a license to operate. Be sure to check whether your business will need one.

The state of Delaware has various details on what licenses and permits are necessary for businesses in varying fields. You can check points like how much you would spend on obtaining a license and what documents you’d have to file. For instance, an auto body shop in Delaware will require a permit to use spray coatings that might contain hazardous air pollutants. Some counties and towns also have specific licenses businesses in those areas have to obtain.

Establishing a Delaware Holding Company

A holding company in Delaware is instrumental in helping people start businesses in the First State. A holding company operates as an LLC or corporation and will not conduct any of your business operations. This entity can exist in Delaware thanks to how outside companies not formed in Delaware can be exempt from various taxes.

You can start a holding company within Delaware to help you keep your assets safe from most taxes. The key is to limit your activities within Delaware to managing your intangible assets. These points include stocks, bonds, trademarks, debt obligations, and any other intangible assets you might hold.

You’ll require legal representation to help you set up a Delaware holding company. The process is extensive and requires various points on your end, including:

• Your business name
• Articles of incorporation
• The business agent or director that will manage your holding company
• Whatever assets you plan on incorporating within Delaware

All of these documents will be necessary for helping you get your holding company in Delaware ready for use.

Tax Points

The Tax Foundation reports that Delaware has some favorable taxes that benefit businesses starting up in the First State. Here are a few factors to note:

1. Delaware does not have any state or local sales taxes.

Delaware is one of five states that doesn’t have a sales tax. Businesses formed in Delaware do not have to pay taxes on the sale of goods or services available to customers. This point is beneficial for helping groups stay operational, as customers may be more willing to purchase products when they know they won’t have to spend extra on sales tax.

2. The individual income tax in Delaware applies only to those who are physically living in Delaware, and that tax rate varies based on the income one earns during the year.

Companies incorporated in Delaware doing business outside the state will not have to pay an income tax on what it provides or sells.

Delaware’s income tax rate for state residents can dramatically vary by income. The income tax rate in Delaware goes from 2.2% to 6.6%, depending on how much a person makes in one year. The 6.6% rate applies single filers who earn $60,000 or more. Entities that earn from $25,000 to $60,000 will be subject to a 5.55% tax rate. Since an out-of-state business won’t have to pay these income taxes, there’s no need for a business operator to worry.

Even if you choose to physically locate your business in Delaware, the income tax is still less than what you’d spend in other parts of the northeastern United States. While the 6.6% maximum rate isn’t as low as the 3.07% flat rate in nearby Pennsylvania, the rate is still dramatically less than the 10.75% charged in New Jersey and the District of Columbia or the 10.9% rate in New York.

3. Your business won’t pay corporate tax if it is part of a Delaware holding company.

Delaware doesn’t charge corporate taxes on income earned by a Delaware holding company. Delaware has the country’s eighth-highest corporate tax at 8.7%, so forming your business with a holding company in the state will be essential in helping you keep your expenses under control.

4. Businesses outside Delaware also don’t have to pay gross receipts taxes on goods shipped to customers outside Delaware.

The Delaware Division of Revenue reports that gross receipts taxes range from 0.0945% to 0.7468%, with the rate varying based on how much business activity one holds. The company selling goods or services will pay for this tax, not the consumer. A business established outside Delaware but incorporates in Delaware won’t have to pay these taxes for transactions outside Delaware, but deals made within the state may still be subject to these taxes.

5. Property tax rates are minimal.

Businesses holding some physical presence in Delaware will not spend as much on property taxes as they would in other areas. SmartAsset writes that property taxes are calculated based on the last time a property was assessed. Since local governments in the state don’t regularly reassess property values, it’s possible for this tax to be minimal. The average property tax is about 0.53%.

6. The franchise tax in Delaware varies by corporation size.

The Delaware Division of Corporations writes that franchise taxes and annual reports are due on March 1 of each year. The franchise tax starts at $175 for a business with up to 5,000 authorized shares. A company with 5,001 or more shares will pay a franchise tax starting at $200 with an additional $75 for every 10,000 extra shares. The highest tax one could spend will be $180,000, and that total is still less than the income or corporate taxes a business might spend in another state. A $50 fee is also necessary for the annual report.

How Can You Avoid Income Taxes When In Delaware?

Businesses that conduct operations in Delaware can avoid the in-state income tax by working with a shell company. One of these companies can hold intangible assets without directly running regular business operations.

A shell company or subsidiary entails businesses that do not have any actual business operations. These companies are typically utilized for parking monetary funds.

Shell companies are convenient for how they can be utilized to hold funds in an area where taxes won’t be a threat. But it’s also critical to do this only for legal business purposes. Various parties, including ones from overseas, have long used shell companies for money laundering purposes. Creating a shell company with the intention of managing a legitimate business’ income is a legal option in Delaware and will not produce any scrutiny like what would happen with an overseas business.

You can use a few steps to get in touch with a shell company to avoid income taxes within the state:

1. First, search for a shell company within Delaware. Various organizations may appear within the state’s business registrar.
2. After finding the shell company, select your company name to get listed.
3. List a specific director who will appear on the paperwork. While that director won’t have any real power, that person’s name will still be listed.
4. Proof of identification is also necessary for getting into the shell company. The director’s passport or another identification document can be provided in this situation.

This process is essential for getting into Delaware without risking excess taxes. But be sure you are direct when following the application process, as it’s easier to complete your work when you are honest about what you are doing and aren’t trying to hide details.

Protection Against Takeovers

One final part of why starting a business in Delaware is a good idea involves how Delaware state law prevents businesses incorporated in the state from being easily taken over. Section 203 of the Delaware General Corporation Law states that shareholders cannot engage in further tender with businesses for at least three years after buying more than 15 percent of a company’s stock. This protective measure is necessary for ensuring the stability of a business and that it cannot be easily taken over unless a more valuable investor meets various standards.

The Last Word On Starting a Business In Delaware

It is no surprise that Delaware is such a popular place for companies to start their businesses, as the state’s heavily favorable tax laws make it so the long-term cost to run a business won’t be as high. But the process of registering in Delaware requires various steps and measures to ensure you can take advantage of these points. Be sure when starting your business in Delaware that you know what to expect out of the process.

Remember to look at the data you’re providing and that you have a solid foundation for running your business. While Delaware can be useful as a tax haven, the effort can go awry if you don’t plan everything right.