For decades, the State of Delaware has been a leading domicile for U.S. and international corporations. More that 50% of all publicly-traded companies in the United States including 58% of the Fortune 500 have chosen Delaware as their legal home.

The Delaware Secretary of State touts the following advantages:

• Modern and flexible corporate laws;
• Our highly-respected business court, known in Delaware as the Chancery Court, which has written much of the modern business case law;
• A state government that is business-friendly and accessible;
• The expertise of Delaware's corporate and legal service providers; and
• The customer service oriented staff of the Delaware Division of Corporations.

Delaware’s rise to prominence was mostly fueled by New York City companies fleeing the stricter laws of New York and New Jersey. Historically, Delaware enticed these companies by adopting management friendly corporate laws and having a special Court of Chancery that largely devoted itself to business issues. Many business incorporation services began in Delaware to handle the exodus from New York.

Disadvantages of Delaware Incorporation

In my view, the historical reasons to incorporate in Delaware have now diminished. First, most states have adopted “Delaware style” corporate laws so the advantage has been minimized. Your corporation will be expected to qualify in the state where your business operates and this will likely subject you to their laws anyway.

More importantly, Delaware exacts a fairly heavy price in the form of the Delaware franchise tax. This tax can rise to $150,000 per year and is currently based on $50 per 10,000 shares or $50 per $1,000,000 authorized capital. The computations are sufficiently complex that the Corporations Division provides a “Franchise Tax Calculator” on its site that provides an MS Excel spreadsheet. The problem with this tax is that it is often forgotten during corporate transactions such as stock offerings, mergers and acquisitions and so on. If the management is not diligent, a transaction can inadvertently trigger a significant tax.

Because of the sheer volume of Delaware filings, many functions are not handled by many online incorporation services. This can be frustrating when first setting up. Phone numbers are perpetually busy and service providers can be expensive.