In working with South Florida clients contemplating where to incorporate, two states come up the most: Florida and Delaware. There are many instances where the idea of a Delaware incorporation may be overly glamorized or preferred simply because many well-known Fortune 500 companies have incorporated in Delaware. Because of this, some entrepreneurs intend to incorporate in Delaware, without ever doing a true cost/benefit analysis of the legal, cost and tax implications. In many instances it will actually be advantageous to incorporate in one’s home state. My advice would be to truly assess your circumstances, and determine whether your home state advantage of incorporating in Florida will outweigh the Delaware allure.
When could Delaware be the right choice?
One of the top factors that could actually make Delaware the appropriate choice, is investors. If your company intends to bring in future private equity investment, Delaware could be the right choice. Additionally a company working towards an acquisition may also logically lean towards Delaware, depending on the circumstances. Under these scenarios Delaware may be ideal due to its:
· Flexibility (corporate shareholders, directors, and management do not need to be residents of Delaware; shares owned by people outside of Delaware are not subject to Delaware taxes)
· Well-settled interpretation of Delaware corporate law, which is perceived as creating greater certainty for management and investors.
Reap the benefit of Florida home state advantages; convert to Delaware later, if necessary.
Home state incorporation in Florida has its practical perks. Leading the list will be cost-saving benefits in terms of your corporate filing fees and costs. In many situations, it will be better to reap the cost savings of incorporating in your home state, and converting to Delaware at a later time, if specific circumstances arise making it beneficial to do so at that time.
· There will be initial filing fees associated with either Florida or Delaware. Additionally, business promoters located in Florida will often need to retain registered agent services of an agent located in Delaware (for an annual fee). Whereas in your home state, Florida, it will likely be easier to designate a representative already affiliated with the company, who is located in Florida. Additionally, Florida only imposes an annual report fee to maintain your corporation’s status. In comparison, Delaware imposes a franchise tax based on your corporation’s capitalization.
· Florida corporate income is taxed using one of two methods: a 5.5% state tax on federal taxable income or a 3.3% alternative minimum tax (AMT). A Florida corporation is required to use whichever method results in the higher tax for the corporation. Regardless of which method applies in a given case, $50,000 of income is exempt.
· Delaware corporate income tax is a flat 8.7% of taxable income derived from Delaware. However, there is NO state corporate income tax for corporations that are formed in Delaware but do not transact business there (there is only the franchise tax). Before anyone gets prematurely happy about the previous sentence, please know that the State of Florida imposes a corporate income tax on foreign (out-of-state) corporations that are doing business, earning income, or existing in Florida.
In most instances, a business that will operate in Florida, but incorporate in Delaware will spend more money to do so. Notwithstanding the above, there are specific situations where incorporating in Delaware will be the best choice to make. However, you should do your best to ascertain whether this is in fact true in your case, and that you are not succumbing to the Delaware allure. At the end of the day, it is most important that you do what is in the best interest of your company.
1. Speak with an attorney to determine if there are any unique circumstances in your situation that make key differences in the Delaware General Corporation Law (“DGCL”) or the Florida Business Corporation Act (“FBCA”) particularly important, with respect to the rights and obligations of the stakeholders in your corporation.
2. Explore the possibility of whether your company can operate as an LLC or as an S corporation that will receive better tax treatment.
3. Research the corporate and LLC statutes for states you are considering, either on your own or with an attorney.
4. Use your company’s projected revenue to evaluate the real implications of corporate tax. Consult a tax professional.
5. Importantly, keep in mind that it is possible to convert a Florida corporation or LLC into a Delaware entity at a later time, should the need arise (perhaps at the special request of your investors).
This post is not intended to be a substitute for legal advice. Consult a licensed attorney for specific corporate law questions that you may have.