In working with South Florida clients contemplating where to incorporate, two states come up the most: Florida and Delaware. This has often been the case, whether the business entity will be a corporation, limited liability company (LLC), or a limited partnership (LP). This post has been updated as of December 2018, because of how often the topic continues to come up. There are many instances where the idea of a Delaware incorporation may be favored 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.
For quite some time now, Delaware has been known as THE state whose laws provide the most flexibility and the most protection to corporations, LLCs, and LPs. However, in an effort to attract businesses and create in-state jobs, many states around the country have liberalized and modified their corporate laws to be more similar to Delaware. As a result, the corporate law advantages and the tax advantages of forming an entity in Delaware are not as significant as the were years ago. In many instances it will actually be advantageous to incorporate in one’s home state. Even so, this will not always be the case, so I am really glad that you are doing your due diligence (which I’m guessing brought you to this page). My advice would be to truly assess your circumstances, and determine whether your home state advantage of incorporating in Florida will potentially outweigh the Delaware allure.
Let’s jump right in….
These are some of the major factors that will likely be considered in the Florida vs. Delaware debate.
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:
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.
Delaware’s laws are designed to protect stockholders, and because of this, many large companies that have securities traded on national stock exchanges favor Delaware.
However, for smaller businesses and closely held businesses, entity formation in your home state where your business will be operated is often appropriate and advantageous.
· 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.
Tax requirements (Delaware vs. Florida Taxes)
FLORIDA CORPORATE TAX
· As of the date this post was published, Florida corporate income is taxed using one of two methods: (1) the regular Florida corporate income tax which is a 5.5% state tax on federal taxable income minus the appropriate adjustments and exemptions, or (2) the Florida Alternative Minimum Tax (AMT) which is calculated by multiplying Florida minimum taxable income by 3.3%. (You definitely should verify and confirm whether this is still true if viewing after publication date.) 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. For more information on net income tax of Florida corporations, visit the Florida Department of Revenue (DOR) website. For more specific information on calculating the FL corporate income tax base and rate or the AMT, check out the Corporate Income Tax Guidance published by Florida DOR, here. Another helpful resource to look into, also available on the Florida DOR website is its page on Florida Tax Incentives for Businesses that outlines the tax credits, refunds, and other incentives that the State of Florida offers to businesses to promote business development and job creation within the state.
DELAWARE CORPORATE TAX
· 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). This specifically falls under Section 1902(b)(6), Title 30 of the Delaware Code, which sets forth the exemption by stating, “A corporation maintaining a statutory corporate office in the state but not doing business with the state” shall be exempt from taxation by the State of Delaware. 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. For further guidance, and up to date answer to questions on Delaware corporate income tax, check out these very helpful Delaware Corporate Income Tax FAQs published by the Delaware Division of Revenue.
In many instances, a business that will actually operate in Florida, but incorporate in Delaware and only maintain a corporate statutorily-required office there will spend a little more money to do so. Notwithstanding this, as mentioned above, there are specific situations where incorporating in Delaware will be the best choice to make based on your specific tax and legal circumstances. Do your best to ascertain whether this is in fact true in your case. At the end of the day, it is most important that you do what is in the best interest of you and your company.
A Possible Option = 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 more advantageous to do so.
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).
Whether you’re just browsing or a real life scenario brought you here, my parting advice to you is to continue to be resourceful, to research and understand the issues that affect you and your business, and to know when to rely on others to get things done. Best of luck! Thanks for reading.
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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.