Got an innovative idea? Starting a new business? Decided to incorporate? Now what?!
One of the first decisions a budding entrepreneur encounters when starting a new business is where to incorporate their new venture. In my corporate and business law practice, I tend to point clients in one of two directions, either their home state (the state where the business operates), or Delaware. For this article we will assume the home state of the entrepreneur is the State of Maryland.
I frequently hear from clients that their “friend” told them they MUST incorporate their new business in Delaware. Many entrepreneurs will state they were told Delaware has lower incorporation costs, tax benefits, and a sophisticated body of corporate law. Some of these statements are true, while others depend on your specific situation.
Let’s weed through the noise and analyze the factors for the basis of incorporating a business in Maryland or Delaware.
First, let’s examine the costs.
Costs to Incorporate[1]
State of Maryland
- Initial Fee: $100.00 filing fee plus $20.00 fee for organization/capitalization
- Annual: $300.00 Personal Property Tax
- Initial Fee: $89.00
- Annual: Minimum of $175.00 Delaware Franchise Tax
Additional Fees if incorporating in Delaware but operating a business in Maryland
State of Delaware
- Annual: $50.00-$219.00 depending on company (Note that Delaware requires an in-state registered agent for filings and to receive service of process)
State of Maryland
- Initial Fee: $100.00 Foreign Business Qualification fee
- Annual: $100.00 Name Registration fee
$300.00 Personal Property Tax
Examining the fees alone, initially, it may be slightly less expensive to incorporate in Delaware rather than Maryland; however, I encourage my clients to look at the long term picture. The fees a Maryland business that is incorporated in Delaware would pay at the outset are higher considering they must still register with the Maryland State Department of Assessments and Taxation as a “Foreign Business,” receive approval to operate in Maryland and pay a qualification fee of $100.00. Additionally, on an annual basis, a Maryland business that is incorporated in Delaware must pay Delaware a franchise tax of at least $175.00 as well as Resident Agent fees that range from $50.00 to $219.00. However we are not done yet; in addition to the Delaware fees, annual fees charged by the State of Maryland include a name registration fee of $100.00 and a personal property tax of $300.00. Many readers may respond with the question, “but don’t I make up for these additional incurred costs as a Delaware corporation by not having to pay Maryland corporate income taxes?” This is a common misconception. Yes, Delaware has no corporate income tax but a business operating in Maryland while incorporated in Delaware will pay and continue to pay Maryland corporate income taxes every year.
Body of corporate law
The best argument for incorporating in Delaware is the same reason that the majority of large U.S. corporations, publicly traded or privately held, are incorporated in the State of Delaware: they have a special court system, known as the Chancery Court, with judges that oversee a well-developed body of business law. Many large corporations prefer this system because they are frequently involved in complex litigation, which in Delaware is decided by Chancery Court judges rather than juries. Additionally, Delaware’s vast corporate legal precedents (created by previous litigation) are attractive for investors because it has a clear standard for what fiduciary duties a Board of Directors owes to the corporation. However, just because Delaware is a business-friendly state doesn’t necessarily make it right for you.
Thoughts to consider
One of the main considerations for where to incorporate depends on the financing of the new venture. If an entrepreneur plans on raising money in the near future, you can bet a venture capital company is going to dictate where you incorporate your business. The old adage, “Whoever has the gold makes the rules,” will generally apply with deals involving venture capital companies. However, if you plan to fund your new business by applying for financing from a bank, by applying for an SBA loan, or by simply bootstrapping as your grow, then incorporating in Maryland may be a better option as you will be able to avoid the additional costs associated with Delaware corporations.
When starting your own business, always think about the logistics of operating a business. For the average business, starting a company in Delaware can be much more burdensome than the benefit is worth. I would rather have an entrepreneur focus on the business instead of worrying about the additional hassle (and costs!) associated with incorporating in Delaware.
* Please note that each business situation is different. You should always seek legal advice before making a decision about where to incorporate when starting a business.
[1] These fees are based on the current rates as of the posting date of this blog.
