By Jonathan Feniak, Esq., MBA
As you might already be aware, Delaware enjoys a strong corporate-friendly reputation. The state has long been popular for incorporation and remains a common choice for a number of reasons.
For example, when a business chooses to incorporate in Delaware, it’s often seen as a strong signal that they’re hoping to attract big investors. It may also send a signal as to the type of business they hope to become. Many venture capitalists look at Delaware incorporation as a pre-requisite to consideration for investment.
But do you really need to form your company in Delaware? And is incorporation really the best entity choice for your business?
Indeed, forming a Delaware corporation will not be the right choice for every business. And when it comes to choosing entity type, there are a number of factors you’ll want to consider. Keep in mind that different entity structures make sense for different businesses. Likewise, the best choice for where to form your company will hinge on the specifics of your business, as well.
Factors like the size of your business, your given industry, how and where you operate, and more, can influence what’s best for your company. Here, we’ll compare forming your company in Delaware versus forming in Colorado and explore different scenarios for your business.Order Now
For starters, there isn’t a simple cut-and-dried answer here. As we compare the two states in regards to business formation, consider the goals and current situation of your own business to get a sense of which state makes more sense for you.
When it comes to incorporating a business in the state of Delaware, there are a number of appealing benefits that might stick out. For example, Delaware has a Court of Chancery, which is a court system dedicated to handling business-related disputes. Matters are decided by experienced judges and handled in a timely manner. This sort of dedication and specificity to the business world makes Delaware corporate law more predictable and appealing to corporations.
In addition, the state of Delaware does not have any sales or income tax. There are also no disclosure requirements for business owners, so they do have the option of remaining anonymous should they choose. Note, however, that the state may share information with the IRS in certain cases.
But even with all this corporate-friendly prestige, there are some notable disadvantages to choosing Delaware for incorporation, as well. Perhaps most notably is the cost. You’ll find that Delaware is more expensive when it comes to registering and maintaining your business than it is in the state of Colorado.
In Delaware, these fees can reach up into the hundreds of dollars, including a $300 franchise tax and even a $50 fee if you’d like to change your registered agent. If you’re a big corporation, these fees probably matter very little to you. But if you’re a smaller company, they can have a much bigger impact. Colorado, on the other hand, charges a mere $50 registration fee along with a $10 annual fee.
These are some of the options you should weigh when considering which state is best for your business. If you need to set up your business to receive venture capital funding at the onset, or if you know there are complex legal or liability matters to address, incorporating in Delaware might be the best choice for you.
If these are not immediate concerns for your business, forming in Colorado will not only work just as well but also help you save considerably on cost. The state of Colorado also has a great business-friendly reputation. Additionally, keep in mind that you do have the option of converting to a Delaware corporation at a later time if the mentioned Delaware advantages are something that you’re working toward in the future.
As you consider which state meets your business formation needs, it’s also worthwhile to explore which entity type best suits your business. A C-corporation entity is not the only available option when it comes to providing liability protection to owners. A limited liability company, or LLC, offers similar benefits while typically enjoying an easier formation process and a more flexible management structure.
Another scenario that you might consider is forming your LLC in Delaware for its advantageous corporate law structure, while then operating the LLC from Colorado. This may sound like a complicated process, but really the only Delaware requirement is that you maintain a registered agent in the state.
Meanwhile, you must register your Delaware LLC as a foreign entity in the state of Colorado, which requires an application and filing fee. You must also maintain a registered agent for your business in Colorado (just as in Delaware).
Once you have successfully registered your business as a foreign entity, you will receive a certificate of authority from the Colorado Secretary of State granting you permission to operate in the state. The certificate of authority is often times required when applying for licenses and permits. Additionally, it may be required to open a bank account for your business.
At this point, you can begin to conduct business in the state of Colorado. Note that completing the proper registration and compliance is an important step, as failing to do so can result in penalty and fines. Also, be sure to keep up with periodic reporting and fees to remain in good standing with the state. If you’re planning to form a business entity, you should also read up on business licenses, articles of organization, and EINsOrder Now