Starting a business isn’t easy. What more if you are forming a C corporation. Many Fortune 500 companies and startups prefer to have their incorporation in Delaware. There are various reasons why incorporation in the state is a good idea,
Like any business venture, incorporating in Delaware also has its disadvantages. For anyone who is considering it, getting enough information about incorporation is vital. You need to know if some factors could affect your business in the future.
Continue reading to learn more about the reasons you should not consider forming a C corp Delaware:
Delaware C Corp Disadvantage #1: Your Business is Not Funded by Venture Capital
Delaware incorporation is not for everyone. One of the factors that you have to instill in mind is you cannot get funding from Venture Capital.
While it is true that Venture Capital or angel investors prefer investing in Delaware C corporations, realistically speaking, you still have to qualify to get the funding. According to Entreprenuer.com, only 66% of businesses are eligible for Venture Capital funding.
It means that there’s no assurance that your business will get funding from Venture Capital. You’re lucky if your small business gets selected, but the odds are high of not getting it.
If you are unsure, it is best to consider LLC instead of C Corporation. Here is the difference between the two:
- If you are after tax flexibility and limited tax admin upkeep, you may prefer LLC formation. LLCs are the best option for new businesses. They are also very easy to establish and maintain. You don’t have to worry about annual reports either.
- C Corporation is an entity or corporation that is taxed individually from its owners. It means that you have to pay different layers of taxes.
Delaware C Corp Disadvantage #2: Your Business is Not Actually Located in Delaware
Location is another essential factor if you are planning to incorporate in Delaware. If your office is outside Delaware, you’ll need to get someone who can represent you in the state. This individual will also act as your registered agent.
You also have to register your business in your state as a foreign business entity. Of course, along with these necessities, it’s part of your responsibility to pay taxes for the revenue originating from your home state.
You’ll still have to prepare for annual reporting both in your home state and Delaware at the same time. If your business is at a young age, the expenses are no joke. Imagine the money that you have to invest to make this possible. It would be best if you could have your primary location as Delaware instead of your home state. You can save expenses and other resources if you do start in Delaware.
Delaware C Corp Disadvantage #3: You are Subject to a Franchise Tax
One of the disadvantages of Delaware C Corp is the yearly franchise fee. It means that you have to pay the annual franchise fee each year. The tax that you need to pay will depend on the company share’s value.
Usually, the franchise tax starts from 175,000 USD to 250 000. The tax that you are going to pay will depend on how big or small your company is. For a company to be considered big, you need to have annual gross revenue of 750,000 USD.
There are two methods to determine the annual franchise tax fee you have to pay. These are the Non-Stock for Profit and Authorized Shares methods. Visit the Delaware Division of Corporation page for complete information. This can help you gather more details of how Delaware calculates these annual income tax fees.
Delaware C Corp Disadvantage #4: You Must Foreign Qualify Your Company
Another reason why incorporating in Delaware is not for you is you have to foreign qualify it. This move is needed in case your business location is outside Delaware. It also means that you may only need to do business with Delaware.
Each state has different requirements for a business to qualify as a foreign entity. This process is also called Foreign Qualification. This is where your home state gives you the authority to operate in Delaware. You also need to familiarize yourself with the state’s business laws on how Delaware companies can get into the corporate level.
Delaware C Corp Disadvantage #5: You Must Register an Agent in Delaware
When incorporating in Delaware, one decision that you have to make is to register an agent in Delaware. Again, it is needed especially if the primary location of your business is outside the state.
The Delaware Division of Corporation needs this for you to be able to acquire the legal documents for your corporation. This agent will act as your representative in the state. As the Delaware law declares, it will also give you the opportunity to be recognized as a corporation in the state.
Delaware C Corp Disadvantage #6: Consent to the Jurisdiction of Delaware Courts
When you incorporate a C-corp in Delaware, you are giving consent to the jurisdiction of Delaware courts as a business owner. For example, if one sues your business, you have no choice but to hire a licensed Delaware lawyer and face a jury from the state. This could be a hassle for you if your business is located on the West Coast.
You need to be there for every proceeding. Imagine the stress and burden of travelling in and out of Delaware just for this. If you are always busy, this is something that you don’t want to do often in case a problem arises.
Delaware requires you to file annual reports even if you already have one in your home state. If you need help in processing the paperwork, get in touch with the experts from Doola today.
“Forming a corporation in Delaware can cost between $1-2K more than in other states.”
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Want to convert your business from Delaware LLC to C Corp in Delaware? Many entrepreneurs wish to create a Limited Liability Company (LLC) instead of a corporation due to several reasons. Lower financial and maintenance costs are the main advantages. As your business grows, you will need to convert it to C Corporation. Here are the best ways on how you can do it easily:
Complete Your LLC Consent form and Agreement Plan of Conversion Form
This document will show that all members of your Delaware LLC agree that the company will be converted to C Corporation. They should show their support and approval of the move. This agreement also determines the conversion of units to shares.
Documents Should Be Filed in the State
Included in the documents that you have to comply with within the State of Delaware are the Delaware Certificate of Incorporation and Certificate of Conversion. You have to remember that there are fees when filing for these documents and these include Delaware taxes.
Whether you are planning to start an LLC or C Corporation in Delaware, it is vital that you have someone you can depend on. Always remember that starting a business is not an easy task.
At Doola, we are available to help you build your business in Delaware or in other states. Our experts will make sure to guide you every step of the way. We are here to offer you the best services that you need from corporate law to Delaware Corporation information. Click here to get more information.
Delaware C Corp Disadvantages FAQs
1. What is the main disadvantage of a C corporation?
The main disadvantage of a C corporation is that there’s no assurance that your business will be funded by Venture Capital.
2. Is it worth it to incorporate in Delaware?
Yes, but only if want to start and build an empire in the state.
3. Do corporations pay taxes in Delaware?
Yes, every business and corporation must pay appropriate taxes annually.