There is some difference of opinion in the legal community with respect to the best state in which to be incorporated, for public companies.

Delaware has been the jurisdictional choice for decades. If you go public using a Delaware corporation, no one will question your decision. The Delaware state legislature has been in the forefront of fine-tuning the corporate law, so as to attract companies. Delaware is a small state, without a corporate income tax,, and Corporation franchise taxes contribute a significant percentage of the state’s revenue. Delaware has been favored for the largest public companies, primarily because of Delaware’s business court system. In contrast to other states, where lawsuits are heard by judges drawn from many backgrounds, including criminal or family law, the Delaware business court is made up exclusively of judges with business and corporate life experience. Over the decades, interpretations of Delaware corporate law have become so respected, that they are highly persuasive and other states.

The huge amounts of money involved in the larger public companies offset the downsides to a Delaware incorporation. Therefore, if you look at a dozen IPOs, the majority of them will be with Delaware corporations.

The principal drive back to a Delaware incorporation is the cost. Delaware annual fees are minimum of $350, but they also can go up substantially based on the size of the company and the number of shares outstanding. Delaware uses three different methods to compute annual franchise taxes; a company can choose which ever of the three formulas produce the smallest tax, but very large companies (or those which have a structure with which inadvertently triggers a large tax) pay well over $100,000 per year. If you own a Delaware corporation, you have to plan ahead not to fall into a very high tax rate.

Filing a Delaware franchise tax return can be confusing, in addition, because the annual bill from Delaware always uses one of the three methods which consistently produces the highest tax. Many persons go ahead and pay this amount, without using one of the alternate methods.

Recommended Posts