What Every Small Business Owner Should Know About Delaware

As a small business owner or startup who lives in Washington state, you may have heard the buzz about setting up your company in Delaware. Perhaps friends or social media posts have touted the benefits of doing so. However, before you jump on the Delaware bandwagon, let's break down why incorporating in Delaware is likely not the right move for your small business.

Reasons to Avoid Delaware Incorporation

1. You’re likely not getting tax benefits: it's essential to dispel the myth that incorporating in Delaware will result in significant tax savings. While it's true Delaware does not tax Delaware incorporated companies that don't conduct business within the state, Washington will tax your company if you're operating it within Washington borders and/or fall within Washington’s tax rules. Therefore, incorporating in Delaware likely doesn't provide any tax advantages for a small business based in Washington.
2. Filing costs in Delaware are likely higher: the initial filing costs associated with incorporating in Delaware may actually be higher than those in Washington.
3. Delaware may impose a franchise tax on your small business: even though Delaware's franchise tax may be insignificant for a small business, it is still an added expense that the business would not incur if it chose to incorporate in its home state of Washington.
4. Double the workload and double the cost: setting up a corporation in Delaware does not exempt you from Washington's filing and licensing requirements. This means you will have to navigate the bureaucracy of both states, doubling your workload and costs. From annual reports to licensing fees, maintaining compliance in two jurisdictions can quickly become burdensome for a small business owner.
5. Legal disputes in another state can be a hassle: another consideration is the inconvenience and added expenses that come with legal disputes if your business gets sued. If a legal issue arises, you will likely have to have the lawsuit filed in Delaware. This means you would have to travel to Delaware or at the very least hire a Delaware attorney to represent you instead of your local Washington counsel. Something like this could increase your expenses and time away from your business. This extra hassle can be particularly burdensome for small businesses with limited resources.

It is important to recognize that while Delaware offers certain benefits for larger corporations, such as privacy protections for investors and owners, these advantages are often irrelevant for small businesses. Instead, the practicalities of managing a small business in Washington State make incorporating in Delaware an unnecessary complication.

Despite the allure of Delaware's corporate-friendly reputation, small businesses in Washington State do not stand to gain significant advantages by registering there. From tax considerations to compliance requirements and legal implications, the drawbacks most likely outweigh any perceived benefits. Therefore, before making any decisions regarding incorporation, it's crucial to consult with legal and financial professionals who can provide tailored advice based on your specific circumstances.

Every situation is unique. The information provided in this blog is for general informational purposes only. I can only advise on Washington law. I highly recommend consulting with a certified public accountant to address tax advantages or disadvantages specific to your  financial situation. If you have specific questions, please feel free to reach out to me for personalized guidance.