Should You Incorporate Your U.S. Subsidiary In Delaware?

Should You Incorporate Your U.S. Subsidiary In Delaware?

- Delaware is a favoured state for incorporation for a number of reasons:

- It has historically offered the best franchise tax rules and has been the most pro-management.

- Delaware’s General Corporation Law is one of the most flexible business formation statutes in the United States.

- Delaware’s Court of Chancery uses judges instead of juries. Since cases are heard before judges, decisions are issued as written opinions that companies can rely on, allowing them to avoid litigation.

- It costs very little to incorporate in Delaware.

Delaware does not require director or officer names to be listed in the formation documents, thus providing a level of anonymity.

However, if you incorporate in Delaware but do business in a different state (i.e., maintain an office or warehouse, or hire employees or a sales force, among other things), you will have to register to do business in that state as a “foreign corporation.” Therefore, not only will you have to pay the filing fees for the state in which you are transacting business, but also Delaware filing fees. For example, if your Delaware company has a business office in Los Angeles, you must register the company to do business with the California Secretary of State’s Office and file a California Statement Of Designation Of Foreign Corporation, along with paying a filing fee of $100.

Together with the additional extra filing fees, incorporating in Delaware will require that you have a registered agent for service of process in Delaware, which will cost you additional fees.

If you incorporate in Delaware, you will not only have to pay the annual franchise tax in the state in which you are doing business, but also in Delaware. For example, if your company is headquartered in Texas, but incorporated in Delaware, each year you will not only have to pay the annual Texas Franchise Tax, but also the annual franchise tax in Delaware.

Also, incorporating in Delaware, but doing business in a different state will mean that you will have a second layer of reporting requirements.  For example, if you incorporate your company in Delaware, but are headquartered in New York, you would have to comply with the annual reporting requirements in both states.

For these reasons, not every company should incorporate in Delaware.  Instead, you should make sure that the benefits of incorporating in Delaware outweigh the extra expense and time of being incorporated there instead of in whichever state your company is actually transacting business.

For more guidance on where to incorporate your US subsidiary, please contact US & Canadian Business Lawyer, Renate Harrison at 613-747-2459 x307 or at rharrison@HazloLaw.com