Olivia Roach, CEO, Military Caregivers. Known as American CEO Whisperer.
As an entrepreneur in Alabama, you might be considering Delaware as the home for your business incorporation. Known for its business-friendly laws and vast legal precedents, Delaware has long been the go-to destination for many large and small businesses.
However, recent legislative changes in Delaware have raised questions about whether it’s still the best choice for new incorporations. Before making a decision, it’s important to evaluate the pros and cons of incorporating in Delaware versus your home state of Alabama.
As a longtime business consultant and analyst, I hope to help save you some of the headaches I experienced scaling under a local LLC, only to learn Delaware would have been a more appropriate fit for us at the time. I’m a U.S. Navy Veteran with multiple degrees and extensive business experience, having spent years helping small- and mid-sized businesses grow. I’ve guided and referred owners on where to incorporate—whether in their home state or Delaware—based on taxes, growth goals, succession planning and legal risks.
Here’s what I’ve learned from working with startups and Fortune 500 leaders, helping structure businesses for long-term success.
The Delaware Advantage
• Business-Friendly Legal System: Delaware is home to a sophisticated and well-established legal system that supports businesses. This includes the Delaware Court of Chancery, which specializes in business law, offering quick, expert decisions for corporate disputes. This reliability can be helpful for companies looking to resolve issues efficiently and avoid costly, lengthy litigation processes.
• Business Privacy And Confidentiality: As noted by Delaware’s government: “As a general matter, U.S. states do not collect the names of beneficial owners—the natural persons who ultimately own, control, or derive benefits from a company—through the incorporation process. But Delaware and the majority of states do require disclosure of the names of the natural persons who serve as directors. Delaware also requires each Delaware corporation to disclose the names and addresses of its directors on its annual franchise tax report. All such filings with the Delaware Division of Corporations are public records.” This level of privacy can be appealing to business owners who value confidentiality.
• Flexible Corporate Structure: Delaware allows for a pretty high degree of flexibility in organizing and managing businesses, which I’ve found particularly beneficial for startups and companies looking to raise capital. You can tailor the structure of your business to meet your specific needs, whether that’s through different classes of stock or varying shareholder rights.
• Tax Benefits For Out-Of-State Businesses: While Delaware charges a franchise tax, the state does not impose additional taxes on businesses that operate outside of its borders. For companies based in Alabama, this could mean a lower overall tax burden if your business does not have a physical presence in Delaware. (See the “lack of physical presence” section below if conducting business primarily in Alabama.)
• Large Network Of Established Corporations: Delaware is home to more than 2 million businesses, including a majority of the Fortune 500 companies. This network creates a sense of credibility and offers opportunities for collaboration and resources.
Potential Disadvantages
• Recent Legislative Changes: Delaware’s lawmakers recently approved a bill that will overhaul the state’s corporate law to prevent companies with controlling shareholders from leaving the state. Some critics fear it will disproportionately benefit corporate insiders and billionaires while making it more difficult for investors to hold them accountable.
• Costs And Compliance Complexity: Incorporating in Delaware involves additional costs, including an annual tax of $300, which can become expensive for smaller businesses. Additionally, businesses incorporated in Delaware but operating in Alabama need to comply with both Delaware’s laws and Alabama’s, which can quickly add complexity to your operations and legal obligations.
• Potential For “Dexit” And The Changing Landscape: Delaware’s reputation as the go-to state for incorporation is changing. Some businesses have begun to move their incorporation to states like Nevada or Texas. This could be a sign that there is more competition for Delaware as other states adopt more favorable corporate laws.
• Lack Of Physical Presence: If your business operates primarily in Alabama, incorporating in Delaware might create a couple of logistical issues. You may need to hire a registered agent to represent your business in Delaware, which is an added expense. Additionally, dealing with Delaware’s legal system from afar could lead to delays or complications if legal issues arise.
• State-Specific Tax Considerations: While Delaware has tax benefits for out-of-state businesses, Alabama may still require you to pay state taxes on your business income. This could offset some of the advantages of incorporating in Delaware, especially if your business operations are primarily based within Alabama.
Is Delaware The Right Choice For Your Business?
Incorporating your business in Delaware offers several advantages, especially if you’re looking for legal protections, flexibility and privacy. However, recent changes in Delaware’s corporate law, along with the added costs and complexities of operating in two states, might make it a less appealing option for some entrepreneurs.
If you primarily operate in Alabama and don’t foresee your business expanding within a larger national or international scope, it might make sense to consider incorporating in Alabama. This could save you money, simplify compliance and allow you to focus on growing your business without the additional burden of dealing with Delaware’s evolving laws.
You may want to consult with a business attorney or tax advisor to determine the best path forward for you. You can find a business attorney who handles incorporation by checking your state bar association website or searching on LinkedIn.
It is also a good idea to contact your local Small Business Development Center (SBDC), which often offers free business advice and can walk you through your options. Speaking with a CPA who understands business formations is another smart move because a knowledgeable CPA can explain the tax impact of incorporating in your state compared to Delaware. You can also network through small business groups or connect with mentors.
Ultimately, the decision to incorporate in Delaware or Alabama will depend on your specific business goals, your structure and the long-term vision you have for your business.
The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.
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