Why should someone incorporate in Delaware?
The excitement of a new business venture can sometimes make the prospect of litigation seem distant, or even impossible. It is that very optimism and conviction that drives entrepreneurs to launch out in the first place. But as the old saying goes, “Those who fail to plan, plan to fail.” Should push come to shove, isn’t it better to be prepared? Many people wonder why they should incorporate in Delaware. A Delaware corporation or LLC backed by competently-prepared legal documents offers predictability when relationships go sideways. This makes incorporating in Delaware the best option for protecting your business from attacks, both internal and external.
The Delaware LLC Act offers the thickest protection to a business and its owners. Experts in business law fill the benches of both the Court of Chancery and the Delaware Supreme Court. In other states, businesses can find themselves in front of judges who may be skilled politicians, but not experts in business and contracts. Likewise, the fate of a business incorporated in other states can be left to the vicissitudes of a jury. These jurors may or may not have an understanding for the doctrines of business law.
The U.S. Chamber of Commerce has previously determined Delaware to be the number one state for litigation liability systems, with good reason. But to the new business owner, the advantages of this superior legal environment can seem unclear or impractical when a company is not located in Delaware. The good news is that IncNow will fulfill the requirement for your business of having a registered agent with an office address in Delaware. In addition to not needing to have your “headquarters” or even a business address in Delaware, there is no need to make in-person visits for meetings. In fact, you won’t even need to worry about opening a Delaware bank account.
If you are looking for affordable predictability for your company, look no further than Delaware.
Delaware LLC vs. Corporation
In Delaware both LLCs and corporations offer their owners limited liability. A business operating as an unincorporated sole proprietorship or general partnership exposes its owners to unlimited liability. Both an LLC and corporation may be a single-person entity. The fee structure is similar in cost, depending on the corporation’s size, amount of stock and par value of the stock. That said, there are some important differences.
The documents that serve as the “birth certificate” for each entity show their differences. These are called a Certificate of Formation for an LLC and a Certificate of Incorporation for a corporation. Another important difference is the internally-filed document that lays out how the owners and managers run their respective operations. LLCs are governed by an Operating Agreement, but Corporations utilize bylaws, minutes, shareholder agreements and stock certificates. An LLC Operating Agreement is a simple way to diffuse a future ownership or management dispute, like a prenuptial agreement.
The owners of an LLC are not called “Stockholders,” rather LLC owners are called “Members”. Different nomenclature is also used for LLC ownership shares, which are often called “interests”, or “units.” Unlike the LLC, a corporation is required by statute to have an annual meeting and maintain minutes, which show elections of directors and appointment of officers. In Delaware, the LLC is a “creature of contract”. The owners have the flexibility to require or waive meeting requirements and even modify or eliminate default fiduciary duties. Corporations cannot waive many fiduciary duties.
LLCs can be more protective when it comes time for ownership change restrictions. LLC agreements often include the Right of First Offer, or the Right of First Refusal, for members when an exiting member is marketing his ownership for sale. This would not normally be an option for stockholders of a corporation. The risk in not having restrictions is getting unwanted partners. Corporations can however set up restrictive Stockholder Agreements that prohibit some transfers to keep out unwanted owners.
MORE: Delaware LLC vs Corporation Comparison Chart