Tax Advantage of Incorporating in Delaware

Research has it that many companies are incorporated in Delaware. The number of companies incorporated in Delaware is far more than are physically headquartered there. More than half of all publicly traded and Fortune 500 companies have incorporated in Delaware. One of the reasons for this data is the fact that Delaware offers great tax advantages.

While states like Wyoming and Nevada are rising in popularity due to their lack of state corporate income tax, Delaware has some business-friendly tax law. Businesses that are formed in Delaware but don’t conduct business there do not need to pay state corporate income tax. Also, stock shares owned by people outside Delaware aren’t subject to Delaware taxes.

In short, Delaware can be described as a Tax Haven. If a company does business in another state, it is not subject to corporate income tax from Delaware. There is also no tax royalty payment or other “intangible assets”. Non-residents are also not subject to personal income tax.

Taxation requirements are often favorable to companies with complex capitalization structures and/or a large number of authorized shares of stock. Where a company has a complex capitalization structure, it is likely to gain more tax advantage in Delaware; also, where the company’s shares are large. By this foregoing, Delaware’s tax regime is favourable to large companies.

Delaware does not tax the income earned from intangible assets such as trademarks, copyrights and leases. Thus, business or individuals can simply park their intangible assets in their Delaware corporations and not worry about being taxed on any income generated from those assets. These corporations can also use some of these intangible assets as business deductions in other states and further reduce their tax liability outside of Delaware.

Delaware does not impose state sales taxes or personal property taxes, so having a physical corporate office in the state is not as expensive as it may be other states with more rigorous tax laws. Delaware also allows the formation S-Corporations which are not typically subject to federal taxes.

As much as incorporating in Delaware has many tax advantages, there also exist some disadvantages. A company is required to pay the annual Delaware franchise tax as well as the franchise tax of the state where it is doing business. The amount will be based on the value of the company’s corporate shares. The tax starts at $175, plus a $50 filing fee, and can go higher than $100,000.

The table below gives a better understanding of the tax rate.

Company’s Corporate SharesTax Rate
5000 shares and belowMinimum of $175
5001 to 10000$250
Additional 10000 sharesAdditional $75 to total tax

As a result of the fact that Delaware’s Franchise tax is high and the incidence of double taxation that is created where the company is not physically resident in Delaware and does business in another state, it has been argued that there is no tax advantage in incorporating in Delaware.

The fact that the supposed advantages of incorporating in Delaware are outweighed by the disadvantages makes the advantages questionable. It thus is concluded that incorporating in Delaware is only advantageous where the company is resident in Delaware and doing business there.

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