It is often said that Delaware is one of the best states in the nation for business incorporation.  This thought process stems from several factors including tax benefits, flexibility of law, and longevity and consistency in legislation and court decisions.  However, small businesses doing business primarily in New York are unlikely to realize these benefits, and, thus, are more likely to benefit from incorporating in New York.

Large corporations see three primary benefits from incorporating in Delaware.  First, there are several cost saving benefits.  For example, corporations incorporated in Delaware, but not transacting business in the state, are not subject to corporate income taxes, and shares of stock owned by those who reside outside of Delaware are not subject to Delaware taxes.  Further, the cost of incorporation is one of the lowest in the country.  Second, corporations benefit from Delaware’s corporation laws.  Delaware law allows one person to hold all of the offices of a corporation; does not require shareholders, directors, or officers to reside in Delaware; and provides great flexibility in establishing the maximum number of authorized shares of stock.  Finally, corporations benefit from Delaware’s unique court system.  Corporate legal matters are handled exclusively by the Delaware Court of Chancery.  The long standing Court system provides quick resolution of conflict, specialized rules regarding the award of attorney’s fees (which encourage expedient settlement of conflicts), and over one hundred years of common law dedicated to interpreting commercial litigation issues.

However, “closely held” (i.e. small business) corporations doing business primarily in New York are often better off skipping the middle man and incorporating directly in New York.  To begin, New York requires that businesses organized in other states doing business primarily in New York register as “foreign corporations.”  This registration process costs nearly as much as incorporating in New York, and the business must still pay to incorporate in Delaware.  While the corporation may not be required to pay Delaware taxes, as a corporation doing business primarily in New York it will still be subject to a variety of New York taxes.  And, if the business is a private rather than public corporation it will not realize any of the stock benefits available to Delaware corporations.  Finally, by incorporating in Delaware a business subjects itself to a lawsuit in the state of Delaware.  For a small business the costs of traveling out of state to litigate a dispute could be extensive.  Additionally, in 1993 the New York Supreme Court developed a Commercial Division which is exclusively responsible for commercial litigation matters.  While the New York Commercial Division cannot boast the longevity of the Delaware Court of Chancery, New York is well on its way to streamlining the way it handles complex commercial litigation.

While there are many benefits for large corporations to incorporate in Delaware, for small businesses doing business primarily in New York it is probably best to stick close to home when incorporating.  That being said, each business’s needs are unique.  If you are considering incorporating your New York based business contact Jennifer Granzow, at Wladis Law Firm to discuss which state may be best for your incorporation needs.

Photo: http://www.glasbergen.com/wp-content/gallery/cartoons/toon-1907-1.gif