Sat 19 Mar 2016 | By:

Pros and Cons to Starting a Delaware Corporation

Pros and Cons to Forming a Corporation

One of the many legal procedures that you have to go through to start your Delaware small business on the right foot is to incorporate.

You can operate your business unincorporated, but the risk of experiencing future business problems is very high. Because of this, I recommend that you place incorporating as the number 1 spot on your list of priorities.

In the state of Delaware, you will be asked to select a legal entity which you want to form your business under during the incorporation process. There are actually many ones that you can choose from, one of them is forming a Delaware Corporation.

A Delaware Corporation can give you and your business several advantages, it’s a good business structure to start with. To help figure out what is your best business structure, here’s a detailed explanation of its pros and cons. Be sure to read each point closely to learn how to start a Corporation in Delaware.


Pros to Forming a Corporation in Delaware

1) Liability Protection

Incorporating your Delaware startup as a corporation will give you many advantages. One of the best benefits is the ability of a corporation to protect you from liabilities – may it be financial, legal or personal. When forming a corporation, you create an independent and separate entity. Your business will not be connected to you in any way.

Your small business will have its own rights and responsibilities for its own transactions, thus protecting you from being accountable from financial legalities you may encounter. Your personal assets will also be protected by Delaware law.

2) Perpetual Existence

Another great benefit of having a Delaware Corporation is establishing Perpetual Existence. There’s a high probability that your business can outlive you and the rest of your co-founders/co-owners; this is why you need to incorporate your business to ensure its lifelong continuation.

The power of succession can be easily exercised when you operate an incorporated business. For instance, when an owner or co-founder dies, his/her shares of stock are transferable, ensuring that the business continues to live on in your absence.

3) Attracts Investors

Financing is very important when doing business. When you start with little money, you’ll have a major problem kickstarting your operations which may cost you your business. Looking for funding is hard enough, more so if you start your small business without incorporating it.

Before you encourage or convince investors to invest in your venture, you need to form an entity first. Investors and even financial institutions will trust you more because you are operating legally under the state of Delaware.

4) Organized Power Structure

When you form a Delaware Corporation, you’re ensured that no power struggle will ever happen within your company because the organizational structure and hierarchical order is well-established. Job descriptions are well-explained and everyone knows their duties and responsibilities.

Business operations flow smoothly only when there is a perfect balance within the chain of command. Effective management and leadership are actually 2 tools that will propel your Delaware startup.

5) Business Credibility

Forming a corporation can give your small business an added boost of credibility. Having a title or abbreviation right after your business name automatically makes you a trusted enterprise. When you have a Co. right after your business name, consumers will know that you have officially and legally incorporated your business within Delaware, a big plus when it comes to credibility.

These are just some of the most important advantages if you form a Delaware Corporation. If you want to make sure that your business is fit to be incorporated as a Corporation, you can consult with an attorney or (if you want to save money) you can use a business entity comparison chart.


Cons to Forming a Corporation in Delaware

1) Costly and Time-consuming

Any government process involved in business will always require cash, time and effort. You need to prepare your financial resources because you may need to pay many fees and charges. The process of forming a Delaware Corporation will require hard work, preparation of your documents, and understanding every procedure. Time management is also essential when incorporating your business.

2) Double Taxation

A corporation is taxed differently from its business owners based on the revenue and income it generates on its own. When this is divided among owners in the form of dividends, this will result in double-taxation. Double taxation happens when the owner’s dividends are also taxed with personal income taxes. Essentially taking two bites out of the apple.

3) Subject to Strict Government Regulations

One of the major disadvantages of running a Delaware Corporation is subject to strict government regulations. As a business owner, you need to brace yourself for the several compliance requirements to file and obtain to continue your operations.

The more documents you need to prepare, the greater effort, time and money is required from you as well. Aside from this, corporations are also penalized severely when they are unable to comply with requirements.

4) Corporate Formalities

Examples of corporate formalities include: regular director meetings, efficient record keeping of corporate activities, and maintaining the financial independence of your Delaware small business. Although plentiful, corporate formalities are created for a reason: to establish your company as a separate and independent entity.

5) Difficult to Dissolve

As much as a Delaware Corporation is difficult to start, it is also equally hard to dissolve. All aspects of a corporation from formation, operation and dissolution are highly regulated; you have to file lots of paperwork and pay several fees to fully dissolve it. While it’s not impossible to completely close a corporation, expect that it may take time to do so and you may have to play the waiting game.

At the end of the day, everything boils down ultimately to what fits your business better. Before you decide on a legal structure, make sure that you understand the benefits and responsibilities for each business structure. Starting a corporation in Delaware is not easy and you don’t want to incorporate the business under a legal structure that you’re not totally sold on.

Different legal structures can provide you with different pros and cons, but remember you have an important role to play by protecting your business. To safeguard your Delaware small business’s reputation and good standing, you need to follow long-term requirements for the structure that you chose.

Please be aware that this is not legal advice – it is solely an informational guide. For details on how to form a Corporation in Delaware or starting a business in Delaware, a lawyer has the best answers for you.

About Ryan James

Half hardworking hermit, half avid adventurer, Ryan founded Startup Savant to simplify entrepreneurship and pay it forward by donating a portion of all revenue to support children's education via