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Do You Need to Incorporate In Delaware? Probably Not, but Maybe.

bio_eric_turnbull_smBy Eric C. Turnbull

For a long time, a common strategy in the early stages of company formation has been incorporating in the State of Delaware. This long standing trend has brought about several myths as to why companies actually go to Delaware; but despite what you may have heard, there is no secret tax loophole for simply incorporating there. Rather, the preference of Delaware incorporation has simply grown from a trend of large corporations filing in the state and the resulting strong body of corporate law. Each state in the United States has its own separate corporations act and body of corporate law, and Delaware's particularly expansive body of corporate law often provides consistency, familiarity, and comfort for large corporations looking for a state in which to incorporate.

However, if your company's operations are headquartered here in Michigan (or any other state for that matter), you should not simply assume that it is most beneficial to incorporate in Delaware. Depending on your circumstances, incorporating in Michigan may be the wiser option. Here a just a few examples of differences between Michigan and Delaware incorporation:

  • A Michigan company can act as its own registered agent, assuming its principal place of business is located in the state. A Delaware corporation located in Michigan will have to hire a registered agent in Delaware, and this could also open up the corporation to potential lawsuits in Delaware.
  • Delaware imposes an annual franchise tax on its corporations, whereas Michigan does not. Companies often fall out of good standing in Delaware because they are unaware of the franchise tax or forget to timely pay it.
  • Delaware has statutory procedures for ratifying defective corporate actions and determining "par value" of shares, whereas Michigan does not. Conversely, Michigan has director indemnity provisions and more protective anti-takeover provisions.

Each state has its own corporate laws, and they all vary from each other in one way or another. In that sense, Delaware is no different than any other state, other than the sheer volume of corporations. And because of the sheer volume of corporations, there have been more disputes, which lead to more binding decisions on Delaware corporate law, which have brought even more corporations, which have led to specialized Delaware courts to handle corporate matters.

So why go to Delaware? That ultimately depends on what kind of company your business is, and what it expects to be. Larger national companies with offices around the nation and fast-growing companies funded by venture capital firms prefer Delaware as the state of incorporation because of how familiar it is to larger investors. Who knows how that started - but it has snowballed into a large body of reassuring case law, so large companies like to stay in Delaware. If you're a smaller and more closely-held company doing business in and around Michigan and the midwest, you likely don't have any need to incorporate in Delaware. Everything you need is right here in Michigan the same as it is in Delaware.

Above are just a few of the distinctions between Michigan and Delaware incorporation, and the best choice for your state of incorporation will depend heavily on your particular circumstances. It may make sense to incorporate there based on your business' circumstances, or it may be better to stay with your home state. But there is no secret tax haven or corporate windfall waiting for you in Delaware. It's just Delaware.

 
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