Should I form my business in Delaware or Indiana?
Whenever starting a company, one of the decisions to make is where to form the business. If a business’s primary place of operations will be in Indiana, it certainly makes sense to consider Indiana as a logical state. But other states, most notably Delaware, are often selected for the state of incorporation.
Advantages of a Delaware Corporation
Business Friendly Tax Laws
Delaware corporations are not required to pay state income tax in Delaware if the entity does not, outside of having its jurisdiction of formation within the State of Delaware, do business within the state. Additionally, shareholders who do not reside in Delaware are not required to pay Delaware taxes on their shares.
Venture capital investors, private equity firms, and investment banks typically prefer Delaware corporations above all other states and business structures. Additionally, the corporate attorneys hired by the institutional investors or investment bankers will often be much more familiar with Delaware law than other states. Any company seriously considering outside funding or going public is typically advised to start out as a Delaware corporation, rather than having later to convert or domesticate to Delaware upon the demand by an investment banker or venture capitalist.
Privacy or Anonymity
Delaware does not require corporations to list officer and director names on the formation documents. Additionally, no information beyond the corporation’s legal name and address is displayed for free on the Delaware Secretary of State database.
Flexible and Business-Friendly Corporate Laws
If a company wishes to structure its business in a particular or unusual way, Delaware’s corporation laws are flexible, giving the company more freedom to organize the corporation as it wishes. Additionally, there is no requirement that shareholders, directors, or officers reside in the state of Delaware. As opposed to other states, only one director is required to be appointed to a board of directors, allowing for even more flexibility and simplicity.
Well Established and Highly Respected Court System
The Court of Chancery in Delaware specializes exclusively in the issues of corporate law. Cases can thus be decided quickly and, preferably, without juries, who may or may not be as experienced or knowledge on corporate law matters. Additionally, due to the high volume of corporate cases in Delaware, litigation has more predictable outcomes and there is less uncertainty with respect to the legal dispute.
Disadvantages of a Delaware Corporation
While Delaware provides many benefits to corporations which choose Delaware as their jurisdiction of formation, smaller businesses, or businesses with only a few shareholders, sometimes find that incorporating in Delaware is not worth the advantages.
The single biggest disadvantage to incorporating in Delaware is the ongoing costs in doing so. Franchise taxes, which are applied to all corporations regardless of whether they operate in Delaware or not, can be complicated to calculate and high in dollar amount. On top of annual franchise taxes, a Delaware corporation must maintain a registered agent in the state for purposes of service of process. For companies that operate outside of the State of Delaware, this likely means hiring a third-party service corporation. These costs can accumulate to thousands of dollars each year.
Even though an entity is formed in Delaware, the entity must still abide by the laws of the state in which it operates. This creates dual-jurisdiction compliance issues, and likely increases costs and work associated with staying compliant in the company’s state of operation.
Advantages of an Indiana Corporation
Indiana offers many of the same benefits to corporations as Delaware. The Indiana Business Corporation Law is business friendly and flexible. For example, residency is not required to hold the position of officer or director, and only one person must be named as a director to the board. Additionally, the laws are flexible enough to accommodate most unusual or unique corporate structures.
The greatest benefit to incorporating in Indiana, and an advantage on companies which choose to incorporate in Delaware, is that the Indiana legislature and Indiana courts have taken a particularly director friendly application and interpretation of the business judgment rule as codified in the Indiana Code.
The Indiana Business Corporation Law materially limits the circumstances in which directors may be held personally liable for their actions to shareholders as opposed to Delaware law. Indiana law adopts a “conclusive presumption” in favor of decisions by disinterested directors with respect to corporate actions and with respect to the termination of derivative lawsuits brought by shareholders. The law also moved away from the negligence standard for personal liability of directors, as codified in Delaware, and adopted the requirement that a director must have acted willfully or recklessly to be personally liable. I.C. § 23-1-35-1.
Further, Indiana has developed its own Commercial Court system. While the Commercial Courts are not the exclusive place in which business disputes are resolved, these Courts are based on the same general premise ad the Delaware Chancery Court system, in that the Judges who run a Commercial Court docket in Indiana have a high volume of commercial cases and are generally more familiar with commercial law than a court of general jurisdiction.
There is no universal answer to the question of where to incorporate a business. The only certainty is that businesses should recognize that they have a choice of where to incorporation and carefully examine the costs and benefits of incorporating in various states. For questions about incorporation contact a member of Barrett McNagny’s Business Law Team.