Incorporating your company is one of the most important processes to complete for your company’s future.
Researching all about incorporating companies has led me to one simple conclusion. Incorporating your company in essence is simply legitimizing it for the rest of the world. There are many reasons to incorporate the first being the removal of personal liability for the owners.
Before incorporating, all of a company’s liability falls on the owners of that company. So if someone decided to sue your company for negligence (hopefully that will never happen), you as the owner would be personally responsible for the outcome of that suit.
Incorporating takes that possibility away. Once a company is incorporated, the government will recognize that company as basically its own person. It will be able to buy and sell property, bring suits against other entities and much more. It will also remove the liability of the owners for anything the company might be responsible for.
Incorporating also has many other benefits ranging from not being limited to the lifespan of the owner to being able to raise investment capital. Incorporating is a must for anyone who wants to grow their startup into a successful company.
Why Incorporate in Delaware
Where to incorporate is a very important question. The law does not require the company to incorporate in the state it operates in. Which makes it very important to know that each state has different benefits and drawbacks to incorporating.
One of the most popular ones being Delaware. Among the many benefits of incorporating in Delaware is the fact that Delaware has no corporate income tax. While you many be small now and taxes are not a huge problem, in the future that might be the exact opposite. Being smart in the early stages of a startup will lead to big benefits down the line.
Reasons for Incorporating in Delaware:
• Continuing with the earlier example in which a company is being sued for negligence, Delaware’s laws state that the ruling party of any corporate litigation be a judge not a jury. While litigation is the last thing on a company’s wish list, it should be reassuring to know that if your company were ever in such a situation that a knowledgeable and experienced person be the ruling party in your case.
• Going along with the judicial situations, since so many companies have incorporated in Delaware, there is a long and rich history of corporate court cases. This history can serve as precedent in any future cases. Having similar cases already been tried should make the outcome of your case less uncertain.
• If your company needs a lawyer, incorporating in Delaware is a huge asset. Most corporate lawyers are well-versed in Delaware law due to the large number of companies currently and previously incorporated in Delaware. This makes choosing a lawyer a lot less limited for companies.
• Owners and shareholders who do not live in Delaware do not need to pay personal tax. So being taxed twice should not be a concern for the heads of the company.
• If an IPO is on the cards, being incorporated in Delaware is almost a requirement from most investment bankers. So rather than going through the long and arduous process of becoming a Delaware corporation right before an IPO, might as well start out incorporating in Delaware and getting all the benefits that come with it.
• Hopefully one day your company becomes large enough to be listed on the stock exchange. So it is an immense benefit that owners of shares of companies incorporated in Delaware do not have to pay Delaware taxes for those shares. This is contingent on if the shareholder lives in Delaware. There is also no requirement for the shareholders or high-ranking officials to be residents of Delaware.
These are just some of many advantages for incorporating in Delaware. It is also important that each company does its own research to see which state best fits the company’s goals and aspirations. Hiring a lawyer who specializes in startup laws a great way to get started in your company’s incorporating process.
Need help incorporating in Delaware? Contact Sam Mollaei, Esq., business lawyer, via email at [email protected] or via phone (818) 925-0002.
This post is written by Sonny Desai, a pre-law UCLA student majoring in Economics with a minor in Entrepreneurship who has experience in writing about startup law.
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