Many start-ups and home-grown companies consider Delaware incorporation because of its corporate-friendly laws. However, these benefits come at a cost, especially when it comes to fees and taxes.
It’s important to understand how each choice might impact your business. The answer to the question “should I incorporate in Florida or Delaware?” depends on your unique circumstances.
Publicly traded companies and private equity firms raising venture capital typically choose Delaware for its internationally recognized, annually updated corporate law, court system, rich caselaw and administrative user-friendliness. However, for home-grown companies looking to attract investor-shareholders, Florida’s more robust appraisal rights statute and more favorable tax treatment can overcome the seemingly appealing benefits of Delaware incorporation.
Effective asset protection requires separating safe assets (like publicly-traded investment securities) from liability assets (like rental real estate or commercial property). When the owner entity incurs liability, its ownership interests are vulnerable to claim by judgment creditors. When the entity owns only safe assets, those interests are protected by Florida LLC law. For companies with significant liability risk, a statutory conversion to Florida can transfer the business’s EIN, property deeds and management structure without interruption or loss of continuity. However, the cost may be prohibitive for some smaller companies and entrepreneurs. Some prefer to form and maintain a separate Delaware company for greater protections and lower upfront and annual costs.
Delaware is known as a corporate haven, and many companies choose to incorporate in this state because of its friendly business laws. However, a major downside to Delaware incorporation is that the law is heavily dependent on judicial interpretations instead of clearer and more comprehensive statute. This makes the state less favored by counsel that prefers more clear and consistent standards.
Another downside of Delaware is that it requires companies to pay franchise taxes and state income taxes, which can make the state a more expensive choice for small businesses. Florida, on the other hand, offers low filing fees and no state income tax for LLCs and partnerships.
If you have already incorporated your company in Delaware, but would like to take advantage of Florida’s advantages, our firm can help with a statutory conversion. This process allows you to move your Delaware LLC to Florida without interrupting your business or forcing you to start over.
Florida is well known for its business-friendly climate. In fact, many magazines rank it second in the nation for providing an environment that fosters growth.
Private equity, venture capital and other institutional investors often require out-of-state incorporation, specifically Delaware, because of its internationally recognized and annually updated corporate law, excellent business court system, rich caselaw, and administrative user-friendliness.
However, Florida offers a number of advantages that may negate some or all of these factors for start-ups and home-grown businesses. For example, Florida’s more robust appraisal rights provision may give start-ups and home-grown companies a distinct advantage in negotiations with investors who attempt to profit through appraisal litigation.
Moreover, Florida’s relatively simple fee structure—$70 for incorporation filings and a single annual franchise tax of $138 payed to Sunbiz—may be more appealing than the byzantine fees in Delaware. Additionally, Florida allows one person to hold all of the positions required for a corporation (director, shareholder and officer) while Delaware requires separate people for each role.
While Delaware and Florida both offer many advantages for businesses, determining whether to incorporate in one or the other should be based on the priorities of each business. For example, if asset protection is a priority, then Delaware may be the better choice. However, if tax benefits are more important, then Florida might be a better option.
Florida is a very business-friendly state with no minimum capital requirements for LLCs. It also does not impose a franchise tax. It is also easy to register a Florida corporation online.
In contrast, Delaware has a highly developed and internationally recognized corporate law system, a sophisticated business court system, rich caselaw, and administrative user-friendliness. These factors often lead public companies and those raising equity capital from institutional investors to select Delaware. For homegrown companies, however, these factors can be offset by cost and other considerations. For example, the Florida statute allows short-form mergers requiring only 80% parent ownership of subsidiary shares, which can significantly reduce disclosure, solicitation, documentation, and other time-consuming burdens.