Incorporation is a critical legal matter that impacts more than your company’s tax responsibilities for doing business. From startups to public enterprises, your bottom line is affected by your state of incorporation’s corporate income tax, excise (sales and use) tax, sales tax, physical and economic nexus tax, franchise tax, and gross income tax. Historically, in the U.S., Delaware is considered “the place” to establish your corporate entity as there’s no Delaware sales tax. Three other states—Nevada, Oregon, and Wyoming— have also decided to make incorporation in their state more appealing.
That means more options for you. So, in which state should you incorporate?
Why Do So Many Companies Incorporate in Delaware?
Delaware has a long history of being a preferred state for business incorporation. This reputation continues up to this day, giving a Delaware corporation an advantage when new companies are looking to set up shop. When you look into the reasons why so many companies, large and small, are incorporated in the state, you’ll find that it’s not simply due to “tax loopholes.”
A wide range of factors makes Delaware an attractive option, especially for corporations that operate nationwide across the US or internationally. Most important may be the state’s favorable corporate laws. Delaware’s laws provide flexibility in management and shareholder rights that are typically not seen elsewhere. As a result, corporate officers and directors feel safe with their headquarters in Delaware.
Those laws are enforced in a unique court, the Delaware Court of Chancery. The court focuses on business law, with an extensive history of resolving corporate disputes. This provides an efficient legal system for companies, with results that are often predictable when compared to courts in other states.
Does Delaware Have Sales Tax?
There’s no Delaware sales tax and the state doesn’t require the disclosure of the names of officers and directors in a company’s formation documents. This offers a level of privacy to founders and other stakeholders that is matched by few other American states.
And, of course, those tax benefits can’t be ignored. Delaware offers perhaps the most favorable tax treatment to businesses. Corporations incorporated in Delaware that don’t conduct business in the state are not subject to state income tax. This unique benefit is just the tip of the iceberg in the state’s favorable tax laws.
Delaware Has More Corporate Entities Than People for a Reason
When Delaware first established the Court of Chancery in 1792, it sought to provide a legal “remedy” for corporate entities not found in the common law for the rest of us. As a result, internal business disputes go to a special court. The Court of Chancery made Delaware home to more corporate entities than people, providing a roadmap for other states wishing to become business-friendly.
Delaware company registration guidelines
The requirements to incorporate under Delaware law are minimal.
- Information needed to register includes a Name and Entity type.
- A registered agent to act as an intermediary between your company and the state.
- Pay a fee to reserve a business name ($75).
- The fees for filing in Delaware vary depending on your entity type. For example, the fee for filing a Certificate of Incorporation in Delaware is $500 for a Statutory Trust, $200 for a Foreign Limited Liability Company, and $89 for a Stock Corporation.
The Delaware Division of Corporations offers electronic submission of business entity documents between the hours of 7:45 a.m. and 11:59 p.m. (EST) Monday through Thursday and until 10:30 p.m. (EST) on Fridays.
Delaware state tax explained
The lack of Delaware sales tax means no in-state purchases are subject to tax, whether a company is physically located in the state or not. And there’s no state corporate income tax on goods and services provided by Delaware corporations that operate outside of the state. Delaware holding companies benefit from no corporate tax on interest and other investments.
The state also doesn’t impose personal property tax. County-level real estate property tax can exist, but it’s typically very low in comparison to property taxes in other states. In addition, the state has no value-added taxes (VATs), use taxes, or an inheritance tax.
To compete for business tax income with New Jersey and New York, Delaware made incorporating within its borders easier for absentee (aka out-of-state) companies and incentivized these companies to do so.
A sole proprietorship, a partnership, and a c corp in Delaware like Amazon (the world’s largest online retailer) incorporated in the “Liberty and Independence” state don’t pay:
Corporate income tax (unless they do business in Delaware)
Their strategy worked. The vast majority of American companies with an IPO incorporate in Delaware. Founders of new companies wondering, “Does Delaware have state income tax?” are pleased to find the state’s favorable corporate income tax rules. The lack of sales tax in Delaware is a bonus. Whether a business has decided to Delaware incorporate, or they’re doing business for events like the SD State vs Delaware game, the state remains very business-friendly.
How Delaware makes money from incorporated entities
Without these taxes, you may be wondering if a c corp in Delaware contributes tax revenue at all. The state does tax its corporate entities, just not in ways that are familiar to businesses residing in other states.
For a c corp, Delaware collects hundreds of millions annually in taxes and fees from out-of-state business entities who are incorporated under its laws. There is a Delaware franchise tax as well as a gross receipts tax on companies. These are the main Delaware taxes the state uses to generate its tax revenue.
Annual Delaware Report Fee
Businesses incorporated in the state of Delaware must file an annual report fee. Domestic non-exempt corporation’s annual report fee is $50 and $25 for exempt entities. There is a $200 penalty fee for not filing an annual report by March 1st. Partnership entities such as limited partnerships, limited liability corporations, and general partnerships aren’t required to file a yearly report in Delaware, but they do pay a $300 tax annually.
The Delaware franchise tax
A franchise tax is a state charge on corporations to conduct business in their state. Other states that have a franchise tax include Alabama, Arkansas, Delaware, Georgia, Illinois, Louisiana, Missouri, New York, North Carolina, and Oklahoma. The amount of franchise tax and how each state calculates the tax varies.
Businesses incorporated and operating in Delaware must file a DE franchise tax annual report and pay a franchise tax and a corporate income tax. Delaware franchise tax is no less than $175 and no more than $200,000 annually. Here are the various ways to calculate and pay Delaware franchise tax:
- Flat tax:
- $175 for non-stock for-profit companies
- $300 for LP/LLC/GP entities
- Authorized shares method
- Assumed par value capital method
Does your company have to pay a gross receipts tax in Delaware?
If you have customers in Delaware, the answer is yes. A Delaware corporation pays a gross receipts tax for the privilege of selling goods (tangible and intangible) or services to those living in the state.
Gross receipts tax is the opposite of a sales tax that customers pay. Instead, companies pay for total sales. Delaware rates range from .0945% to .7468%, depending on the business activity. Payment is due monthly or quarterly. Late payments are subject to penalty fees.
Take note, gross receipts tax in Delaware cannot be reduced by deducting expenses related to the costs of the goods or services sold.
Your very own Delaware corporate tax calendar
Delaware incorporated entities that owe $5,000 or more in franchise taxes must make estimated quarterly payments in progressively smaller amounts under Delaware tax rate laws
|Delaware Requirement:||Due Date:|
|Delaware Informational Return: Form 1902(b)||April 15|
|The deadline for limited partnerships, limited liability corporations, and general partnerships to pay a $300 tax to the Division of Corporations. No annual report is required.40% first of four estimated payments on franchise tax over $5,000 owed.||June 1|
|The deadline for Foreign businesses incorporated in Delaware to file an annual report and pay a fee of USD 125.00.||June 30|
|20% second of four estimated payments on franchise tax over $5,000 owed.||September 1|
|20% third of four estimated payments on franchise tax over $5,000 owed.||December 1|
|State of Delaware Corporate Income Tax Return: Form 1100 or Form 1100EZDeadline for incorporated businesses to file an annual report and pay their franchise tax to the Division of Corporations.
Final payment on the remaining balance of franchise tax over $5,000 owed.
Incorporating in Nevada Has Certain Advantages Over Delaware
The goal may be the same for both Delaware and Nevada—to make their state a great place to incorporate a business—but, in the end, Delaware has been much more successful in attracting out-of-state foreign corporations than Nevada. However, Nevada doesn’t have as many rules or requirements for maintaining your incorporation or taxes.
Factors for consideration when selecting between Nevada and Delaware as the domicile for your new business
When considering what state provides the most significant legal protection, you need to do your homework on the type of business you’ll be running, where your clients are, and where your operations will be. In other words, Delaware may have the highest number of companies incorporated there, but Nevada may be better suited for your business.
Here are the highlights of why incorporation in Delaware may be more attractive than in Nevada.
- The corporate laws of Delaware favor the stockholders, while Nevada’s laws advantage directors and officers. Delaware is preferred by shareholders (i.e., venture capital), and Nevada’s laws have attracted more family-owned corporations.
- Delaware has a substantially longer history of business litigation (i.e., Delaware’s Court of Chancery) than Nevada.
- A business license is required in Nevada, but in Delaware, the license is only needed if your company does business in the state.
Both Nevada and Delaware share the following requirements for LLC incorporation.
- You don’t need a bank account in Delaware or Nevada to incorporate in those states.
- You don’t need a physical office or mailing address as a stipulation of incorporation in those states.
- Do require a registered agent and the natural person to act as a contact.
- You don’t need to disclose a list of members or beneficial owners in Nevada or in Delaware to incorporate.
Nevada corporate taxes and fees
From a financial perspective, your state of incorporation hits the bottom line in the form of corporate taxes and fees. The Battle Ground State of Nevada has some similarities and differences with the “Delaware loophole.”
Nevada doesn’t collect state income tax. Period.
While there’s a Delaware income tax on corporations, Nevada doesn’t have an income tax. Thus, the Silver State doesn’t collect corporate income tax from Nevada corporations doing business in the state. Compare that with Delaware, which collects corporate income tax on Delaware businesses if they conduct business in the state. Nevada companies don’t have to pay a franchise tax, but they do in Delaware.
What business taxes are you required to pay in Nevada?
Employers should know that Nevada has a modified business tax for companies paying at least $50,000 in wages per quarter.
If the sum of all taxable wages, after health care deductions, paid by the employer doesn’t exceed $50,000 for the calendar quarter, the amount of tax is $0. If the sum of all the wages paid by the employer exceeds $50,000 for the calendar quarter, the tax is 1.475% of the amount of the wages that exceed the $50,000.
Nevada corporations with a tax liability can apply for a non-refundable Commerce Tax Credit with the state’s Department of Taxation.
Reporting requirements and fees for Nevada corporations
Businesses incorporated in Nevada are required to file a list of Officers and Directors ($150 fee) and register for a business license ($500 fee) annually. Recall, Delaware requires that the names and addresses of directors be held with the registered agent who acts as the absentee corporation’s communication conduit. However, annual reports of Delaware corporations are publicly available and list directors by name.
Instead of a franchise tax and annual report that Delaware requires, Nevada wants 1) a current list of Officers and Directors and 2) an up-to-date business license each year. Both are due by the last day of a business’s anniversary month. For example, Silverado LLC established a limited liability corporation in Nevada on January 11, 1980. Every year after, the Nevada company has to file the Officer / Director list and renew its business license by January 31st.
Business Privacy in Delaware, Nevada, Oregon, and Wyoming
Business is a very public activity, but some businesses prefer to keep information on ownership private. To get you started, here is an overview of some of the most business-friendly states that have entered into an information-sharing agreement with the IRS.
The U.S. IRS Information Sharing Agreements are between federal agencies (i.e., the IRS and the FBI), between the IRS and state governments, and local governments. At the state level, an IRS Information Sharing Agreement includes:
- Audit results
- Federal individual and business return information, and
- Employment tax information
States that receive information about a company from the IRS act on the data at their discretion. If privacy is essential to your business, speak with your legal advisor and research which states are proactively using this information to create tax legislation.
Table: Business Information made public and shared with the IRS in Delaware, Nevada, Oregon, and Wyoming
|State||Is ownership public information?||Participates in the U.S. IRS Information Sharing Agreement|
|Delaware||Yes. Annual reports are public information and list the names and addresses of a business entity’s officers and directors.||No.Delaware has an MOU on information sharing with the U.S. Treasury.|
|Nevada||Yes. A list of Officers’ and Directors’ names and addresses is filed annually.||No.Nevada doesn’t collect business income tax.|
|Oregon||Yes. Annual reports are public.||Yes.|
|Wyoming||No.||No.Wyoming doesn’t collect business income tax.|
Finally, a topic of discussion for any new business deciding where to incorporate is nexus.
Which Business-Friendly States Have Economic Nexus Laws?
Delaware and Oregon don’t have economic nexus laws on the books because they don’t need to. The four states that don’t have sales tax are Delaware, Montana, New Hampshire, and Oregon. States without sales tax revenue don’t need to be concerned with economic nexus.
inDinero Has Experts for Every State
Where your company is headquartered is a big decision. The tax benefits afforded by Delaware, Nevada, and other states are certainly an important factor to consider. But as you’ve learned throughout this article, just because there’s no Delaware sales tax or property tax doesn’t mean a corporation won’t have to pay its fair share in other ways.
Perhaps Delaware taxes aren’t the most important consideration for you and your stakeholders. The unique privacy laws might carry more weight with you than the lack of Delaware state income tax. Or you might simply be interested in setting up shop in a lush environment like Oregon offers.
Business-friendly states want your business, but there’s a lot more than low taxes and minimum filing requirements to consider. inDinero can help set up an accounting system and prepare your taxes for any state where you do business—and make sure you’re filing the most advantageous Delaware tax return for your company. Get in touch with us today to speak to inDineo’s team of experienced tax experts to see how he can help.
Quick Note: This article is provided for informational purposes only, and is not legal, financial, accounting, or tax advice. You should consult appropriate professionals for advice on your specific situation. inDinero assumes no liability for actions taken in reliance upon the information contained herein.