Key Takeaways

  • Delaware offers strong legal protections, flexible structures, and is ideal for startups seeking venture capital.
  • New Jersey provides favorable LLC laws, privacy protections, and is a good option for local businesses.
  • Delaware corporations appeal to investors, especially in tech, due to predictable case law and C-Corp tax strategies.
  • LLCs in both states offer pass-through taxation, but Delaware provides enhanced contractual flexibility and fewer formalities.
  • Tax implications, filing fees, annual requirements, and investor expectations all play a role in choosing between a Delaware LLC and corporation.
  • Out-of-state registration and maintenance costs should be considered for companies not physically located in the incorporation state.
  • Legal support is available on UpCounsel to guide you through your business entity decision.

Incorporating in Delaware vs. New Jersey can depend on several factors, including the complexity of your business. Large, complex corporations are typically informed in Delaware, as this state has a very business-friendly climate. Incorporating in New Jersey also has its advantages, so it's important to compare each state in closer detail.

Forming an LLC in Delaware vs. New Jersey

For most companies, the most beneficial business entity is a limited liability company (LLC). If you've decided to structure your business as an LLC, you will need to choose a state for formation, with two of the most popular options being New Jersey and Delaware. In many cases, making this decision should be very easy. If New Jersey is not your home state, you will need to cover the costs required for a foreign business entity, which means you should instead form your LLC in Delaware.

Forming in Delaware is also the better option for LLCs that plan to use a complex ownership agreement. LLCs that have plans to work with investors should also choose to form in Delaware.

Key Differences Between Delaware Corporation vs LLC

Understanding the distinction between a Delaware corporation and LLC is crucial, especially for startups and growing businesses. Here's how they differ:

1. Management Structure

  • Delaware Corporation: Managed by a board of directors and officers. This structure enforces corporate formalities such as annual meetings and detailed recordkeeping.
  • Delaware LLC: Offers flexible management, which can be member-managed or manager-managed, with fewer required formalities.

2. Tax Treatment

  • Corporation: Subject to corporate income tax (C-Corp). May be eligible for certain deductions but may face double taxation (once at corporate level, once at shareholder level).
  • LLC: Pass-through taxation by default (profits taxed once as personal income of members). Can elect corporate taxation if desired.

3. Investor Appeal

  • Corporation: Preferred structure for venture capital and institutional investors. Stock options, preferred shares, and convertible notes are easier to issue.
  • LLC: Less favorable for outside investors due to complex pass-through taxation and less standardized equity issuance.

4. Legal Predictability

  • Corporation: Delaware’s Court of Chancery provides case law specific to corporations, reducing litigation risks.
  • LLC: Also protected by Chancery Court, but corporations benefit more from the extensive judicial precedent.

5. Formalities and Maintenance

  • Corporation: Must file annual reports and hold annual meetings. Requires detailed bylaws and board resolutions.
  • LLC: No requirement to hold meetings or maintain extensive records. Operating agreements can be tailored to specific needs.

Reasons to Choose New Jersey

Several reasons exist to incorporate in New Jersey. For starters, New Jersey has a vibrant economic climate, with thousands of LLCs formed in this state every single year. New Jersey is also one of the highest-ranking states in terms of job creation and gross domestic product.

One of the biggest advantages of incorporating in New Jersey is that LLCs will have a tremendous amount of contractual freedom. In this state, the members of an LLC can define capital contributions however they wish, and will also be able to share losses and profits in whatever way best fits the company. The New Jersey LLC Act also gives limited liability companies the right to create different membership classes. This means that LLCs can issue both non-voting and voting interests.

Another benefit of forming an LLC in New Jersey is that there is no member's names filing requirement in this state, which makes establishing the LLC much easier. For instance, a person can sign the company's Certificate of Formation without actually being a member of the company. Similarly, the person that files the LLC's formation documents does not need to be an LLC member. This means the members of the LLC could hire a non-member to handle formation of the LLC.

There are several other benefits of forming a New Jersey LLC:

  • Your company will have an unlimited duration.
  • You can customize the duties between parties to your operating agreement.
  • You can secure control of your LLC.

Tax and Compliance Considerations in New Jersey vs. Delaware

When deciding between Delaware and New Jersey, tax and compliance burdens can influence your decision significantly.

Delaware:

  • No sales tax.
  • No state corporate income tax on goods/services not physically in Delaware.
  • No tax on intangible assets like trademarks or patents.
  • Franchise tax applies (can be expensive for large corporations).
  • Requires a registered agent and annual reports.

New Jersey:

  • Corporate Business Tax applies (as high as 11.5% for corporations with over $1M in net income).
  • No franchise tax for LLCs.
  • Requires annual reports and a registered agent.
  • LLCs must pay an annual fee but often pay less overall than Delaware entities registered as foreign in NJ.

For NJ-based businesses, forming in-state may reduce the complexity and costs of foreign registration.

Incorporating in Delaware

Delaware has put tremendous effort into positioning itself as the most beneficial states in the country for corporations. In addition to a variety of business-friendly laws, Delaware handles corporate law cases in a Court of Chancery instead of in a traditional court.

The judges that hear cases in the Court of Chancery have experience in corporate law, meaning they are able to make quick judgments without the use of a jury. This system has provided Delaware with a developed body of corporate law, which makes it easy for corporations to determine the potential outcomes of litigation so they can decide whether settling a case is advisable.

One of the most often cited reasons to incorporate in Delaware is the beneficial tax climate in the state. Unlike other states, Delaware does not require corporate taxes for corporations that don't transact business in the state. This means that a corporation could form in Delaware and avoid corporate taxes by doing its business out of state.

Delaware also does not impose taxes on intangible assets or royalty payments, which can help many corporations substantially lower their tax burdens. Incorporating in Delaware can also be completed very quickly, and there is no need to disclose the name of your corporation's shareholders or directors.

The only real disadvantage of incorporating in Delaware is that you would need to register as a foreign entity in your home state before you would be able to do business. Depending on the laws in your home state, qualifying as a foreign entity can be very expensive. Delaware also requires that corporations appoint a registered agent, but this is a requirement in most states where you could incorporate.

Choosing the Right Entity for Your Business Goals

Your choice between a Delaware corporation and LLC—and whether to incorporate in Delaware or New Jersey—should align with your goals:

Goal Best Option
Attract venture capital Delaware Corporation
Retain simple structure LLC (Delaware or New Jersey)
Operate locally in NJ only New Jersey LLC or Corporation
Minimize double taxation LLC with pass-through taxation
Plan for IPO Delaware Corporation
Flexibility in management & agreements Delaware or NJ LLC

Legal and tax advisors can offer personalized guidance to match your goals. If you’re uncertain, you can connect with an attorney on UpCounsel for assistance.

When to Choose a Delaware Corporation Over an LLC

Startups anticipating rapid growth, fundraising, or an eventual public offering typically favor the Delaware C Corporation structure. Here’s why:

  • Equity Flexibility: Corporations can issue multiple classes of stock, which helps structure investor rights, preferred returns, and convertibles.
  • Scalability: Corporations are easier to scale, attract institutional investors, and go public.
  • Standardization: Delaware C-Corp is the "default" structure many investors expect.
  • Vesting and Stock Options: Standardized frameworks for granting options to founders and employees.

However, corporations come with stricter compliance demands. If you don’t plan on seeking venture capital or issuing equity, an LLC might be more cost-effective and easier to manage.

Frequently Asked Questions

1. What are the main tax differences between a Delaware corporation and LLC? A Delaware LLC offers pass-through taxation, avoiding corporate tax, while a C Corporation may face double taxation. However, C-Corps can claim more deductions.

2. Can a New Jersey business still incorporate in Delaware? Yes, but it must register as a foreign entity in New Jersey and comply with both states’ requirements, potentially increasing costs.

3. Is a Delaware LLC better than a New Jersey LLC? Delaware offers more flexible operating agreements and stronger liability protections, but NJ may be better for local-only operations due to reduced compliance.

4. Why do startups prefer Delaware corporations? Because Delaware C-Corps offer investor-friendly structures, strong legal precedent, and easier fundraising via equity issuance.

5. Do I need to live in Delaware to form a company there? No, you can form a company in Delaware without residing there, but you will need a Delaware registered agent and may need to register as a foreign entity in your home state.

If you need help with incorporating in Delaware vs. New Jersey, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.