Key Takeaways:

  • New York Incorporation Benefits: New York offers strong liability protections, business-friendly policies, and a well-developed legal system for corporations.
  • Delaware Incorporation Advantages: Delaware is preferred for its predictable business laws, tax advantages, and venture capital appeal.
  • Publication Requirement in NY: A unique requirement in New York mandates businesses to publish formation notices in local newspapers.
  • Tax Considerations: New York corporations are subject to various state taxes, while Delaware offers no state corporate income tax for businesses operating outside the state.
  • Legal and Business Environment: New York has a thriving business ecosystem and a sophisticated court system, but incorporating out-of-state may require foreign qualification fees.
  • LLC Structure Differences: New York LLCs enjoy strong liability protections and operational flexibility, but Delaware LLCs may be preferable for businesses seeking external investment.

What's the benefit to incorporating in Delaware vs. New York? Deciding to incorporate can be a thrilling step towards unlocking the full potential of your business. Many companies located in New York often question whether they should incorporate in Delaware or their home state.

Incorporating Your Business

First-time business owners sometimes struggle with deciding on how to structure their business. Choosing an entity structure can be difficult and should be thoroughly researched before making a commitment. It can also be a somewhat complex endeavor as there are many tax and legal scenarios which need to be worked out.

There are many advantages to incorporating in Delaware. However, will incorporating in Delaware be the best step for your business? To answer simply, it will all depend on your business.

It always makes sense to incorporate your business in the state in which it runs, especially if the company is fairly young. However, incorporating in a foreign state (a state in the US that is not considered your home domicile) may provide your business with additional benefits. Selecting in which state to incorporate is a serious decision with a wide array of ramifications. It should be researched thoroughly before deciding.

Many businesses decide to incorporate in Delaware because of the friendly corporate environment, tax structure, and predictable body of law. Yet others choose to incorporate in their home domicile of New York because they believe it's in the best interest of their business.

Advantages of Incorporating in New York

New businesses in New York will most likely have most of their operations and customers located within the state. Logistically, many business owners think that it's usually much easier for a business to incorporate where it lives and thrives. Additionally, the state of New York provides businesses with a lot of freedom in their operations. New York LLC laws allow members to:

  • Personalize their fiscal allocations
  • Form an LLC with unlimited duration
  • Protect their personal interests from creditors
  • Utilize New York's supportive commercial contract laws and courts

Government officials have been trying to make the state more business friendly by actively updating policy initiatives. Many businesses save money by incorporating in New York.

Business Environment and Legal Protections

New York’s well-developed legal system ensures robust protections for businesses. Key advantages include:

  • The Business Judgment Rule: Protects corporate directors from liability if they act in good faith.
  • Strong Contract Enforcement: New York’s courts are known for fair and predictable rulings in business disputes.
  • Comprehensive LLC and Corporation Laws: New York’s business statutes provide clarity and flexibility in corporate governance.
  • Access to Specialized Courts: The Commercial Division of the New York Supreme Court handles complex business cases efficiently.

These legal advantages make New York an attractive location for corporations, especially those operating within finance, technology, and real estate industries.

Tax Benefits and Financial Considerations in New York

Incorporating in New York offers several tax benefits depending on the business structure. While the state imposes a corporate franchise tax, many startups and small businesses may qualify for tax credits and incentives. Key financial considerations include:

  • Qualified Emerging Technology Company (QETC) Tax Credits: Startups in high-tech industries can benefit from refundable tax credits.
  • Empire State Development Grants: Incentives for businesses engaging in economic growth activities.
  • Lower State Corporate Tax for Small Businesses: Businesses with net incomes below a certain threshold may pay reduced rates.
  • Sales and Use Tax Exemptions: Various exemptions apply to manufacturers and businesses in designated economic development zones.

New York’s economic development programs make it attractive for businesses looking to establish long-term operations within the state.

Advantages of Incorporating in Delaware

Delaware has become the most popular state in which to incorporate. About 50 percent of the largest publicly traded companies in the world have decided to incorporate in Delaware. Many companies incorporate there because of the extremely friendly business laws. There are many tough laws protecting the personal assets of members from creditors. Additionally, the state shelters the members from personal liability.

The state's also attractive to business owners because it doesn't require businesses to pay state income tax unless they're operating in Delaware. Other advantages to incorporating in Delaware include:

  • Not having to pay taxes on income received from intangible assets
  • Being taxed at a potentially lower rate (as compared to the home state)
  • A simple online incorporation process
  • An exclusive court that's been created to quickly handle business disputes
  • A predictable and well-developed corporate law system
  • Outside investors and venture capitalists usually prefer to work with businesses that have incorporated in Delaware

Delaware’s Investor and Venture Capital Appeal

One major reason companies incorporate in Delaware is its appeal to investors. Venture capitalists and private equity firms often prefer Delaware corporations due to:

  • Familiarity with Delaware Law: Investors are comfortable with Delaware’s established corporate laws.
  • Easier Stock Issuance and Transfers: Delaware’s flexible laws make it simple to structure equity and ownership.
  • Preferred Jurisdiction for IPOs: Many publicly traded companies are Delaware corporations due to favorable regulations.

While incorporating in Delaware may be beneficial for attracting investment, small businesses operating primarily in New York may not see a significant advantage.

Disadvantages of Incorporating in Delaware

Incorporating in Delaware may include the following disadvantages:

  • Having additional obligations or paying extra fees
  • Competition from other states has made Delaware not as alluring
  • Many businesses in New York will see no advantage to incorporating in Delaware
  • Incorporating in Delaware will force your business to register as a foreign corporation in New York (which includes an additional fee)
  • Incorporating in Delaware doesn't prevent your business from paying New York taxes
  • An additional cost to pay for a registered agent
  • An annual franchise tax
  • Delaware requires businesses to file annual reports
  • Small businesses that only operate out of a hand full of states may see a limited, or no additional benefit to incorporating in Delaware

Hidden Costs of Incorporating in Delaware

Although Delaware is often seen as business-friendly, there are hidden costs to consider:

  • Foreign Qualification in New York: If a Delaware-incorporated business operates in New York, it must register as a foreign entity and pay additional fees.
  • Franchise Tax in Delaware: Businesses must pay an annual franchise tax, which can be costly for larger corporations.
  • Registered Agent Requirement: Businesses must maintain a Delaware-based registered agent, adding an extra cost.

For small businesses with no plans for external investment, these extra costs may outweigh the benefits of Delaware incorporation.

Should a New York Business be a Delaware LLC?

There are three main requirement for forming an LLC in New York, they are:

  1. File the articles of organization
  2. File a publication requirement within 120 days of submitting the articles of organization
    • A notice of formation should be published in two newspapers for a period of six weeks
  3. Create an operating agreement
    • The operating agreement will explain how the LLC is managed and outline how profits are distributed

Frequently Asked Questions

1. Why do businesses choose to incorporate in New York? New York offers strong legal protections, a thriving business environment, and tax incentives for certain industries, making it ideal for locally operating businesses.

2. What are the disadvantages of incorporating in New York? New York has a corporate franchise tax, and LLCs must comply with a publication requirement, which can add to startup costs.

3. Is Delaware always the better choice for incorporation? Not necessarily. Delaware is advantageous for businesses seeking venture capital or public trading, but New York may be preferable for businesses operating locally.

4. What is the New York LLC publication requirement? New York LLCs must publish a formation notice in two newspapers for six consecutive weeks, which can be costly.

5. Can a New York business incorporate in Delaware and still operate in New York? Yes, but it must register as a foreign entity in New York, which adds extra fees and compliance requirements.

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