INCORPORATING IN DELAWARE: TIPS TO FOLLOW – By Magda Farhat
If you are in the startup scene, you may have noticed that many companies, even in the Middle East, are incorporated in Delaware. The reason is that Delaware offers a lot of advantages to its companies; here are the main ones:
- The flexibility of Delaware’s corporate laws in terms of how you can structure your company and organize your corporate governance;
- Investors and venture capital firms often prefer Delaware corporations;
- Delaware has business-friendly tax laws: if you are incorporated in Delaware but don’t conduct business there, you are not required to pay Delaware corporate income tax Furthermore, if the shareholders of a Delaware company are outside Delaware, they are not subject to Delaware taxes. However, you will still have to pay the franchise tax once a year; and
- The Delaware court system is familiar with complex corporate law matters and in case of litigation, well experienced and highly respected judges (as opposed to juries) will decide on your case.
Now that you have decided to incorporate in Delaware, here are a few tips to help you cross your way through the legal labyrinth of setting up your business.
Choose the type of entity to form
When you are launching your business in Delaware, the most popular choices that you will be faced with are the limited liability company (LLC) and the C-Corporation.
The key benefit of forming a LLC is that you will be governed by a “pass-through” taxation system. In that sense, you will not have to pay corporate taxes. Nevertheless, this structure doesn’t allow you to raise funds from venture capitalists or any other outside sources. The alternative is the C-Corporation which is widely spread, allows you to raise funds and is more flexible, especially that it permits for an unlimited number of shareholders. Yet, this setup has a problem of double taxation in case you want to distribute dividends.
Organize your paperwork and corporate structure
If you are incorporating through a registered agent in Delaware, this doesn’t mean that your legal paperwork is in order. You will still have to process dozens of documents such as the articles of incorporation, the co-founders’ agreements, the stock purchase agreements, the investors’ right agreement, the voting agreement, etc. At that stage, a qualified business lawyer will have to assist you to make sure your corporate structure is well established.
If you are looking for a law firm in the Middle East that can assist you with Delaware setups, you might want to consider Ororus Advisors.
Allocate your shares suitably
While you draft the legal paperwork, you will come across the cap table. This is when you will have to decide how your shares will be distributed between you, your co-founders and your investors. The more shares you give out to investors at your early stages, the less you will be able to raise other investment rounds, which will slow down your business’s progress. Make sure you are surrounded by experienced mentors and professionals who will guide you in the process and help you decide between what is fair to your company and what is fair to your investors. Vesting restrictions are another element you may want to consider to guarantee that all shareholders will remain in the business on the long run and will continue to contribute to your company’s growth.