Delaware is Suffering: Will Incorporation Fees Increase?
I’ve blogged before about the benefits of incorporating in Delaware. Thus, I was somewhat shocked to see the Deal Journal blog about how Delaware is becoming another victim of the credit crunch. I never thought about how much revenue Delaware receives from its Division of Corporations, but the article contained this statistic:
Delaware’s Division of Corporations contributed $700.8 million in revenue to the state in fiscal 2007. That was about 22% of the state’s total revenue.
According to Mark Roe, a Harvard Law Professor interviewed in the Deal Journal article, most of the Division of Corporations revenue comes from corporate franchise tax fees:
The current situation is that Delaware’s corporate tax base is eroding. On Delaware, it can have a big effect because Delaware gets about one-sixth to one-quarter of its state budget from corporate franchise fees.
Thus, If I’m reading the article correctly, Delaware doesn’t take in a lot of revenue from new incorporation fees. Delaware’s incorporation fees vary (click here for Delaware’s corporate fee schedule), but usually fall well below states like Texas which charges $300 for a new LLC or corporation. So will Delaware raise its incorporation fees to help make up the decreased Division of Corporations tax revenue?
The problem with raising incorporation fees is that Delaware needs to attract new filings, especially from out-of-state businesses. Raising incorporation fees would obviously not be a step in that direction. But it may be a better alternative, at least politically, than raising the state sales or corporate income tax.
And even if Delaware doubled or tripled its new incorporation fees, it wouldn’t affect a potential recommendation whether new startup company should incorporate in Delaware.
About the Author
Ryan Roberts is a startup lawyer and represents technology companies through all phases of the startup process, including incorporation, seed & venture financings, and exit transactions. Click here to learn more about his practice.
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Delaware just raised it's minimum franchise tax to $75 (plus a filing fee of $25). Not sure how much that matters in the big picture, but it's a way to get more money without discouraging new companies.
Delaware makes a lot of their revenue from incorporation fees. Plus, because of the arrangement Delaware has with registered agent companies, Delaware can file so many new entity formations with a very small staff. The registered agent companies enter the formations or other filings directly into Delaware's system and print good standings without anyone from the Delaware Secretary of State touching the document. Yes the Chancery Court is great for companies like Disney and other Fortune 500 companies but Delaware has to have that steady stream of small businesses that pay the one time incorporation fee and continue to pay the franchise tax of $75.00 annually. Then the small business has to hire a registered agent who might cut you a deal on the first year of their annual registered agent fee of $250.00 to $300.00 but after that first year you pay the full fee. What the small business usually doesn't realize is they still need to qualify in the state they are really conducting business in and they still have to file franchise tax reports and maybe pay franchise taxes. So why does a first year start up that is usually not going to bring in enough revenue to pay themselves a salary filing in Delaware? Are they going to fly into Philadelphia and take the train to Wilmington to litigate using the great laws of Delaware? Unfortunately, too many businesses incorporate in Delaware and find out it really costs more than if they would have paid the $300.00 in Texas in the first place.
@ Damon – I agree. It's kind of like how cereal boxes are now smaller.
@ Mike – That's what I always loved about Delaware. They are very high tech when it comes to customer support (live chat) but you have to fax or mail in your certificate of incorporation. That is, of course, you use CT Corp or Blumberg.