Delaware or Maryland when starting a business?

by | May 6, 2013 | Corporate, Uncategorized

We often are asked whether to file a Maryland or a Delaware corporation or limited liability company.  The chart below explains some of the factors that can affect this decision.  We do not believe that there is any material difference if you are forming a single member LLC or sole stockholder entity and you are a maryland resident and the property and business is located in MD – in these cases it is just easier to register in MD.  In any other case, this issue should be considered fully.

[table caption=”Delaware vs Maryland” width=”500″ colwidth=”100|200|200″ colalign=”left|left|left”]
Court System^Advantage Delaware:  Delaware has the Court of Chancery, which is a pre-eminent court system, and a significant body of case law that allows lawyers to give fairly accurate advice regarding outcomes in disputes^Maryland has a Technology Track in its circuit court, but many fewer decisions, so it is harder to predict how a particular issue might be resolved

Informal actions^Delaware has a very flexible law for approving informal actions – they can be approved with just the number of persons necessary to take the action, unanimous approval is  not generally necessary^Maryland law requires most informal actions to be unanimous, so as the number of members increases, this becomes inconvenient

Number of Members^As the number of members / stockholders increase, the harder it is to maintain a contractual stockholder agreement (this factor is about even for LLC’s), so the more you have to rely on applicable law.  Delaware law is more fully developed than Maryland law^As noted above Maryland law does not allow for easy informal actions, so as the number of members / owners increase, it is harder to maintain control over the minority members.

Taxation^Delaware has no state income tax so non resident members are not taxed on passthrough income (at the state level)^There is no material difference for pass throughs as long as all members are MD residents- however, for non resident members who own a Maryland pass through entity, there is a tax withholding requirement for the Maryland LLC.

Conversions^Delaware law has a form entry for entity conversions (i.e. LLC to Corp or Corp to LLC)^Maryland law does not provide for a simple conversion process – you must fully document a merger transaction (which makes such conversion transactionally more expensive)

Garnishment^Bank accounts in Delaware are not subject to garnishment^Bank accounts in Maryland are subject to garnishment, however, a Maryland entity may own accounts in Delaware, so this is more a matter of convenience


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