Reason 1: Higher Initial Fees Forming a Delaware LLC or Corporation does NOT come cheap. Despite or rather because of its favorable tax and business regulation climate, Delaware knows that it can keep its LLC formation or incorporation fees on par with other states, and still be a favored location for publicly traded companies and large multi national corporations to call their incorporation state. Being a small state (in both size and population), Delaware can keep its property taxes low, by filling up its coffers with the incorporation and llc formation fees. Also, when you incorporate or form an LLC in Delaware, your business would in all likelihood, still be required to registered/obtain certificate of authority, from its state of principal place of business. In addition, to paying initiation fees to 2 states, the legal fees to structure such an entity would often be substantially higher. For example, our law firm would typically charge $1,000-$1,500 (including the filing fees) to prepare a New York LLC, but $5,000-$7,000 to arrange for the formation of a Delaware LLC with the subsequent NY Certificate of Authority. This may be pocket change for a Forbes 500 company, but a major chunk of start up capital for a mom and pop type of business. Reason 2: Higher Ongoing Fees. Unless you can deploy the resources of full time accountants and tax lawyers in multiple locations, it is unlikely that a small business would reap the rewards of any transfer pricing tax minimization strategies. However, such business entity, would still be saddled with paying registered agent and multiple other state filing fees to two states (Delaware and its state of principal place of business). Also, because the Delaware LLC and Corporate governance laws are tailored to big businesses, a small business would often need periodic attorney reviews to make sure the proper corporate formalities are kept. Also, this entity set up would make the annual tax preparation for the business and its owners more cumbersome than it has to be. Reason 3: Waste of resources that could have been used for a better asset protection plan. If your primary goal of forming an LLC or incorporating is for obtaining limited liability protection, my experience tells me, that the state of formation or incorporation, is nowhere nearly as important as, the owner(s) sitting down with a competent attorney, discussing ways to optimally protect assets from possible predatory current, prospective and/or potential creditors. Since many precious resources are wasted on complying with 2 business governance legal frameworks, less resources are left for providing a customized and individualized asset protection plan. Reason 4: Choosing Delaware could backfire on owners seeking limited liability. Here are just some ways that forming a Delaware LLC or Corporation could backfire on owner(s) choosing Delaware to limit their personal liability exposure: a) It may take longer to receive notice of any litigation, since you may be relying on a Delaware registered agent forwarding the legal documents to an out of state registered agent, who in turn would forward the legal papers to the owners/managers, b) Delaware courts are known to adjudicate corporate governance disputes (ie. veil piercing actions) at a rapid pace. This may be great for boosting Wall Street confidence, but a horrible litigation strategy for a civil defendant entity and/or its business owners, where there is some truth to the adage of 'justice delayed is justice denied', c) Since, there is a lot of additional record keeping requirements, there is an enhanced risk of owner(s) and/or manager(s) slipping up, d) The possible potential of harder time in obtaining insurance coverage from instate carriers. e) Litigation defense revolving business organization issues, could be an expensive undertaking in Delaware, due to potentially retaining 2 separate defense counsels (1 familiar with the local Delaware court peculiarities, and 1 for the state at which the claim has originated or have a legal nexus. Reason 5: Potentially decrease and/or complicate access to obtaining financing. Traditional lenders, making loan decisions on small (less than $2 million) amounts, would oftentimes tend to be local in scope, and dealing with an out of state formation/incorporated entity (especially one from a jurisdiction with as onerous and lengthy business organization statutes as Delaware) may decide that it is not worth their time, to conduct the added due diligence. Having a Seal from the State of Delaware in your LLC/Corporate kit may be important (many would argue, practically required) for Wall Street underwriters and venture capitalists, but to a small bank loan officer, it may be construed as added hassle (better case scenario) or signal poor cost-benefit analysis by the business owners/managers (worse case scenario).