As inescapable as the “incorporate in Delaware” mantra seems to be, few entrepreneurs and startups actually know why Delaware is a favorable state of incorporation for new businesses. Moreover, for founders who are not sure whether they actually need to incorporate in Delaware, this article is intended to give an explanation of why Delaware is considered the place of choice for businesses and whether it is right for your business.
Investor Comfort. One of the biggest reasons startups form in Delaware is due to investor comfort. The overwhelming majority of Fortune 500 companies and publicly traded companies are incorporated in Delaware. Delaware C corps are what investors know and understand, so if your company is a startup looking to acquire financing from investors, especially institutional investors, there a strong likelihood you will attract more investor interest as a Delaware C corporation than other type of entity.
Logistics and Cost. Yes, it is also true that incorporating in Delaware can be cheaper than most other states when it comes to incorporation fees. Further, because the state of Delaware’s commerce stream is in large part supported by corporate filings, Delaware has improved its handling of corporate filings by investing in better technology and resources, so filings tend to be handled promptly. There are also a number of “rush” filing services available, giving you the option to form a Delaware corporation in 24-hours, same-day, two hours, and a half hour.
Convenient Structure and Privacy. Unlike some states, Delaware allows corporations to be formed with one board member, and only requires one person to hold the executive positions. Further, the identity of the directors on the board of directors need not be disclosed, which provides extra privacy protections.
Taxes. Unlike some states, Delaware does not require taxes to be paid if your business is not doing any business in Delaware. Though you will still need to pay franchise fees, as in most states, the tax rates tend to be better than in other states. You do not have to pay state income tax for a Delaware corporation if you are operating out of the state. You also do not need a business license in Delaware if you are not operating in Delaware. There is also no inheritance tax on stock that is held by non-residence of Delaware. Finally, there are no Delaware state taxes on intangible personal property, and shares of stock owned by non-residents are not subject to Delaware taxes.
Court System. Another reason companies form in Delaware is due to the Delaware court system, which operates a completely separate court (the Chancery Court) specifically for corporate disputes. There are no juries in Delaware Chancery Court, which means there is no way uninformed members of the public will decide controversies based on emotion or feelings – disputes will be presided over by judges who spends all of their time handling corporate cases and know corporate law very well.
When is it not right to form in Delaware? If you are single-person company that is not doing business in any state other than your home state, without ground operations, retail locations, product sales, or other business operations in more than one state, you may want to not want to form in Delaware. If you are not looking to acquire outside financing or investments (other than through traditional means, such as a loan), then the extra fees of forming in Delaware may not be right for you. There are extra initial filing fees for incorporating in Delaware, including getting domesticated in your state on foreign qualification to do business in the state that your business will actually be operating out of. Further, you will be pay for a registered agent for service of process in Delaware, which is also a requirement, as well as the state you will be doing business in. You will also be paying two sets of franchise fees, depending on which state you will be doing business in. California, for example, charges a minimum of $800 in franchise fees per year, regardless of whether your corporation is making any money.
Didn’t Start in Delaware and Now Want to Switch?
If your company formed somewhere other than Delaware and now wants to switch to being a Delaware corporation, do not worry – all is not lost. Delaware has made it very easy for companies to convert into becoming Delaware corporations or LLCs, and our article on this topic covers the process for doing so.