Good old Delaware. According to its license plate, little Delaware is the “First State.” Presumably, this refers to the state’s position as the first to ratify the United States Constitution, but Delaware also takes first place for incorporation among startups. Many entrepreneurs have heard that angel investors and venture capitalists will demand that their company be a Delaware C corporation. It’s not just startups, either. According to Delaware (an admittedly biased source), a full 64% of the Fortune 500 are incorporated in Delaware. So why do so many people choose to incorporate in Delaware when their businesses are based elsewhere?
1. Favorable Corporate Law
Because Delaware has been home to so many corporations for so long, it has a large body of court cases setting precedent for corporate governance. This gives directors and shareholders a great deal of guidance when running their companies. Many other states lack this precedent and have largely untested corporate law.
2. Favorable Court System
No one wants to end up in a lawsuit, but if you do, you certainly hope to end up in front of an experienced judge. Delaware maintains The Court of Chancery, a separate court system just for adjudicating corporate disputes. In many other states, corporate disputes end up in the general civil court system, where the judge may have very limited experience dealing with corporate law.
3. Affordable Fees
The state filing fee for incorporation in Delaware is usually under $100. As of the date of this blog post, most early stage companies will need to pay a yearly “franchise tax” of $350 and annual report fee of $50. This stacks up quite favorably against many other states. You should take care to use a low par value when incorporating, or else your franchise tax could actually be quite high. It’s definitely worth speaking to your attorney about this.
While Delaware is often a good option for incorporation, it’s certainly not the only option. There are times when other states may make sense. For example, some states offer more privacy. If you’d like to discuss which state is best for your company, please feel free to contact us for a free consultation. We offer a variety of incorporation services.