Why Do Many Startups Choose to Incorporate in Delaware?
Although it is one of the smallest states in the US, Delaware is certainly a burgeoning corporate powerhouse. More than one and a half million businesses, including roughly 60% of Fortune 500 companies, more than 50% of all US businesses, and numerous startups, have incorporated in the state (delaware.gov).
This reality is possible only due to its business-friendly reputation, one that has its origins in the 1899 enactment of its General Corporation Law.
The General Corporation Law paved the way to a mature corporate ecosystem, as well as the development of a well-respected legal infrastructure.
Many businesses incorporate in the state simply for convenience. The rule of thumb says that if a business foresees raising funding or needing to incorporate in Delaware in the future, it’s recommended to do it right off the bat to avoid costly inconveniences down the line.
This choice is not based on where business is done but rather where the jurisdiction best meets business needs. Businesses gravitate toward Delaware for a plethora of reasons, which we’ve detailed below.
What Are the Benefits of Incorporating in Delaware?
Incorporating a business as early as possible is necessary to build credibility, protect intellectual property, and reduce exposure to liability. Furthermore, incorporating in Delaware, in particular, renders the businesses more attractive to potential investors. There are a host of other advantages that come with choosing this state. Read on to know more.
1. Corporate Statutes
With a detailed database of judicial precedents and robust and flexible corporate law corpus, Delaware is the perfect business-friendly state. Additionally, in an effort to maintain this status, these corporate statutes are often updated by legislators and corporate attorneys.
Ensuring the efficiency of the system and the protection of business entities is at the forefront of Delaware’s legal setup. Airtight laws and acts such as the Delaware General Corporation Law (DGCL), and the Limited Liability Company Act (LLC), are models for legal environments in other states.
The DGCL provides businesses with the flexibility to run as per their requirements with minimal mandatory laws that do protect the interest of the investors. It lends certainty and reliability to all of the corporations’ practices.
With custom business structure, i.e., the operating agreement, and better asset protection against creditors, Delaware LLC is regarded as the most business-friendly entity.
2. Flexibility in Control
Delaware is an attractive choice for businesses and investors alike for a few reasons. Firstly, the governing law provides investors with different classes of stock that come with voting rights and control over corporations. Other states may not always provide this.
Secondly, the state allows for a single-member board of directors, as opposed to other states, which require the number of directors to be equal to the number of shareholders up to three.
3. The Court of Chancery
Business owners steel themselves for drawn-out legal proceedings in the event of litigation. But unlike other states, Delaware has the Court of Chancery, the country’s oldest court of law, which exclusively handles corporate cases. Instead of juries, judges (who are appointed by merit, not through elections) with corporate law experience preside over hearings.
Consequently, business owners can rest assured that they will receive a fair and predictable judgment.
4. Establishing a Presence in the US
Many foreign companies and nationals, who would like access to US venture capital resources, decide to incorporate in Delaware. This is particularly convenient since one does not have to be a US resident to form a Delaware corporation.
Aside from the fact that all legal professionals are well-versed in ‘Delaware corporate speak’ due to its ubiquitousness, the state is equally favored by investors.
This is because investors are well acquainted with the streamlined nature of filings, legal agreements, and processes in Delaware. As a result, legal outcomes are more predictable, and there is reliability in the laws that govern corporations.
Most venture capital firms, angel investors, and startup accelerators often prefer, if not require, that startups be incorporated in Delaware to even consider investing in businesses.
You may also be interested in: How to Build the Perfect Investor Report
Wanting to maintain discretion when it comes to investors, founders, and proprietary information is not uncommon. Delaware laws support businesses that want to keep a low profile since formation documents need not state founder or investor identities.
Additionally, any potential moves made by shareholders to obtain company books are kept at bay. These actions are discouraged since any such requests must be made in-state, which is inconvenient.
There are many reasons why Delaware is king when it comes to convenience, such as:
- Quick turnaround times (as little as a few hours).
- Delaware corporation search tool, which lets users easily search for any registered corporation in the state.
- Fast document retrieval and same-day filing as a result of certain Delaware Registered Agents being allowed to access an electronic database.
- Geographical flexibility, since business owners need not reside in the state or have a physical company address to incorporate in Delaware. Simply retaining a Delaware Registered Agent is sufficient.
8. Tax Advantages
While incorporating and maintaining a corporation in Delaware can be expensive (state filing fees, annual fees, registered agent fees), it is a cost-efficient choice in the long run.
The corporate taxation legislature makes it so that:
- No corporate taxes are owed if no business is done in the state, even for corporations formed in Delaware.
- Royalty payments and intangible assets are not taxed.
- Individuals living out of state, holding stock of the Delaware incorporated businesses are not taxed on the stock they own.
For early-stage companies, there are hundreds of decisions to be taken. Where to incorporate is one of them and should certainly be prioritized. Additionally, so must the managing of investments and equity distributions.
But not all decisions have to be hard or involve complex problem-solving. Sometimes, simple solutions exist. Much in the way that Delaware is the panacea for incorporation woes, trica equity is the ideal solution for ESOP, cap table, and equity management.
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