Why Do Startups Incorporate in Delaware?
If you’re based in another country or state, you might be wondering if there’s a reason to register your company as a Delaware corporation instead of just creating a simple LLC where you live. The short answer, especially if you’re planning to grow your company and secure outside funding, is “Yes.”
Just a few years ago, I was helping a friend working on a startup building innovative developer tools which had incorporated in their home city of Berlin.
Despite a tight pitch, great product, and solid founding team with past exits under their belt, it was almost impossible for them to raise funds as a German entity. Most tech investors didn’t even want to talk to them since they, as a rule, would not invest in German entities due to the “draconian bureaucracy” associated with investing in early-stage, private companies in Germany.
They were eventually successful in securing funding — after spending nearly $30,000 to incorporate in Delaware and make their German GmbH a wholly-owned subsidiary of the newly-formed Delaware entity. Creating this new corporate structure was far more costly than simply creating a Delaware C Corporation, to begin with.
Virtually every corporate lawyer, tech executive, and VC in the United States is familiar with Delaware’s exhaustive body of business case law — and over two-thirds of all Fortune 500 companies are registered there for good reason.
What Are Delaware’s Advantages for a Tech Startup?
- Delaware Corporation Search. Delaware secretary of state entity search has an easy online form to search existing corporation names in the Delaware company register.
- Tech investors understand Delaware corporate law. Making things easy for them will make things easier for you.
- Minimum costs, maximum control. Delaware corporations are only required to have one director, which helps keep costs low and leadership consolidated. Compare this to California, which requires companies to retain two directors when they have two shareholders, and three directors when there are three or more shareholders.
- Easy to manage from afar. Businesses need only maintain a registered agent with an address in the state. There is no requirement to maintain an office or other physical presence in the state, and there is a well-developed service industry providing registered agents for nominal fees.
- Privacy protection for company information. The names of officers and directors don’t necessarily need to be stated on formation documents.
- Tax advantages. The Delaware tax payment is quite low. There is no corporate income tax if you do business in another state, and no personal income tax or tax on stock if owners live outside the state.
- A high volume of corporate transactions is executed there. Because of this, legal agreements and processes in Delaware are intimately familiar to investors, lawyers, and most business executives.
- The most robust corpus of corporate case law in the US. This ensures more predictable legal outcomes and better standardized documentation.
- A specialized Court of Chancery. This specialized Delaware court has jurisdiction over corporate matters and is focused on the rapid resolution of business disputes.
Registering with a “Foreign Agent Qualification”
If you choose to incorporate in Delaware, keep in mind that you will also need to register in every US state in which you do business — and likely your home state if you are based elsewhere — with a so-called Foreign Agent Qualification.
The process to do so is covered at length in the article Registering your Delaware C Corporation to Do Business as a Foreign Corporation. It is, however, possible to set up your business in other states and countries as a subsidiary of your Delaware corp to minimize tax liability, an idea we will cover in another article.
If you’d like to skip directly to the Instructions for creating a California registered agent, they are covered in the article Filing For A Foreign Agent Qualification in California.
What About the Delaware Annual Franchise Tax?
As you consider a Delaware incorporation, it’s helpful to understand the methods underpinning the state’s franchise tax. Most corps calculate their tax liability based on an annual flat tax and file a relatively simple Delaware annual report, covered in the article Delaware Franchise Tax, The Abridged Version.
Think Twice About Registering Elsewhere
This isn’t to say that registering elsewhere doesn’t have its appeal. Certain states, like New Mexico, Nevada, and Wyoming, have become popular with entrepreneurs aiming to keep personal information out of the public record. Others including Washington, Nevada, Wyoming, Texas, and Florida make a good case with very low or zero corporate tax.
When considering this issue, keep in mind the basic principle that where you incorporate is not necessarily where you do business. The aim should be to choose the jurisdiction that best meets the needs of your business and investors.
For tech startups, it’s simply very difficult to beat the overall advantages of incorporating in Delaware. The rule of thumb is simple: if you think you’re going to have to incorporate in Delaware at any point in time, it pays to do it right out of the gate. I can tell you from personal experience that reincorporation is more expensive than initial incorporation by a long shot.
- If you are planning on raising outside funding for your company, Delaware is an excellent choice of jurisdiction.
- 70% of Fortune 500 companies are registered in Delaware.
- Delaware Franchise Tax is amongst the lowest in the US when calculated correctly.
- Delaware offers robust advantages for business from both legal and financial standpoints.
- Registering elsewhere may result in the need to re-register down the road, which can be costly.
Originally published at https://capbase.com.