One of the questions entrepreneurs and startup founders ask us the most is, “Why do so many startups incorporate in Delaware?” As co-founders or business partner(s) sit around a table and discuss the best ways to bring their startup to life, one of the topics that usually pops up (or should pop up) is entity formation. The typical entity of choice is a Delaware C-corp.
There are at least a half-dozen reasons startups and businesses choose to incorporate in Delaware over other states. Some of the most important reasons are listed below.
Why do so many Startups Incorporate in Delaware?
(1) favorable business tax regime;
(2) more predictable legal outcomes in the corporate law realm;
(3) a specialized court (Delaware Chancery ) for corporate law disputes;
(4) well-established and robust protections for Directors, Shareholders, and Officers;
(5) quick and efficient corporate services from the Division of Corporations;
(6) corporate statutes allow more flexibility for a corporation than other states.
What is the downside to incorporating in Delaware?
(1) the extra cost associated with hiring a registered agent;
(2) depending on how much stock you issue, the franchise tax fees;
(3) foreign qualification fees in your home state; and
(4) extra reporting requirements.
As you can see, there are many reasons to incorporate in Delaware. The cons mostly related to extra fees. For context, it’s estimated that more than 50% of publicly traded companies and more than 60% of the fortune 500 are Delaware corporations. It should be noted that a C-Corp may not be the ideal entity for your startup. We briefly explain the differences between a C-Corp and LLC in this FAQ.