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When you incorporate your startup company, two main decisions arise. First, what type of entity should your startup company be? Second, where should you incorporate?
Of the two, entrepreneurs focus primarily on choice of entity–LLC, Corporation, etc.–and usually just incorporate in their home state. And home state incorporation will make sense for most. But for a few startup companies, incorporating in a foreign state like Delaware, will be a better decision.
Delaware’s division of corporations lists 4 reasons to incorporate in Delaware on its website:
Why Choose Delaware as Your Corporate Home?
More than half a million business entities have their legal home in Delaware including more than 50% of all U.S. publicly-traded companies and 60% of the Fortune 500. Businesses choose Delaware because we provide a complete package of incorporation services including modern and flexible corporate laws, our highly-respected Court of Chancery, a business-friendly State Government, and the customer service oriented Staff of the Delaware Division of Corporations.
Talk about selling your state short. I’ll see their four reasons and raise them one. Thus, the following are my top five reasons to incorporate in Delaware:
1. Flexible Laws. Delaware’s General Corporation Law is the most advanced and flexible business formation statute in the United States. It is designed to provide maximum flexibility in the structuring of business entities and the allocation of rights and duties among founders and shareholders.
2. No Wildcard Juries. If you do end up going to court to settle a dispute, Delaware’s Court of Chancery uses judges instead of juries. I don’t know about you, but I’d rather place my startup company’s legal fate in the hands of a well-trained expert than people whose legal experience consists of The People’s Court and Law and Order re-runs.
3. Precedence = Less Litigation. Since judges are used, decisions are issued as written opinions that your startup company can rely on. Thus, most Delaware corporations do not end up litigating disputes because their professional advisers examine these published opinions and construct deals to avoid lawsuits.
4. It’s Free! (Well, almost). Delaware charges $89 to incorporate. A little bit cheaper than California ($100..but they nail you for $800 every year in franchise fees), New York ($125), and a lot cheaper than Texas ($300). [note: Even if you incorporate in a foreign state like Delaware, your startup company may still be subject to registration as a "foreign entity" and compliance with the laws of states you transact business in.]
5. Privacy. In a world where personal privacy is constantly eroding (the Google 3D Mapping truck should be driving by my house anyday now), Delaware does not require director or officer names to be listed in the formation documents. Thus, Delaware provides a level of anonymity from snoopers.
Even though this post makes a big push for incorporating in Delaware, you shouldn’t assume Delaware is the default choice for your startup company. The fact so many large, public companies choose Delaware should demonstrate that large, public companies tend to benefit the most from incorporating in Delaware.
So think about it and discuss incorporating in Delaware with your co-founders and professional advisers. But note that if you are planning to work with an investment bank or venture capital fund, you will likely have no choice but to become a Delaware entity. And for the five reasons above, that may not be such a bad thing.
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December 27, 2007 at 10:11 pm
Though you do raise many positive notes regarding DE registration, several drawbacks that should also be pointed out include the fact that in many states such as Massachusetts, if you conduct business, you will still need to file a foreign certificate of state. To that end, you will still incur the standard financial burden of an LLC or Corporate-filing fee. You will also be required to designate a registered agent and incur their fee. Moreover, if your primary place of business is not in Delaware, but rather in another state, in your corporate filings, you will need to indicate your place of business, where business records are maintained, etc. As such, the privacy that is obtained pursuant to Delaware’s enhanced security may be lost with even a cursory investigation into another state’s SEC site.
December 31, 2007 at 10:15 pm
Michael:
You raise good points regarding the potential pitfalls of incorporating in Delaware when your startup operates anywhere else besides Delaware. And you also indirectly bring up another good point– a startup will never find the perfect entity/jurisdiction combination when incorporating. That is, you can find the best combination but the perfect combination is unattainable.
February 22, 2008 at 2:40 am
And how do you gentlemen feel about incorporating in Nevada? I attended an interesting briefing about incorporating in that state. Anonymity was a big topic in that briefing, along with others similar to what you have described for Delaware. Plus, it’s closer since I’m in CA. : )
Another question, what would be key determining factors on incorporating in a different state would be more beneficial?
One last comment… Ryan, great blog!
March 05, 2008 at 2:32 pm
I once had a California CPA suggest Nevada incorporation for a project I was working on, with the reason of trying to escape California’s franchise tax. The only problem, from my perspective, was that the entire business was being operated in California. So, I would imagine the California Franchise Tax Board (along with the Secretary of State) would have had a problem with that as well. (And I don’t mean to imply that you can’t incorporate in NV if 100% of your business is in CA.)
Anyways, from what I understand, Nevada offers some tax and privacy benefits relative to Delaware. For example, Nevada does not share company information with the IRS. But these tax/privacy benefits are eroded since the IRS tends to audit Nevada corporations more frequently than other states’ corporations.
Thanks for the kind comments!
April 23, 2008 at 3:56 pm
The question I have is I just recently moved to Iowa from Wisconsin. I am in the process of disolving my S corp in WI. I recently looked at the iowa corporate tax rate and it is the highest in the nation! I do business in a couple of different states but my office and primary source of business is mostly generated from Iowa.
Is it legal and possible to setup a corporation in another state like Nevada, but reside and do most of my business in Iowa. It is going to cost me an extra 3-6k which is double whatI paidin WI
thanks
April 23, 2008 at 9:40 pm
if delaware & nevada are equally compatible for incorporating any business, then what significant differences is there between the two ? And if every screen of privacy can be broken by the government one way or another , then what is the purpose of all the smoke screening ?
April 24, 2008 at 11:41 am
@ Josh - You can incorporate your company in any state. But you must typically register as a “foreign entity” in the states that your company does business. Also, consult a CPA about your interstate/multi-state tax issues. I believe you have to apportion the taxes according to the amount of business (or amount of assets) you have in each state…but see the previous sentence.
@ Carl - I get asked the Delaware vs. Nevada question frequently, so it will be the topic of a future blog post. And the “smoke screening” you refer to is usually for non-governmental entities.
May 28, 2008 at 12:07 pm
Does anybody know what is the franchise tax for delaware?? and if for example I icorporate in delaware but I want my office to be in NY would i have extra charges?
Thanks!!
June 13, 2008 at 8:41 am
ana - Here is a link to how franchise taxes are calculated in Delaware: “http://corp.delaware.gov/frtaxcalc.shtml”
July 18, 2008 at 9:11 am
Ryan — in the very beginnings of a startup with a partner in Virginia and thought of the LLC as a good fit for getting things in place. Is switching over to the C corp doable by year’s end, or should I just bite the bullet and make it a corporation now anyway? Nothing has been signed yet, but coming up soon. Excellent and always helpfu blog — thanks!
July 18, 2008 at 9:30 am
Michael-
I don’t think it’s worth it if you plan to convert within 6 months.