Start-ups often ask what is the most beneficial jurisdiction in which to incorporate. Most of the time we advise our clients that incorporating in the State of Delaware is the most advantageous for the following reasons:
• Investor Credibility. Most institutional and many sophisticated angel investors prefer to invest in a company that is incorporated in Delaware. If your company is already incorporated in Delaware when you approach investors, it shows that you are sophisticated and understand the investor’s needs and desires. More than half of U.S. publicly-traded companies are Delaware corporations.
• Advanced Corporate Law. Delaware’s corporate law is well-established and familiar to most corporate lawyers. The large volume of precedent cases means that the manner in which contracts and other business transactions are likely to be interpreted by Delaware courts is highly predictable, which is critical in negotiating transactions or deciding whether to pursue litigation. The statutory business law in Delaware is also well developed and regularly updated.
• Business Liability Protection. Delaware corporate law has strong protections for the personal assets of stockholders. Directors and officers also have broad protection from personal liability for their business decisions that result in losses to the company.
• Chancery Court. Delaware has a separate court that hears only business-related cases, with judges who are experts in business law issues. As compared to other state courts, legal disputes in the Chancery Court can be handled promptly by sophisticated and experienced judges instead of juries.
• Administrative Convenience. Delaware runs an efficient corporate filings department. Documents can be filed online and processed by the Delaware Division of Corporations, with evidence of filing provided, in less than an hour.
• Business-Friendly Corporate Formalities. Delaware is more accommodating than most other jurisdictions when it comes to many corporate formalities. For example, (i) Delaware does not require disclosure of the names of the company’s stockholders and directors; (ii) stockholders and directors can act by written consent rather than through meetings; (iii) mergers, conversions, amendments to governing documents and other filings can be completed quickly online; (iv) a single person can hold title to each officer position in the company; and (v) there are no minimum bank account balance requirements.
• Taxes. Companies that are incorporated in Delaware but do not operate within the state are not required to pay state income tax, and non-Delaware residents are not taxed on their ownership of stock in a Delaware corporation.
If the company does not do business in Delaware, the main disadvantage of Delaware incorporation is the additional cost:
• Franchise Taxes. A Delaware corporation must pay an annual franchise tax based on a calculation involving the number of its authorized shares and the value of its assets, plus a filing fee. The minimum annual cost is $125.
• Foreign Qualification. The company will likely need to register to do business in its home state. The cost of this annual “foreign qualification” varies by state.
• Registered Agent. A Delaware company is required to have a registered agent with a street address in Delaware to receive legal documents on behalf of the company.
• Annual Report. The company will need to file an annual report in Delaware.
The total annual cost will vary but is often at least $400. A small company outside of Delaware that does not expect to seek third party investors may decide that the costs of Delaware incorporation exceed the benefits. However, a company that does expect to receive financing from venture capital or other institutional investors should assume that the investors will prefer the company be incorporated in Delaware. We recommend you seek advice of legal counsel when deciding on the best jurisdiction to form your corporation.