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Incorporating in Delaware presents a range of benefits such as the efficiency of the court system, structural flexibility, privacy, investor preferences, and tax advantages. However, it can add layers of bureaucracy and might not be cost-efficient if the company does not operate in the State.
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- Topic Tags
Startup incorporation, VC incorporation preference, Delaware corporations, Corporate tax
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Why do companies incorporate in Delaware?
What are the disadvantages of incorporating in Delaware?
- Summary bullet points
- A vast portion of larger companies are incorporated in Delaware
- Delaware incorporation offers a series of advantages, but small businesses might not be able to reap these benefits
- The Delaware Court system is well known to be efficient. It specializes in corporate proceedings and uses expert judges instead of juries.
- Delaware allows for corporate structure flexibility with respect to other States, especially in terms of shareholders, directors, and officers.
- Delaware law protects the privacy of the company not demanding disclosure of directors and officers’ identities upon incorporation.
- VCs and Investment Bankers tend to prefer Delaware corporations
- Businesses incorporated in Delaware that don’t conduct business there do not need to pay Delaware corporate income tax. Shareholders outside of Delaware do not need to pay Delaware taxes.
- Incorporating in Delaware also presents some disadvantages if the company is incorporated in Delaware but physically located in another state
- It will need to pay an annual franchise tax in both states.
- It will have to follow the reporting requirements for both states.
- Follow-up links
Why do VCs prefer Delaware corporations? - https://www.foundersspace.com/fund-raising/why-do-vcs-prefer-delaware-corporations/
Court of Chancery - https://courts.delaware.gov/chancery/
Franchise Tax - https://www.investopedia.com/terms/f/franchise_tax.asp