June 10, 2024

Why Do Most Startups Incorporate in Delaware?

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Most business owners know that Delaware is the gold standard when it comes to incorporating startups and other businesses. In fact, roughly 93 percent of 2022 initial public offerings were registered in Delaware. Furthermore, Delaware is home to around two-thirds of all Fortune 500 companies.

You might be tempted to keep things simple and incorporate your new business in your home state. However, Delaware offers some key benefits that may make it worth the extra effort. In this article, we'll go over four reasons to incorporate in Delaware — plus three drawbacks that founders should also be aware of.

1. Tax Benefits

While Delaware does have a corporate income tax, you won’t have to pay this tax unless you operate there. Avoiding state corporate taxes is one of the main reasons why business owners choose to incorporate their companies in Delaware.

Of course, this doesn’t mean that you won’t have to pay taxes at all. Delaware does have a franchise tax, and you may also be required to pay corporate taxes in states where you operate.

The key point is that you can incorporate a business in Delaware without operating there or paying Delaware corporate tax. Note that you will need to register your business separately in any other states where you plan to operate. Our team can help you manage compliance issues while setting you up with a favorable tax arrangement.

2. Court of Chancery

The Court of Chancery is one of the most widely recognized aspects of Delaware’s business-friendly environment. While other states generally use juries, the Court of Chancery hears all kinds of business-related cases with judges.

Additionally, the Court of Chancery is exclusively focused on business litigation, which enables it to handle cases more quickly and efficiently than courts in other states. As the hub for corporations, it’s no surprise that Delaware is also a leader in business law.

Investors, business partners, and other stakeholders naturally want to avoid legal complications, so incorporating in Delaware will also help you build stronger business relationships. If you're incorporated in another state, potential partners may be less familiar with that state's laws and therefore more apprehensive about working with you.

3. Privacy

Many states require businesses to publicly disclose the information of their owners or officers. This can be tricky for founders — particularly those who operate from their home address. You may not want these details to be publicly available.

On the other hand, Delaware doesn’t require new companies to disclose the names and addresses of officers and directors. This makes it easier to maintain your privacy while staying in compliance with all state regulations.

Another key benefit is that Delaware allows businesses to incorporate with a smaller team. You can still incorporate your company in Delaware even if you’re its only member.

4. Venture Capital Fundraising

The same things that make Delaware attractive to business owners also make it appealing to venture capital. If you’re interested in VC backing, it’s a good idea to incorporate in Delaware instead of your home state.

Many VC firms, angel investors, and startup accelerators (YC, 500 Startups, etc.) prefer, or even require, that startups be incorporated in Delaware before investing. Startups incorporated in Delaware can stand out and make themselves attractive to outside investors.

On the other hand, many startups succeed without any venture capital. Incorporating in Delaware might not be as crucial if you already have independent funding sources. This is just one of many things you should consider before launching a US company.

Drawbacks of Incorporating in Delaware

These four points are all great reasons to consider Delaware, but it's not all positive. As with any other state, Delaware has its own unique pros and cons for founders to be aware of. Let's take a look at three disadvantages of incorporating Delaware for startup founders.

1. Franchise Tax

While Delaware doesn’t have any state corporate income tax, it does charge a franchise tax. All non-exempt businesses incorporated in Delaware are required to pay the franchise tax — even those that don’t have any operations in the state.

Franchise taxes are based on either the value of your company or the total number of shares. Small businesses with 5,000 or fewer shares pay a minimum tax of just $175, which shouldn’t have much of an impact on your bottom line.

2. Complexity

Unless you live and work in Delaware, incorporating your business there could end up making things more complicated. Companies that operate and incorporate in different states have to register in both, which theoretically takes twice as much work.

Fortunately, Firstbase makes compliance easy by incorporating your business and alerting you to compliance issues in every state where you operate. We can also file foreign qualifications and serve as your registered agent in all 50 states.

Still, if you aren't motivated by the benefits mentioned above, you may prefer to incorporate in your home state simply to avoid the hassle. Operating in more states inevitably means more compliance filings, more fees, and more headaches.

3. Adds Other Costs

Another issue is that incorporating in Delaware and operating somewhere else may result in higher taxes and other costs. Remember that these costs will vary depending on the states in which you operate.

For example, let’s say your business is incorporated in Delaware but operates only in New York. In that case, you’ll be required to pay franchise taxes in both states. Whether or not incorporating in Delaware is worth the extra cost depends on how much you value the other benefits that Delaware provides.

Final Thoughts

Which state you choose to incorporate in might seem like an afterthought, but it can make a big difference in the long run. From state taxes and fees to privacy and business litigation, it’s important to consider all the factors before incorporating your business. It's technically possible to move your business to another state later on, but it's much easier to simply pick the right state during your initial incorporation.

While Delaware isn’t the best choice for every company, it’s easy to see why so many businesses end up making the same decision. At Firstbase, we offer incorporation in both Delaware and Wyoming. Click here to learn more about the pros and cons of these two business-friendly options.

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