Many savvy startups have heard they should form their corporation in Delaware. Indeed, more than half of public and Fortune 500 companies are incorporated in this state.
Delaware advertises its General Corporation Law as one of the most advanced and flexible in the country for business entities. In reality however, nearly all states have now modeled their own corporate laws to mimic the provisions of Delaware’s in order to provide the much-touted “business friendly” legal landscape for companies.
There are still some benefits for incorporating in Delaware. First, if you have to go to court to settle a dispute, Delaware has a special Court of Chancery that focuses solely on business law, and decisions there are rendered by judges instead of juries. This means your company’s legal fate will be in the hands of a well-trained business law expert instead of laypeople who might struggle to understand complex legal concepts. Second, since Delaware’s corporate law is one of the oldest, there is a vast amount of case law that your company can rely on. Thus, most Delaware corporations do not end up litigating disputes because their professional advisers examine this case law and can construct deals to avoid lawsuits.
Despite these benefits, by no means should a startup believe forming is Delaware is the “default” rule. More often than not, for administrative ease, forming your corporation in the state where you will reside and, at least initially, carry out most of your business activities is probably the state in which you should incorporate. It lessens the risk of having to travel out of court for legal disputes. Nevertheless, the fact that so many large, public companies choose Delaware should indicate that large, public companies tend to benefit the most from incorporating in Delaware.
Finally, one may argue if you incorporate in Delaware, you send a message: “This is a national company.” You send a signal to investors that you understand their preferences and are serious about receiving investments. From a marketing perspective, this may be important for customers and vendors as well.
Note: Even if you incorporate in a foreign state like Delaware, your company may still be subject to registration as a “foreign entity” and compliance with the laws of states you transact business in.
If you’re considering starting a business or revisiting a current one, contact us today.