Why Incorporate In Delaware?

Jason and I occasionally get asked “why are the majority of companies incorporated in Delaware, regardless of their actual physical location?”  Besides being difficult to spell (c’mon – you thought there was an “e” instead of an “a”, didn’t you), Delaware offers some tangible advantages over incorporating in other states.  While we aren’t experts on state laws outside of California, Colorado, and Delaware (e.g. feel free to offer “my state is better than Delaware to incorporate in” comments), we thought we’d summarize a few of the reasons below.

First, Delaware’s large body of business laws helps a company plan carefully to avoid a lawsuit.  Certainty is “power” and one can generally be “more certain” about a particular legal outcome in Delaware compared to other states.  While we might not agree with a decision made by Delaware courts, it is at least nice to know what the ground rules are, which are much less clear in most other states.

Next, Delaware courts have the ability to deal with complex cases.  In general, their reputations is at least as good, if not the best, in the country.  Some of the courts adjudicate with jury trials, so in addition to the mitigated expense factor, their decisions are generally well-developed and easy to read.

Furthermore, most corporate attorneys are clued into Delaware law in addition to the particular state they practice in.  For instance, Jason assures me that he is as comfortable with California legal issues, as well as Delaware law, despite the fact that he has never set foot in the state (quick – name the bordering states.) 

Finally, the infrastructure of Delaware allows for most administrative functions and filings to occur at a much more rapid pace and at less expense than other states.  For instance, Delaware was among the first to accept faxes as legally binding, thus greatly improving the speed of incorporations and amendments to corporate documentation. 

As you can see, many of the advantages are due to the court system and case precedents in Delaware.  Many investment bankers will demand that their clients are incorporated in Delaware before going public.  Some of this is just “tradition,” but a lot of it is the clearly legal picture that Delaware law paints and the comfort zone that insurers have insulating boards subject to Delaware law.

Keep in mind that regardless of where you incorporate, you may still have to comply with laws of the state that you reside in.  For instance, California has a code section that is called the “long arm statute” that basically says:  we don’t care where you incorporate, if your primary place of business is California, then you need to abide by X, Y and Z. 

  • Jon

    I heard that VCs will insist on Delaware incorporation for startups. Is that the case in general? While most startups are Delaware corporation, I do see quite a few CA corporation, e.g., Apple, Yahoo.

  • I Got My LLC in Delaware. I did. Last month. One lawsuit too late, albeit.

    You should get your LLC too if you do anything remotely commercial. It’s going to be one of the best sub-$500 investments you will ever make. At the least, it gives you some bragging rights(“yo!I *own* an L-L-C. Respeck”).

  • Yes – most VCs will insist on the company being incorporated in Delaware – mostly for reasons listed above.

  • ak

    “Many investment bankers will demand that their clients are incorporated…”

    I believe this sentence requires the subjunctive case viz:

    “Many investment bankers will demand that their clients BE incorporated…”

  • In addition to the above, Delaware is usually much cheaper than CA in terms of annual filing fees. Also, depending on which entity you form, a Delaware entity does not require state-level K-1s to investors, so this can in turn reduce some accounting hassle and cost.

  • William

    For a guy just starting out…

    I have developed a sense, through much research, that I should keep my business dealings outside of a corporation until I can show a profit of some kind. I was wondering, however, if there is some logic that I can gleem about the type of structures I should be considering.

    1. We are looking at real estate investing
    a. flipping
    b. fix, keep, rent
    2. We are looking at business buying
    3. I am a web programmer who works a full-time job as well as takes private clients
    4. My wife has a full-time corporate job who has private massage clients.

    Should we have seperate entities for each aspect, or just one ‘umbrella’ entity?

    Also, since we figure that creating the business entity is in the future, should we still investigate Family Trusts and other ‘family’ based entities to protect our personal belongings?

    Any non-binding guidance would be appreciated. I fully understand that this would not be legal advice but only a ‘parlor room’ suggestion of ideas. 🙂

    Thanks you,

  • test

    No I didn't think there was an "e". Thanks for condescending to your readers.

  • test

    No I didn't think there was an “e”. Thanks for condescending to your readers.

    • Actually, I was making fun of myself since I always spell it incorrectly.

  • Actually, I was making fun of myself since I always spell it incorrectly.

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