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.