Delaware Startups: Everything You Need To Know
Delaware startups usually have an easier time with filing and following business law.3 min read
Delaware startups usually have an easier time with filing and following business law.
Why Startups Incorporate in Delaware
Most tech startups are in Delaware due to finances. Some companies must be formed as a corporation in Delaware to be funded by venture capital firms. These firms know more about corporate law in that state than any other state. Having a corporation in Delaware is ideal for those who are going to need venture capital for funding; other than that, there is no real benefit to incorporating in the state. There are some downsides, such as extra filing fees, and the annual Delaware Franchise Tax.
Reasons Why Tech Startups Incorporate in Delaware
- Companies from outside the country choose Delaware to have the ability to use resources in the US, such as venture capital.
- Venture capital investors have some set procedures that corporations must follow so they can invest in the companies.
- Corporate laws in Delaware favor company owners most. These corporate laws are very well known by most corporate lawyers, and courts in other states tend to look to them for guidance.
- Laws in Delaware are more for the protection of the management of a company than anything else.
- Stock investors in Delaware get to have special voting rights and the ability to control the corporation.
- Delaware laws are flexible, which is why most companies go public in the state.
- The law allows the board of directors to be consist of one member.
- There is no need for your entity filing to be reviewed by the state.
- Certain terms and standards have helped to bring down the cost and time needed to legally form a company.
- Founders are sometimes given free online resources through larger law firms.
Think of your long-term goals when deciding where to create your company. It would also be good to think of who you plan to have as company investors; this can be a good indicator of where you should set up your new business corporation.
Courts in Action
The legal system in Delaware is mostly business friendly. The governing bodies of the state try to keep business laws up-to-date and cater mostly to corporations. Delaware is most known for the Court of Chancery, which deals with any business issues without using trials. Without the use of juries, the Court has taken care of most American corporations.
Board members in LLCs based in Delaware must place interests back into the company to sell any of them publicly. The law also allows business owners to choose who can enter the board as a voting or non-voting member, and stop a member from publicly selling their interests to people they don't like.
Corporations in Delaware face lower tax rates than those in other states. The income tax rate for a corporation is 8.7% of the gross income. The federal corporation tax schedule is broken down by taxable income:
- Up to $50,000: 15% tax
- $50,001 - $75,000: 25% tax
- $75,001 - $100,000: 34% tax
- $100,001 - $335,000: 39%
- Over $335,000: 34% tax
A single business owner who files the tax returns under the married, jointly-filed status pays the following taxes:
- Up to $35,800: 15% tax
- $35,801-$86,500: 28% tax
- Over $86,500: 31% tax
Personal Asset Protection
LLC owners in Delaware have protection over their assets in the case that your company faces a lawsuit or criminal offense.
The laws in Delaware are aimed to help corporations run better and smoother. Boards of directors can have meetings if one member is absent as long as another member fills in. A certificate of correction is available if there are any spelling or grammar mistakes on a document. Delaware also allows you to change your corporation into another entity with simple procedures to save on time.
Names and addresses of directors in a company do not need to be on formation documents in Delaware.
One Word of Caution
While the advantages are great for business owners in Delaware, shareholders don't get those same benefits. Shareholders may be taxed higher due to having to dividends they received not being a deductible when filing taxes.
If you need help with Delaware startups, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.