Key Takeaways

  • Delaware offers flexible and business-friendly corporate laws through its Court of Chancery, known for efficient, expert handling of corporate cases.
  • Startups and large corporations alike choose Delaware due to its predictable legal system, low incorporation costs, and favorable tax treatment.
  • Investors, including venture capitalists and angel investors, often prefer Delaware corporations for clarity in shareholder rights and governance.
  • The state provides privacy protections for owners and directors, plus simple filing and minimal residency requirements.
  • Despite clear benefits, companies operating elsewhere must comply with dual reporting and pay registered-agent and franchise-tax fees.

Why Do Companies Incorporate in Delaware?

If you are one of those who wonders, "Why do companies incorporate in Delaware," then here are some possible explanations for this trend.

  • Low and competitive corporate taxes
  • Friendly political scene
  • Up-to-date and corporation-friendly business environment
  • Ideal legal culture, lawyers, and judges who quickly and expertly address and solve corporate cases
  • Simple filing process for small businesses and protection from penalties

Many Fortune 500 companies choose to incorporate their businesses in Delaware because, despite its small size, the state offers an ideal business environment for startups and big corporations. In addition, Delaware computes taxes out of the revenues of a company, which reduces corporate income tax. Most importantly, the state's Corporation Law is arguably the most adaptable in the country.

Delaware’s Legal and Regulatory Advantages

One of the main reasons why companies incorporate in Delaware is the state’s sophisticated legal framework for businesses. Delaware’s Court of Chancery is a specialized business court with judges—called chancellors—who are experts in corporate law and decide cases without juries. This makes rulings faster, more consistent, and highly predictable, which is invaluable for companies and investors alike.

Delaware’s General Corporation Law (DGCL) is widely recognized as one of the most advanced and flexible sets of corporate statutes in the U.S. The law evolves continuously to keep up with modern business realities, allowing companies to adopt innovative governance structures. Moreover, because many U.S. corporations are registered there, Delaware has a vast body of precedent-setting case law that provides clear guidance for future disputes.

Special Considerations for Corporations Under Delaware Law

What makes this state's laws special and why do companies incorporate in Delaware? Big businesses prefer to set up in Delaware because corporate laws in this state are different from others in that they are more specific and are so special that lawyers study Delaware corporate laws, cases, and decisions distinctively. For this reason, you'll find a lot of them who are fully knowledgeable about Delaware business laws.

Moreover, the Court of Chancery in this state ensures that laws are predictable, decent, and appealing to all types of businesses. Since many companies establish their businesses in Delaware, a vast collection of cases and decisions about all kinds of corporate disputes exists.

Corporate laws in this state are highly dynamic. Lawmakers constantly revise them to favor corporations and are minimize the severity of regulations affecting businesses.

Here are other concrete reasons why you can find more than half of the Fortune 500 companies established Delaware.

  • Affordable cost of incorporation
  • You can attract more venture capitalists if you're a Delaware corporation because they don't need to live in the state in order to invest.
  • You don't have to live in Delaware to become a shareholder or an executive of a corporation.
  • You can form a corporation without divulging the names of the board of directors or stakeholders.
  • You don't have to be a resident to incorporate in Delaware.
  • An LLC Registered Agent for a Delaware corporation need not be a resident.
  • One person who is director, officer, and shareholder can incorporate a business in Delaware.

Why Startups and Venture Capital Firms Prefer Delaware

Delaware’s corporate environment is particularly attractive to startups and investors because it supports rapid fundraising and scalable growth. Venture capital firms often require startups to be Delaware C corporations before investing, since Delaware’s corporate structure is familiar to most investors and provides predictable governance frameworks for issuing preferred stock, stock options, and convertible instruments.

Additionally, Delaware allows one person to serve as the sole director, officer, and shareholder, simplifying early-stage company formation. Entrepreneurs do not need to be residents of Delaware, and ownership records can remain private. These flexible provisions make Delaware appealing for both U.S. and international founders seeking credibility and investor confidence.

Favorable Corporate Taxes in Delaware

Another reason why many businesses choose Delaware is because of the corporate taxes. Expect the following if you registered a corporation in the state:

  • No corporate taxes for Delaware companies that do business outside the state
  • No income tax for nonresidents
  • Nonresident stock owners of Delaware companies are exempt from Delaware taxes
  • Royalties are not taxable

Tax Flexibility and Franchise Fees Explained

While Delaware’s corporate income tax applies only to companies doing business within the state, corporations that operate elsewhere are not subject to this tax. Delaware also does not tax intangible assets such as trademarks, patents, or royalties, making it a strategic jurisdiction for intellectual property-driven businesses.

However, corporations must pay an annual franchise tax, which varies depending on the number of authorized shares or the assumed par value. For small to mid-sized companies, this tax is relatively low, but large corporations with many shares may owe a higher amount. Still, the administrative simplicity and absence of certain local taxes make Delaware’s overall tax climate more favorable than most states.

Businesses and Persons Who Prefer to Incorporate in Delaware

You can find many different business entities that would rather set up shop in Delaware than elsewhere. Here are examples of these individuals:

  • Venture capitalists are firms that are willing to invest in startups in exchange for shares of preferred stocks. They prefer to incorporate in Delaware because the corporate law allows venture capitalists to make corporate decisions without the approval of common shareholders and transactions are a lot easier to implement.
  • Angel investors or affluent business people who inject capital in to businesses like Delaware mostly for the tax laws.
  • Investment bankers are somewhat similar to venture capitalists, but in a more conservative sense. They favor well-established corporations and also prefer Delaware companies for the same reasons as the VCs.

Popular Entity Types Formed in Delaware

Delaware supports a wide range of business entities, each benefiting from the state’s pro-business legal structure:

  • Corporations (C corps & S corps): Ideal for companies planning to raise capital, issue stock, or eventually go public.
  • Limited Liability Companies (LLCs): Offer flexible management structures and pass-through taxation with strong liability protection.
  • Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs): Common for professional practices and investment funds.

Because Delaware does not require members or managers to reside in the state, entrepreneurs can form and manage their entities from anywhere in the world.

Benefits of Incorporating in Delaware

Aside from excellent corporate laws and business environment, some of the benefits of incorporating in Delaware are:

  • Easy to attract investors and marketability
  • Outstanding privacy protections for directors and officers of corporations
  • Expedited and simplified filing processes
  • Lower business processing fees
  • Low cost of set-up and relocation
  • Low annual franchise taxes

National Reputation and Investor Confidence

Another advantage of incorporating in Delaware is its national and international reputation for corporate governance excellence. Over 65% of Fortune 500 companies and a majority of U.S. publicly traded corporations are Delaware-incorporated. This reputation signals stability and credibility to investors, banks, and potential partners.

Delaware corporations also benefit from efficient administrative processing, including same-day filings and online access to documents. The Division of Corporations’ responsiveness allows new businesses to incorporate quickly, which can be crucial during funding rounds or mergers.

Disadvantages in Registering Your Corporation in Delaware

Incorporating in Delaware also has some disadvantages like:

  • Extra cost of registered agent
  • Extra cost of annual franchise tax in Delaware, if you are operating from a different state
  • Need to adhere to reporting requirements set by the state where you are operating as well as requirements set by Delaware

A good way to avoid some of the extra costs is to register your corporation at the onset in Delaware. Then, you won't have to relocate and pay extra fees if your company has to go public or if a venture capitalist requires you to register in Delaware.

When Incorporating in Delaware May Not Be Ideal

While Delaware’s advantages are significant, not every business needs to incorporate there. Small, locally operated companies that do not seek outside investment may find that forming in their home state is simpler and more cost-effective. Operating in another state as a “foreign corporation” means filing additional reports, maintaining a Delaware registered agent, and paying annual fees in both states.

Entrepreneurs should weigh these extra costs against the potential benefits of investor access, privacy protections, and tax flexibility before deciding whether Delaware incorporation aligns with their goals.

Frequently Asked Questions

  1. Why is Delaware known for business incorporation?
    Delaware’s Court of Chancery, business-friendly laws, and extensive legal precedents make it the preferred state for corporations of all sizes.
  2. Do you need to live in Delaware to incorporate there?
    No. Neither the owners, directors, nor officers of a Delaware corporation need to live in the state.
  3. Is incorporating in Delaware only for large companies?
    While many Fortune 500 firms are based there, startups also choose Delaware for its flexible structure and investor familiarity.
  4. How much does it cost to incorporate in Delaware?
    The initial filing fee is relatively low—often under $100—but businesses must also pay annual franchise taxes and registered agent fees.
  5. Can a Delaware corporation operate in another state?
    Yes, but it must register as a foreign corporation in the state where it conducts business and comply with that state’s local laws.

If you need help incorporating in Delaware, 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.